SBFC FInance

Lender of secured MSME loans

Healthy growth, stable margins, geographic diversification and well managed asset quality

SBFC Finance is a NBFC offering secured MSME loans (79.3% of AUM) and gold loans (17.5%) to entrepreneurs, small business owners, self-employed individuals, salaried and working-class individuals. The company has posted strong growth in assets under management (AUM) at a CAGR of 44% from FY2018 to FY2023 at Rs 4943 crore. It has also witnessed healthy disbursement growth, at a CAGR of 40% between FY2021 and FY2023.

The loans with a ticket size of Rs 5-30 lakh account for 87.27% of AUM. The average ticket size (ATS) of secured MSME loans was Rs 9.9 lakh, gold loans Rs 0.90 lakh and other unsecured loans Rs 6.9 lakh. The company has provided loans to 102,722 customers in tier II and tier III cities, focusing on customers who have a strong credit history but may lack formal proof of income documents. The net interest margin was healthy at 9.32% in FY2023.

SBFC Finance has a diversified pan-India presence, with an extensive network in target customer segment. It has an expansive footprint in 120 cities, spanning 16 Indian states and two union territories, with 152 branches. Geographically diverse distribution network, spread across the North, South, East and West zones, allows to penetrate underbanked populations in tier II and tier III cities in India.

As a result of active management of state concentration, the company has been able to maintain low levels of AUM concentration per state with the largest state 17.42%, despite growth over the years. AUM is diversified across India, with 30.84% in the North, 38.53% in the South and 30.63% in the West and East. The disbursements across zones are also well-distributed, and the company has reduced concentration risk across industries and sectors and no single industry contributes more than 10% of loan portfolio.

Aseem Dhru is a CEO of the company with more than 25 years of experience, and was previously Group Head – Business Banking, Working Capital and Retail Agri business at HDFC Bank. He has also been the Managing Director and CEO of HDFC Securities and was a director on the board of HDB Financial Services.

SBFC Finance has complete in-house origination of loans and benefits from risk management framework. Leveraging significant operational experience, the company has set up stringent credit quality checks and customized operating procedures that exist at each stage for comprehensive risk management and have aided healthy portfolio quality indicators such as low rates of Gross NPAs at 2.43% and Net NPAs at 1.41% end March 2023.

The company primarily focuses on small enterprise borrowers with monthly income up to Rs 1.5 lakh and a demonstrable track record of servicing loans and a CIBIL score above 700 at the time of origination. The company sources customers directly through a sales team of 1,911 employees end March 2023, and has adopted a direct sourcing model through branch-led local marketing efforts, repeat customers or through walk-ins.

In addition, the company has entered into a co-origination agreement with ICICI Bank in 2019, through which ICICI Bank and Company co-originate Secured MSME Loans at a mutually agreed ratio of 80:20, respectively.

The company has also created an onground technology-driven collections infrastructure that is extensive, to ensure that the company maintains high asset quality. Approximately 89.49% of Secured MSME Loan collections and 90.92% of unsecured loan collections were non-cash-based EMI collections, thus reducing cash management risk. Technology is at the core of operations. In terms of distribution, the centralized real-time lending system is a multi-product digital platform supporting mobile customer onboarding, paperless login and loan processing, which leads to quicker turn-around time.

The company has demonstrated a history of healthy financial performance. It has been able to access borrowings at a competitive cost due to stable credit history, credit ratings, conservative risk management policies and brand equity. Its average cost of borrowing was 8.22% for FY2023.

The company is backed by marquee institutional investors such as the Clermont Group, Arpwood Group and Malabar Group, who provide their expertise to operations, including through their representatives on Board. In addition to providing capital, institutional shareholders have assisted in growth through strategic guidance based on their previous experience and insight into the financial services sector in India.

The company received credit rating upgrade of [ICRA] A+ (Stable) in October 2022. The company has received a rating of CARE A+; Stable for long term bank facilities in April 2023.

Capital to Risk Weighted Assets Ratio of the company stands at 31.9% end March 2023 with the Tier I ratio at 31.71% and Tier II at 0.19%.

The Offer and the Objects

The initial public offer (IPO) consists of an offer for sale (OFS) to raise Rs 425 crore by issuing 7.87 crore equity shares of face value of Rs 10 each at lower price band Rs 54 and 7.46 crore equity shares at upper price band of Rs 57. The IPO also consists of fresh issue to raise Rs 600 crore by issuing 11.11-10.53 equity shares.

Among the promoters, Arpwood Partners Investment Advisors LLP is proposing to raise Rs 306 crore, Arpwood Capital Rs 75 crore and Eight45 Services LLP Rs 44 crore in OFS.

The promoter and promoter group shareholding would decline to 65.1% post IPO from 80.5% pre-IPO.

The issue is to be made through the book-building process and will open on 03 August and will close on 07 August 2023.

The company proposes to utilize the net proceeds towards augmenting capital to meet future capital requirements arising out of the growth of business and assets. The company also expects to receive the benefits of listing of the equity shares on the stock exchanges and enhancement of Company’s brand name amongst existing and potential customers and creation of a public market for equity shares in India.

Strengths

The company has a diversified pan-India presence with an extensive network to cater to the target customer segment.

The company has witnessed rapid growth since the commencement of operations in 2017. AUM has grown at a CAGR of 49.17% during the last three years.

As of March 2022, less than 15% of the approximate 70 million MSMEs in India have access to formal credit in any form providing strong growth potential.

The company has made significant investments in terms of infrastructure and personnel in setting up a branch network in existing geographies.

Entire in-house loan originations ensure a more direct and thorough understanding of the customer’s profile and leads to better asset quality and low turn-around time.

A CIBIL score is above 700 at the time of origination for 82.32% of secured MSME Loan customers.

The focus is on collateral-backed lending and 96.44% of its loan portfolio was secured with mostly self-occupied properties.

A spouse or parent is made a co-borrower to ensure that there are joint holders for loans ensuring lower defaults and more prompt repayment.

Secured MSME Loans have an average LTV ratio of 42.51% and Loans against Gold is having an average LTV ratio of 68.51%.

A stable credit history, credit ratings, conservative risk management policies and brand equity provides access diversified sources of funding at a competitive cost.

Weaknesses

About 81.33% of total AUM of Secured MSME Loan customers are self-employed, which are often perceived to be higher risk customers due to their increased exposure to fluctuations in adverse economic conditions.

Due to recent growth, a significant portion of the loan portfolio is relatively new and was disbursed during the last 36 months.

The financial services market is being served by a range of financial entities, including traditional banking institutions, captive finance affiliates of players in various industries, NBFCs and small finance banks

The company is subject to the potential increase in competition brought about by changes in the laws and regulations governing business.

More players in consumer-facing businesses with a repository of data (such as e-commerce companies and payment service providers) are expected to enter the lending business, intensifying competition.

The company had a negative asset liability mismatch of Rs 968.19 crore for over one year and up to three years maturity and Rs 1072.30 crore for over three years and up to five years maturity end March 2023.

The company derives a significant portion of AUM at 15.6% and disbursements at 21.2% in FY2023 for secured MSME loans from co-origination agreement with ICICI Bank. The termination of the co-origination agreement may adversely affect growth and prospects.

The gold loans account for 17.5% of AUM of the company, while there is steep competition and the top three gold financing NBFCs accounted for 70% share in NBFC gold loan book in FY2023.

About 69.98% of AUM comes from six states with a share of Karnataka at 17.4%, Uttar Pradesh at 15.5%, Telangana at 12.54% and Maharashtra at 10.5% end March 2023. The concentration in these states exposes to adverse geological, ecological, economic and/or political circumstances in those respective regions.

Valuation

SBFC Finance is one of the fastest growing small business loans focused NBFCs with healthy earnings performance in FY2023. The company has maintained stable asset quality. The revenues of the company jumped 40% to Rs 740.36 crore and net profit galloped 132% to Rs 149.74 crore in FY2023.

The EPS on post-issue equity works out to Rs 1.4 for FY2023. At the price band of Rs 54 to Rs 57, P/E works out to 38.4-40.5 times of EPS for FY2023.

Post-issue, the book value (BV) will be Rs 23.8 at upper price band and adjusted BV (ABV) is Rs 23.2 (net of NNPA). The scrip is being offered at price to Adj BV multiple of 2.5x at the upper price band.

Among peer NBFCs, Five Star Business Finance is trading P/Adj BV (end March 2023) multiple of 4.9x, MAS Financial Services at 3.0x and IIFL Finance at 2.6x.

In terms of P/E, SBFC Finance is offered at 40.5x of EPS for FY2023 at the upper price band. Among peers, Five Star Business Finance is trading at PE of 34.8x of EPS for FY2023. MAS Financial Services at 21.2x and IIFL Finance at 15.7x.

SBFC Finance has exhibited moderate RoE of 8.7% for FY2023, while the RoE was healthy at 13.9% for Five Star Business Finance, 13.4% for MAS Financial Services and 16.7% for IIFL Finance.

The RoA for SBFC Finance was healthy 2.6% for FY2023, while it was robust at 7.0% for Five Star Business Finance. MAS Financial Services has exhibited RoA of 2.6% and IIFL Finance 3.0%.