Spandana Sphoorty Financial Limited A mixed quarter Viewpoint Spandana Sphoorty Financial Limited (SSFL) posted mixed results for Sector: Banks & Finance Q4FY2020. On one hand, the company’s operational performance was below Result Update expectations due to the heightened COVID-19 crisis impact, its operations and collections have started and are picking up,which is a positive indicator. Standalone net interest income (NII) came below estimates, at Rs. 208 crore, Change for Q4FY2020, which was up 28.4% y-o-y and 3.4% q-o-q. Assets under management (AUM) grew by 16.2% q-o-q and 56.2% y-o-y,which would be View: Positive healthy, considering the latter part of Q4 was impacted both for collections and disbursals due to the lockdown.Net interest margin (NIM) stood at 16.4%, CMP: Rs. 536 down 20 bps q-o-q, up 71 bps y-o-y.During the quarter ended March 31, 2020, the company has made higher provision and write-offs towards COVID-19 Upside potential: 12-14% â (accelerated provision of Rs. 129.2 crore; ~2.7% of book) and revision on the ECL model (considering higher credit cost in FY2020 due to floods etc). As a á Upgrade No change â Downgrade result of which provisions jumped to Rs. 187 crore, which resulted in lower- than-expected PAT. By May end, all its branches became operational and Company details more than 92% of the staff resumed work. Notably, collections are picking up and SSFL has collected more than Rs. 145 crore (principal and interest) Market cap: Rs. 3,444 cr since April 20, 2020, and aims to collect around Rs. 300 crore in June. During the quarter, GNPA and NNPA stood at 0.36% and 0.07%, respectively, and 52-week high/low: Rs. 1,400/403 was marginally up on a sequential basis. However, the company has offered moratorium to all its borrowers due to which asset-quality performance is not comparable.However, the resignation of senior members of the management NSE volume: (No of 0.7 lakh is intriguing. The impact of moratorium and COVID-19 is likely to affect shares) AUM growth and credit cost for SSFL in the medium term. Factors such as well-capitalized balance sheet, stable ratings, and strong operating metrics BSE code: 542759 indicate that SSFL is well placed to ride over medium-term challenges. However, lower disbursals will impact interest and fee income. Considering NSE code: SPANDANA the changed scenario and increased uncertainties on the outlook, we have cut our estimates for FY2021E and FY2022E and target multiples. We have a Sharekhan code: SPANDANA Positive view and expect 12-14% upside potential on the stock. Key positives Free float: (No of 2.4 cr shares) NIM improved to 16.6% for Q4FY2020, up by 20 bps q-o-q and 71 bps y-o-y. Largely stable asset quality with GNPA and NNPA at 0.36% (was 0.33% in Q3FY2020) and 0.07% (was 0.04% in Q3FY2020). Shareholding (%) Key negatives Promoters 62.6 ECL model has been revised upwards. Going forward, medium-term credit cost may be elevated. FII 11.6 Disbursals are currently stalled, and collections are also weak. Operations have been impacted due to social distancing norms and the lockdown. DII 4.7 Our Call SSFL currently trades at ~1x its FY2022E book value, which we believe is Others 21.1 reasonable considering its strong capital position (CRAR of 50+%)and steady operating parameters. A strong management and an efficient (and de-risked) business model with levers available for generating better returns offer support. Considering the changed scenario and increased uncertainties on the outlook, Price chart we have cut our estimates for FY2021E and FY2022E and target multiples. We 1500 have a Positive view on the stock and expect 12-14% upside potential on the 1300 stock. 1100 Key Risks 900 700 A prolonged recovery post opening of the lockdown, credit ratings downgrade, 500 and effect on collection efficiency may affect NIM and results of operations. 300 19 20 20 20 19 19 19 20 19 20 - - - - - - - - - - Valuation Rs cr Jan Oct Apr Sep Feb Dec Aug Nov Mar May Particulars FY18 FY19 FY20 FY21E FY22E Price performance Net interest income 345.2 655.0 849.9 686.9 798.2 Net profit 187.9 311.9 351.8 369.7 436.2 (%) 1m 3m 6m 12m EPS (Rs.) 29.3 48.6 54.8 57.6 68.0 PE (x) 18.3 11.0 9.8 9.3 7.9 Absolute 12.3 -50.1 -54.4 - Book value (Rs./share) 216.7 294.6 409.4 458.3 516.1 Relative to P/BV (x) 2.5 1.8 1.3 1.2 1.0 4.8 -38.9 -36.7 - Sensex RoE (%) 13.52 16.5 13.4 12.6 13.2 RoA (%) 4.99 6.3 5.4 4.2 3.3 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates June 03, 2020 7 Viewpoint Key Concall Highlights Business update: AUM growth wasstrong and SSFL remained India’s third-largest Micro Finance Institution (MFI). The company disbursed Rs. 2,324 crore in Q4FY2020 (versus Rs. 1,390 crore in Q4FY2019), the highest in any quarter. SSFL expanded into three new districts. Except 13 districts, all other districts make up less than 1% of the overall portfolio. The 13 districts have less than 2% of the total portfolio. Asset quality: GNPA stood at 0.36% and NNPA at 0.07%, marginally up on QoQ basis.It has set aside Rs. 59 crore as normal provisions and Rs. 109 crore for COVID-19 and other reasons. The portfolio impacted by floods etc. has been completely written off. Liability: SSFL raised Rs.1,409 crore from direct assignment and Rs.533 crore from term loans. Cost of borrowings declined to 11.9%for FY2020 from 13.5% in FY2019.Marginal cost of borrowing declined from 11.3% to 10.2% y-o-y. NIM increased by 16 bpsy-o-y. It raised Rs. 3,777 crore through securitisation and direct assignment route during FY2020. The assigned portfolio has grown from Rs. 804 crore to Rs. 2,407 crore. COVID-19 impact: PBT would have been Rs. 714 crore without COVID-19 provisions. Pre-tax ROA is down due to higher provisions. Presently, the company has around Rs.547 crore in cash etc. On-time collection efficiency for the quarter was 98.52%. COVID-19 Update: SSFL stalled disbursements as a precautionary measure since March 21, 2020, and shut branch operations, suspended collections, and other operations from March 24, 2020. SSFL has sent communication to all borrowers informing changes via text messages. All other operations functioned normally. From April 15,2020, it resumed operations in a phased manner.All branches are in operations and collections are happening at present from customers who did not opt for the moratorium. Loan officers were able to reach only a few borrowers and, hence, collections were impacted due to distancing norms. Additional time spent and travel issues, among others, also added to woes. There has been significant improvement in collections in May as compared to April. So far, they have collected Rs. 145 crore and are expecting to collect over Rs. 300 crore in June. Around 91% of borrower and 90% of AUM are in rural areas. The COVID-19 impact in rural areas has been lower so far. Moreover,SSFL has extremely diversified operations and has a large chunk of borrowers in the agri and dairy segments. Borrowers in Dairy business forms ~56% of borrower base and both the activities have not been impacted. Many borrowers are in the 3rd or 4th cycle and SSFL has strong confidence on its capability to withstand challenges. In addition, SSFL has successfully navigated multiple crisis, including AP loan crisis, demonetisation, political problems and has stayed strong. Assignment income: In Q4FY2020, SSFL raised a total of Rs. 1,942 crore, of which Rs. 1,262 crore was through Direct assignment (DA) and Rs. 147 crore was via securitisation. Borrowing moratorium: SSFL received moratorium from 68% of its lenders, and has repaid every installment for payments due in March and April.It has availed only Rs. 40 crore. Collections on off-balance sheet book are also being transferred to lenders. Net gain on financial instruments:The amount stood at Rs. 1,262 crore due to high direct assignment volumes during Q4FY2020, as compared to previous quarters. Q4 seasonally has high DA volumes. Generally, around 9% of value of DA is taken as upfront. Cost-to-income has come down: Growth has come from existing branches and districts and SSFL has not opened many new branches, or new geographies. Growth of operating costs and employeecount grew by 24%, portfolio grew by 56%y-o-y. Growth has come from existing branches and borrowers.Cost-to-income ratio can go down further. The average loan outstanding per branch is Rs. 8 crore-9 crore for the industry versus Rs. 6.7 crore for SSFL. Once it catches up with the industry,cost-to-income will reduce further. Resignation of key management personal: The CFO and company secretary have resigned due to personal reasons. June 03, 2020 8 Viewpoint ECL provisions: SSFL had to update the ECL model for FY2020. Earlier model had losses for FY2019 considered. Because of floods, etc, provisions there were instances where borrowers missed the first two installments but were repaying later. Hence, the requirement in stage 1 (now 0.82% on Stage 1) has increased but stage 2 and 3 requirements have come down.