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|Saturday, 03 Aug 2019||
Track record of dealing with various business cycles and current strong position can help it tide over the current adverse times that NBFC sector is facing
Spandana Sphoorty is a fourth largest Non-Banking Financial Company Micro Finance Institution (NBFC-MFI) and the sixth largest amongst NBFC-MFIs and SFBs (small finance banks) in India in terms of AUM with a geographically diversified presence in India. It offers income generation loans under the joint liability group model, predominantly to women from low-income households in rural Areas. Through its extensive corporate history, the company has developed an in-depth understanding of the borrowing requirements of the low-income client segment. The business model involves regular client meeting processes through employees, who maintain contact with clients across the districts covered by the company.
Padmaja Gangireddy Managing Director and Individual Promoter of the company have over 24 years of experience in social development and microfinance sector. She founded Spandana Rural and Urban Development Organisation (SRUDO) in 1998, and promoted the company in 2003 and has been the Managing Director since then. Abdul Feroz Khan is Chief Strategy Officer and Sudhesh Chandrasekar is Chief Financial Officer of the company.
The company has 7,062 employees (including 5,051 credit assistants) operating out of 929 branches in 269 districts across 16 states and 1 union territory in India end June 2019. The company was incorporated as a public company in 2003 and registered as an NBFC with the Reserve Bank of India (RBI) in 2004. Subsequently, it was registered as an NBFC-MFI in 2015. Between the years 2005 to 2010, the company grew its micro-finance operations and emerged as the second largest MFI in terms of AUM by March 2010.
In October 2010, the MFI industry (including the company) was severely impacted due to external regulatory action, as the government of the formerly unified Andhra Pradesh promulgated the AP Microfinance Ordinance 2010, which enforced several restrictions on the operations of MFIs. This severely impacted collections and the consequent cash-flow shortage impacted ability to service debt, which in turn impaired growth and profitability of the company.
The lenders of the company referred the company to the corporate debt restructuring (CDR) mechanism of the RBI to develop a plan to restructure borrowings and revive business. The company agreed on a CDR plan with lenders, which allowed the company to get cash-flow relaxations enabling it to continue efforts towards portfolio diversification, process improvement and cost rationalization. These measures helped the company to turn operations profitable from the year ended March 2014.
As a result of collections from the old Andhra Pradesh portfolio and the profits generated from operations in other states, the company was able to restructure outstanding debt as well as raise refinancing debt from existing CDR lenders. It also received capital infusion from Kangchenjunga, Corporate Promoter, and Kedaara AIF - 1, enabling exit from CDR mechanism successfully in March 2017 with approvals from the RBI and lenders. The company is one of only two major companies that were able to successfully exit from CDR.
Post exit from CDR in March 2017, the company has increased lender base, diversified borrowings to new banks and NBFCs and also issued NCDs in the capital markets leading to a reduction in Average Effective Cost of Borrowing from 16.31% for FY2017 to14.74% for FY2018 and further to 12.84% for FY2019. As a result, during FY2018, with increasing flow of capital, the company expanded operations and was able to effectively utilize existing branch network and employees that were earlier underutilized due to lack of capital.
Post exit from CDR, the company optimized ticket sizes and also acquired new clients at existing and new branches helping it to grow Gross AUM sharply by 144% in FY2018 and 40% to Rs 4437.3 crore in FY2019. The disbursements have surged 87% in FY2018 and 29% to Rs 4969.3 crore in FY2019. The company has substantially improved its profitability recording net profit of Rs 311.82 crore on consolidated basis under Ind AS in FY2019 up from Rs 187.95 crore in FY2018. The company has also exhibited sharp improvement in asset quality with gross stage 3 assets declining sharply to 0.1% and net stage 3 asset to 0.01% end March 2019.
According to ICRA Research, the company has the lowest portfolio per branch amongst peer comparison of major NBFC-MFIs and SFBs, as of March 2019. The operating expense to average managed assets (AMA) ratio of the company was better than the industry as a whole for FY2019.
The company has 149 out of its 929 branches in Orissa, 149 in Madhya Pradesh, 136 in Karnataka, 111 in Maharashtra and 83 in Chhattisgarh. Further, 20.01% of AUM came from Madhya Pradesh, 19.98% from Odisha, 13.48% from Karnataka, 10.77% from Maharashtra and 8.70% from Chhattisgarh.
The Offer and the Objects
The initial public offer (IPO) is to collect around Rs 1198.1 crore by issuing 1.405 crore shares at the lower band of Rs 853 per share (face value Rs 10 per share) and Rs 1200.9 crore by issuing 1.403 crore shares at the upper band of Rs 853 per share. The issue consists of a fresh issue of equity shares (0.467 0.469 crore shares) aggregating up to Rs 400 crore and offer for sale of equity shares 0.94 crore equity shares aggregating up to Rs 798.1-800.9 crore.
The offer for sale comprises an offer aggregating 0.819 crore shares by promoters and 0.117 crore shares by other selling shareholders. The issue is to be made through the book-building process and will open on 05 August 2019 and will close on 07 August 2019.
Net proceeds from the fresh issue will go to augmenting the capital base to meet future capital requirements. The Net Proceeds of the Fresh Issue are proposed to be deployed in the FY2020. Further, there will be the benefits of listing of the equity shares on the stock exchanges, enhancement of the brand name and creation of a public market for equity shares in India.
The track record of dealing with the aftermath of the 2010 AP Crisis, CDR and demonetization demonstrates the strength of its business model, policies and client relationships as well as ability to manage the expectations of varying stakeholders in business, including staff, lenders, shareholders and clients.
The companys asset quality has improved in recent years with gross stage 3 assets declining sharply to 0.1% and net stage 3 asset to mere 0.01% as of March 2019.
Operating expense ratio was one of the best at 4.52% in FY2019.
Rural Areas in India are a highly under-served market for formal banking services in terms of access, availability and suitability of products and services and offers strong potential for improvement and that given the relatively deeper reach, existing client relationships and employee base, micro-finance institutions are well placed to address this demand. About 88% of portfolio of the company was located in Rural Areas end December 2018, as compared with 61% for 33 NBFC-MFIs as a whole. As of March 2019, 94.6% of portfolio was located in Rural Areas. Further, loans given to clients for agriculture and allied activities can be classified as "Direct Agri" by banks, which provides the opportunity to assign this portfolio to banks that need to meet their target on Direct Agri loans.
As of June 2019, the company covered 74,749 villages in 269 districts in 16 states and 1 union territory across India through 929 branches. Operations are geographically well-diversified with no single state contributing more than 20.01% to AUM, no district contributing more than 1.82% to AUM and no branch more than 0.3% to AUM as of March 2019.
In the event of a slowdown in the economic activity, or any other developments including political unrest, drought/floods and other natural calamities, or social upheaval in the states it operates in, the company s performance will get affected.
The business the company has been adversely affected in the past by certain state regulations. There can be no assurance that similar disruptions will not occur in the states in which it operate.
Microfinance loans are unsecured and are susceptible to various operational, credit and political risks which may result in increased levels of non-performing assets (NPAs). The focus client segment for micro-loans is women in Rural Areas. As of June 2019, 99.82% of clients were women. These clients typically have limited sources of income, savings and credit histories. Such clients generally do not have a high level of financial resilience, and, as a result, they are more susceptible to declining economic conditions and natural calamities.
The company handles cash in a high volume of transactions occurring through a dispersed network of branches; as a result, it is exposed to operational risks, including fraud, petty theft and embezzlement.
There is significant competition from other MFIs and banks in India (including SFBs). Some commercial banks are also beginning to directly compete with for-profit MFIs for lower income segment customers in certain geographies.
The rise of digital platforms and payment solutions may adversely impact business model and there may be disintermediation in the loan market by fintech companies.
The company expects to get classified as a passive foreign investment company (PFIC) for U.S. federal income tax purposes, which could result in materially adverse consequences, including additional tax liability and tax filing obligations, for a US investor relative to an investment in a company that is not a PFIC.
Currently NBFCs are unable to raise enough resources at reasonable cost and have to keep large liquidity which adversely affects their return ratios.
The annualized consolidated EPS on post-issue equity works out to Rs 48.5 for FY2019. At the price band of Rs 853 to Rs 856, P/E works out 17.60 to 17.65 times for FY2019.
Post-issue, the consolidated book value (BV) works out to Rs 356.0 at the issue price of 856 and Rs 355.9 at the issue price of Rs 853. P/BV works out to 2.40 times. Post issue adjusted BV (net of net NPAs) works out to Rs 355.9 per share and P/Adj BV works out to 2.41 times.
Among peers, Satin Creditcare Network is trading at P/BV of 1.1 times, CreditAccess
Grameen at 3.2 times, Ujjivan Financial Services at 1.8 times and Equitas Holdings at 1.6