MAS Financial Services IPO - a NBFC play

IPO rating – 53 (Investment recommended)

About the issue

MAS Financial Services expects to raise up to Rs. 460 crore, through a fresh issue of Rs 233 crore and existing shareholders selling shares worth Rs. 227 crore. The issue will open on Oct 6 and will close on Oct 10, 2017. The price band for the issue is Rs 456-459, with bid lot of 32 shares. The company plans to utilise the funds raised to augment its capital base.

MAS Financial Services Ltd is a Gujarat-based NBFC. It has grown its AUM at a CAGR of 33.37%, from ₹1053.1 crore in FY13 to ₹3332.6 crore in FY17. The company derives significant revenue from Gujarat and Maharashtra. It has also expanded its presence in Madhya Pradesh, Karnataka, Rajasthan, Delhi and Tamil Nadu.  

As of June 30, 2017, its AUM was derived from micro-enterprise loan segment (~57.8%) and SME loan segment (24.2%). As of June 30, 2017, its unsecured loan portfolio was ₹ 510.1 crore out of on-book AUM of ₹ 2276.24 crore. AUM in micro-enterprise, SME, 2W, CV and housing loan segments increased at a CAGR of 32.1%, 137.6%, 5.8%, 2.6% and 44.1%, respectively, over FY13-17.

The company provides loans in the segments given below:-

The company is planning to expand its product in the high growth agri-inputs and equipments segment. This is a high growth segment and with normal monsoon in Maharashtra and Gujarat, the company sees it as a significant growth area. We see that average ticket sizes for the company in all segments have seen improvement in June quarter 2017, except the two-wheeler. We see company is witnessing growth in all segments.

The company's gross NPAs are stable and have been in the range of ~1% over last 3 years. As of June 17, gross NPAs were 1.14% while net NPAs were 0.96%. Its subsidiary MRHMFL operates in the housing finance business and its net NPAs were 0.36% as of June 2017.

Its long-term bank loans are rated ‘IND-A Stable Outlook’ by India Rating Agency. However, we see that the company has negative cash flow from operating activities since last three years. The company is well-capitalized with CRAR of 23.8% on a standalone basis, of which Tier-I capital was 18.5% as of June 2017 as against Tier-I RBI requirement of 10%. The company’s cost of borrowing also slid to 9.05% in June 2017 vs 9.47% in FY17. Cost of borrowing.

As of June 30, 2017, the net worth of the company was ₹3,836.01 million and ₹ 3,885.51 million, on a standalone and consolidated basis, respectively, as per company's restated financial statements.

Industry

In fiscal 2016, MSMEs accounted for about 45% of the country’s manufacturing output and 40% of total exports. MSME credit is expected to grow 10-12% annually over the next two years.

However, NBFCs' profitability was impacted by demonetisation and rising competition. Also, due to higher employee cost and lower ticket size, the operating expenditure per customer is higher. Technology needs to play a larger role in increasing penetration and reducing costs. As the cost of funds are shrinking due to low interest rate regime, the NBFCs are benefiting from the same. However, due to intense competition, the NPAs are expected to be higher and hence profitability might be lower than earlier years.

NBFC account for 47% of the share of the auto financing which is quite significant, given the extended presence of banks in this segment. There has been spike in the share of NBFCs from 40% in FY12 to 47% in FY16.

With normal monsoon, we expect rural demand to be buoyant. Also, with new model launches in SUV and UV segments, the demand is expected to be steady.

Housing finance and LAP

Due to ‘housing for all’ and tax incentives schemes, the demand is expected to be triggered for affordable housing. Loans against property (LAPs) are secured loans and NBFC prefer to provide the same to borrowers. LAPs have grown at CAGR of 29% over FY12-16. Self-employed borrowers comprised of ~85% of LAP disbursement.

New growth sector – Agri-inputs and equipment financing

The company is planning to enter the new high growth agricultural inputs and equipments sector. The farm input segment is expected to grow at 6% while farm equipment is expected to grow in high single digit.

From the table below, we see that since the company has higher exposure to SME segment, it mirrors the growth of NBFCs such as Bharat Financial Inclusion. However, we see that company’s growth has been better than Bharat Financial Inclusion and M&M Financial Services, while housing finance companies have seen higher growth in FY17 with lower GNPAs. MAS Financial Services valuation look attractive as compared to the growth it has achieved and we see the company has strong potential to grow with the increase in its capital through the IPO.

Outlook

We see IPO issue will infuse 60% more capital as compared to its existing capital. This will sufficiently add financial muscle to further be able to grow its loan book. With GNPAs within limits, asset quality intact, decent valuations and expected entry in high growth agri-input segment, we recommend investors to “SUBSCRIBE” to the IPO.