Spandana Sphoorty Financial (SSFL) was established in 2003 and got registered
as an NBFC in 2004. The company provides microfinance largely to women from
lower-income households with an average loan size of `17,768/customer, in
which it follows ‘joint liability group’ model. It also follows a diversified lending
and borrowing strategy. It has wide presence in the nation with presence across
16 states and 1 union territory. Spandana stands as the 4th largest NBFC-MFI
nationally in terms of AUM with a size of `4,437Cr in FY2019.
Continuous improvement in performance: By March 2010, SSFL was the 2nd
largest MFI in India in terms of AUM and borrowers. In October 2010, the MFI
industry was severely impacted due to external regulatory action (govt. of formerly
unified Andhra Pradesh promulgated AP Microfinance Ordinance 2010),
enforcing several restrictions on the operations of MFIs. This, severely affected
Spandana’s collections and the consequent cash-flow shortage impacted its ability
to service debt, impairing SSFL’s growth. Hence, SSFL’s lenders moved the
company into CDR (Corporate debt restructuring). However, SSFL continued its
efforts and turned profitable by 2014. SSFL also received capital infusion from its
Corporate Promoter and Kedaara AIF–1, enabling it to exit from CDR mechanism
successfully. Since exit from CDR, SSFL has improved on all parameters like avg.
effective cost of borrowing declined from 16.3% to 12.3%; PAR 0+ reduced from
`139.1cr to `38.3cr; and AUM grew at CAGR of 52% over FY2017-19.
Credit rating upgrade post listing to help reduce cost of borrowing: In FY2017,
SSFL did not have a credit rating, however, in August 2017 it received a rating of
BBB-, and since then the rating kept on improving and now it stands at A-. We
believe that post listing there is a strong possibility of a rating upgrade, which will
help to reduce the incremental cost of borrowing.
Diversified AUM across 17 states and opportunity to cater unbanked population:
SSFL’s operation is well spread across 17 states with 929 branches. No single
state/district/branch contributes more than 20%/1.8%/0.3% to the AUM as of
March 2019. Average loan per borrower is at ~`17,800 vs. close peers at more
than `25,000, which clearly shows management’s conservative approach and
clears risk diversification by limiting AUM by state/ district /branch.
Outlook & Valuation: At upper end of the price band, SSFL is valued at 2.7x of
FY2019 BV (Pre-IPO) and on post dilution basis at 2.4x of Book value, whereas
close peers i.e. CreditAccess Grameen is trading at 3x FY2019 BV. Given SSFL’s
successful exit from CDR in March 2017, healthy NIM, return ratio and low
penetration of financial services in rural India coupled with a well-capitalised
balance sheet and experienced management; we believe the company has an
excellent base for next level of growth. Based on the positive factors, we assign
SUBSCRIBE rating to the issue.