IPO Analysis: Spandana Sphoorty Financial Limited
IPO Rating - 49 (Invest with limited exposure)*
About the Issue
Spandana Sphoorty Financial (SSFL), a rural-based non-banking financial company -micro finance institutions (NBFC-MFI) is coming out with its initial public offer (IPO) of equity shares of Rs. 10 each. It is a combination of both primary and secondary sale. The price band has been fixed between Rs. 853 and Rs. 856.
The issues comprise a fresh issue of shares up to Rs. 400 crore (likely to issue 46,72,897 shares at the upper price band) and an offer for sale of 93,56,725 equity shares by existing investors. The issue size is Rs. 1,200 crore at upper price band. The issue constitutes 33 per cent of primary and 67 per cent secondary sale.
| Spandana Sphoorty IPO Details |
| Issue Open | Aug 5, 2019 - Aug 7, 2019 |
| Issue Type | Book Built Issue IPO |
| Issue Size | 14,046,056 Eq Shares of Rs 10
(aggregating up to Rs 1,200.94 Cr) |
| Fresh Issue | Equity Shares of Rs 10
(aggregating up to Rs 400.00 Cr) |
| Offer for Sale | 9,356,725 Eq Shares of Rs 10
(aggregating up to Rs [.] Cr) |
| Face Value | Rs 10 Per Equity Share |
| Issue Price | Rs 853 - Rs 856 Per Equity Share |
| Market Lot | 17 Shares |
| Min Order Quantity | 17 Shares |
| Listing At | BSE, NSE |
About the company
SSFL is a leading, rural-focused NBFC-MFI with a geographically diversified presence in India. The company offers income generation loans under the joint liability group model, predominantly to women from low-income households in rural areas. The company is currently the fourth largest NBFC-MFI in India in terms of AUM with 94.6 per cent of the portfolio located in rural areas.
At the end of March 31, 2019, SSFL has asset under management (AUM) of Rs. 4,437.3 crore. The company currently has 2.46 million borrowers. As of June 30, 2019, the company conducted its operations through 929 branches in India, of which 149, 149, 136, 111 and 83 branches, are located in Orissa, Madhya Pradesh, Karnataka, Maharashtra and Chhattisgarh, respectively. At the end of FY19, 20.01, 19.98, 13.48, 10.77 and 8.70 per cent of the company’s gross AUM originated from Madhya Pradesh, Orissa, Karnataka, Maharashtra and Chhattisgarh, respectively.
SSFL was one of only two major NBFC – MFIs who managed to exit the Corporate Debt Restructuring (CDR) mechanism successfully in March 2017 post the Andhra Pradesh crisis. Regulatory action against microfinance institutions in the formerly unified state of Andhra Pradesh had severely impacted the entire MFI sector and SSFL was placed under the CDR mechanism.
Financials
From the time the company exited the corporate debt restructuring (CDR) in the year 2017, it has exhibited good financial performance. Its gross AUM increased by a CAGR of 84 per cent while its disbursement increased by 55 per cent in the same period. SSFL AUM and disbursement stood at Rs. 4,437 crore and Rs. 4,969.3 crore at the end of FY19. The number of borrowers has also increased by a CAGR of 52 per cent in the same period and is currently at 2.46 million.
For the financial year ending March 2019, the company’s total revenue stood at Rs. 1,048.5 crore compared to Rs. 587.3 crore at the end of FY17 showing a growth of 78 per cent. The profit before tax in the same period increased at a rate of 67 per cent and was Rs. 473.5 crore for FY19. The profit in the same period increased by 66 per cent and was at Rs. 311.9 crore for FY19.
The reason for such better performance is the operational efficiency of the company. For example, Operating Profit/AMA (Average Managed Assets) stood at 10.2 per cent one of the highest in industry. Besides, the asset quality of the company looks within control at the net level. It has negligible net non-performing assets (NNPA, 0.01 per cent) at the end of FY19. The company has an Operating expenses / Annual Average Gross AUM of 4.5 per cent compared to the industry average of 5.6 per cent.
Valuation and recommendation
At the higher price band of Rs. 856, the offer is demanding market cap of Rs. 5,485 crore at upper price band, which looks lower than its competitor such as CreditAccess Grameen that demands higher market cap with similar revenue (FY19). In terms of PE, the offer is made at around 16.04 times its FY2019 consolidated EPS of Rs. 53.35 on a post-issue equity share capital of Rs. 64.3 crore of face value of Rs. 10 each. Even in terms of price to book value, the issues looks attractive at 2.71 times.
Looking at the above valuation matrices and strong operating performance, we believe that the offer is attractively valued. Nonetheless, looking at the slowing economy and consumption growth, you can subscribe to the issue with limited exposure.
*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment