Buy Spandana Sphoorty; target of Rs 620: ICICI Securities

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ICICI Securities research report on Spandana Sphoorty

Spandana Sphoorty’s (Spandana) Q4FY20 earnings has to be seen against the backdrop of its pro-active upfronting of Covid-19-related provisions at Rs1.3bn (~190bps of AuM), highest within the MFI space, and yet delivering ~5% RoA. While AuM growth remained strong at 56% YoY, average ticket size increased by a sharp 50% YoY to ~Rs26,500 – this is a parameter to watch out for going ahead. Higher securitisation income of Rs1bn and margin expansion supported revenue progression and enabled Spandana to improve its cost/income ratio in Q4FY20. Notably, it collected >Rs1.45bn since Apr’20. While entering Covid-19 phase with high growth (47% CAGR FY18-FY20), biweekly/monthly collection model and the likelihood of ~20% borrowers availing extended moratorium poses near-term risk on asset quality. However, Spandana’s diversified operations with 95% of districts having.

Outlook

While near-term asset quality and growth concerns persist, we believe Spandana’s comfortable capital position (CAR at 52.9%), industry-leading profitability (PPoP margin at 16%) and ~190bps of contingency buffer would ensure it achieves normalcy quicker than peers. Maintain BUY with a revised target price of Rs620 (earlier: Rs570). The stock is currently trading at 1.1x / 0.9x FY21E / FY22E P/BV respectively.

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