Spandana Sphoorty Financial Stock Analysis

Spandana Sphoorty

Spandana Sphoorty Financial Limited (“Spandana Sphoorty” or the “Company”) a rural-focused micro-lender, has a diversified presence across the country. The Company offers small-ticket unsecured loans to women in the low-income bracket in rural and urban areas. It provides income-generation loans, business loans and loans against gold jewellery.

  • Net Interest Income (NII) and AUM grew at a CAGR of 44% and 52% during FY17-19 respectively.
  • NNPA reduced from 2.9% to zero with 99% collection efficiency from FY17 to FY19.

Type of Loans:

  1. Abhilasha Loans – As of March 31, 2019, Abhilasha loans amounted to 84.62% of the Company’s Gross AUM. Abhilasha loans are given for income generation purposes and are designed for low-income households that aspire to improve their financial well-being through small ventures.
  2. Other Loan Products:
  1. Loans against property – Loans against property are provided to clients who own businesses, are self-employed or salaried. These loans are offered in AP and Telangana with a monthly repayment structure.
  2. Shree loans – “Shree” or “good beginning” loans are provided in AP to low/lower-middle-income women with a group guarantee.
  3. Gold loans – Gold loans are given against the mortgage of jewelry.
  4. Interim loans – Interim loans are designed to assist clients who are struggling to meet short-term liquidity requirements. The loan tenure ranges from 12 months to 36 months

In addition to their core business of providing micro-credit, Spandana Sphoorty also have contractual arrangements with one of their Group Companies, Abhiram Marketing Services Limited (Abhiram Marketing), a Company engaged in the business of consumer goods (such as mobile phones, sarees, solar lamps, pressure cookers, mixers and grinders and bicycles, among other products) that are intended for purposes such as improving the quality of life of their clients, improving health and hygiene for families, reducing household expenditures and improving awareness, communication and mobility.

  • The stock got listed on 19th August 2019. The stock was listed at Rs. 825, down 3.6% from its issue price.
  • Current Price (22nd Oct 2019) – Rs. 1072.95

Financial Position

Particulars

FY17*

FY18

FY19

Revenue (In Rs. Cr.)

377.06

587.31

1,043.10

Growth

55.76%

77.61%

Net Interest Income (In Rs. Cr.)

228.00

341.25

640.00

PBT (In Rs. Cr.)

45.59

282.70

473.47

PAT (In Rs. Cr.)

443.41**

187.95

311.82

PAT Margin

117.60%

32.00%

29.89%

EPS (In Rs.)

5.48

42.51

52.81

EPS Growth Rate

676%

24.2%

Historic P/E (Closing Price of 31st March)

Historic P/B

5.9

4.0

2.4

CURRENT P/E

20.32

CURRENT P/B

3.64

D/E

35.15

9.50

1.57

ROA

22.00%

6.60%

7.20%

ROE

79.77%

16.21%

19.02%

Net Interest Margin

14.2%

16.6%

18.6%

Cost to Income Ratio

41.78%

30.49%

24.89%

*FY 2017 results on standalone basis. Its subsidiary was incorporated in October 2017 Caspian Financial Services Limited.

**Deferred tax Liablities of Rs. 421.41 Cr.

Peer Comparison

MICROFINANCE LENDING COMPANIES

Name

Last Price

Market Cap.

P/E

P/B

AU Small Finance

653.85

19,185.72

9.31

2.17

Bharat Financial

898.00

12,594.17

12.79

2.98

CreditAccess Gramin

629.95

9,058.43

26.23

3.83

Bandhan Bank

583.5

69,618.40

32.06

6.21

Ujjivan Financial

297.75

3,616.79

16.77

1.96

Satin CreditCare

271.25

1,411.54

6.57

1.25

MAS Financial Services

697.15

3,810.76

23.25

4.06

Equitas Holdings

100

3,419.14

1.40

Average

18.14

2.98

Spandana Sphoorty

1,072.95

6,906.74

20.32

3.64

WHAT’S DRIVING THE STOCK?

Focus on Under Penetrated Rural Sector

With 68% of the population residing in rural regions, banking penetration in India has been lower compared to other countries. The Company strategically focuses on clients in the rural sector as it has a relatively deeper reach, existing client relationships and local employee base to address this demand, which is currently being met by informal sources like local money lenders. As of March 31, 2019, 94.6% of its portfolio was located in Rural Areas.

Geographically Diversified Operations

As of June 30, 2019, Spandana covers 74,749 villages in 269 districts in 16 states and 1 union territory across India through 929 branches. To address geographic concentration risk, the Company has specified exposure caps at the state, district and branch levels. With this adopted norm, its operations are geographically well-diversified with no single state contributing more than 20.01% to AUM, no district contributing more than 1.82% to its AUM and no branch more than 0.3% to its AUM as of March 31, 2019.

Superior Asset Quality

The Company operates with ZERO NPAs.

Asset Quality %

FY17

FY18

FY19

GNPA

42.1

25.9

7.9

NNPA

2.9

0.3

0

Collection Efficiency

97.13%

99.25%

99.74%

Business Growth – Key Financial & Operational Metrics

 

FY17

FY18

FY19

AUM (In Rs. Cr.)

1,302

3,167

4,437

Disbursement (In Rs. Cr.)

2,059

3,858

4,969

Net Interest Income (In Rs. Cr.)

228

355

685

WHAT’S DRAGGING THE STOCK?

Competitive Landscape

Spandana faces significant competition from other MFIs and banks in India (including SFBs), as the microfinance industry is characterized by low barriers to entry.

Operations are Restricted to Few Areas

The Company’s operations are concentrated in the states of Karnataka, Madhya Pradesh, Orissa, Maharashtra and Chhattisgarh and any adverse developments in these states could have an adverse effect on the company’s business, financial condition, results of operations and cash flows.

  • 929 branches in India, of which 149, 149, 136, 111 and 83 branches, were located in Orissa, Madhya Pradesh, Karnataka, Maharashtra, and Chhattisgarh, respectively.
  • As of March 31, 2019, 20.01%, 19.98%, 13.48%, 10.77%, and 8.70%, respectively (total 73%), of its Gross AUM originated in Madhya Pradesh, Orissa, Karnataka, Maharashtra and Chhattisgarh.

Regulatory Disruption

 In October 2010, the AP government passed the AP Microfinance Ordinance to put in place extremely stringent operating guidelines in response to the allegedly coercive collection practices adopted by MFIs in the formerly unified Andhra Pradesh. Post this ordinance, loan collections and asset quality in the formerly unified AP was severely affected across the industry. As the Company had large exposure in the formerly unified AP, the Company had a materially adverse effect on business.