Riding high on the credit growth cycle, non-bank finance companies seem to be making a beeline for Dalal Street. SBFC Finance is the newest kid on the block. Its public issue, opening for bids on August 3, has investors excited about its prospects but there is more than what meets the eye.
SBFC Finance offers secured MSME loans and loans against gold, with a majority of the borrowers being entrepreneurs and small business owners. Among MSME-focused NBFCs in India, the company has one of the highest AUM (assets under management) growth, at a CAGR of 44 percent in FY19-23.
Of the total 70 million MSMEs in India, only 16.9 million are registered on the government’s UDYAM portal, leaving a large number of MSMEs in the country who do not have access to organised finance.
As an investor, looking for a good listing pop, these are exciting prospects. Moreover, the positive outlook on banking and NBFC stocks acts as a solid tailwind. A frequent IPO investor, on condition of anonymity, told Moneycontrol that he will go all in on Day One. “The company is serving lower-size MSME tickets, between Rs 5 lakh and Rs 30 lakh, which no other national player is doing,” he said. The Rs 5-30 lakh ticket size makes for SBFC Finance’s 87 percent of AUM (assets under management).
While this is a strength, it is also a key risk for SBFC Finance’s business. As of March end, 81.33 percent of the company’s total AUM of secured MSME loan customers were self-employed. Self-employed customers and MSMEs are often perceived to be higher risk customers than large corporate borrowers. This is because their increased exposure to fluctuations in cash flows in adverse economic conditions, according to CRISIL.
Moreover, loan against property, though being a secured product, has lengthy recovery mechanism due to various legalities attached with it.
Also Read: SBFC Finance IPO opens tomorrow | 10 things to know before buying shares
Too young?
Jignesh Shial, director of research at InCred Capital, believes a lender should be around for at least 10-15 years to witness one full cycle of credit and bad loans. SBFC Finance, which has been around for only six years, does not make the cut.
“The company saw some stress during Covid-19 but additional liquidity measures took care of that. Following this, the company’s book was largely built in the last two-three years. So, it is very early to give a verdict on its NPA ratios,” he said.
SBFC Finance has seen consistent improvement in asset quality, with the gross non-performing assets in FY23 falling 31 basis points year-on-year to 2.43 percent, and net NPA declining 22 bps to 1.41 percent compared to previous year.
However, the company’s AUM stands at Rs 4,900 crore. This means the exponential AUM growth as well as the asset quality improvement is coming on a very small base. As the base grows, the margin of error also increases, believe analysts.
SBFC also has high debt levels with increasing cost of funds, said Anubhuti Mishra, analyst at Swastika Investmart. In FY23, its outstanding debt increased to Rs 3,745 crore with the average cost of borrowing at 8.2 percent, compared to Rs 2,948 crore with cost of borrowing at 7.65 percent. According to Mishra, investors should consider this IPO only for listing gains.
In the longer run, investors are better off choosing the higher-rung NBFCs that have 'AA' and 'AAA' ratings instead of SBFC Finance which has an 'A+' long-term rating.
Competitive intensity and promoter group
The company competes with Five Star Business Finance, Veritas Finance, IIFL Finance and Fedbank Financial Services in the secured MSME loans segment and Muthoot Finance, Manappuram Finance and Shriram City Union Finance in the loan against gold segment. SBFC has the lowest return ratios compared to all these names.
It has a high attrition rate, hovering on 60 percent. This can result in a slowdown and cause rise in defaults. “NBFC employees build a personal connect with customers while selling loans. The same employees help with recovery since they know the customer’s risk profile well,” explained Shial. At the time of building a young business, such high attrition levels are a big risk.
Another factor not working in favour of the lender is its promoter group. SBFC Finance is backed by SBFC Holdings, Arpwood Capital and Clermont Corporation, all private equity firms. In case of financial services companies, PE firms are not seen as a reliable counterparty as they are usually seeking an exit, said analysts. For instance, Arpwood Capital is selling some stake in the IPO at a 350 percent profit.
Co-origination a boon?
In case of a rise in defaults, the part of the book which will be relatively better protected for SBFC Finance will be the co-origination segment. SBFC Finance was among the first ones to enter into a co-origination agreement with ICICI Bank in 2019.
Co-lending is an arrangement where the loan origination is by one entity but the risk is shared by two. To put it simply, under this arrangement, both banks and NBFCs share the risk in a ratio of 80:20 (80 percent of the loan with the bank and a minimum of 20 percent with the non-banks).
While this part of the book is more secure as it carries lower risk, it also means that termination of the agreement will directly strip off 15.6 percent from the secured MSME loan AUM.
At Rs 57 (upper end of price band), the company is valued at 2.5 times its book, which is much lower than its peers. Given the company’s sub-par return ratios, fragility in a competitive environment and limited track record, analysts believe the lower valuation is justified. The ‘subscribe’ calls from brokerages are justified for some listing gains but long-term investors can probably sit this one out.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
