Spandana Sphoorty IPO review (May apply)

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Review By Dilip Davda on July 31, 2019

 •    SSFL is NBDC-MFI focusing rural women for its lending.
•    Its cost of borrowing has declined in the last three fiscals.
•    In the last two fiscals, SSFL posted CAGR of 85% for AUM and 222% for PBT.
•    Investment may be considered for the long term.
 
ABOUT COMPANY:
Spandana Sphoorty Financial Ltd. (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. As of March 31, 2019, SSFL was the fourth largest NBFC-MFI and the sixth-largest amongst NBFC-MFIs and SFBs in India, in terms of AUM (Source: ICRA Research).  Further, according to ICRA Research, SSFL's operating expense to average managed assets ('AMA') ratio was better than the industry as a whole for Fiscal 2019.
 
As of June 30, 2019, the company had 7,062 employees (including 5,051 credit assistants) operating out of 929 branches in 269 districts across 16 states and 1 union territory in India. Through its loan products and client-centric approach, the company endeavour to strengthen the socio-economic well-being of low-income households by providing financing on a sustainable basis in order to improve livelihoods, establish identity and enhance self-esteem.
 
SSFL yielded the desired result with its cost-cutting measures that lead to a reduction in its cost of borrowings from 16.31% in FY17 to 12.84% in FY19. On a consolidated basis, its gross AUM increased from Rs. 3166.79 cr. for FY18 to Rs. 4437.28 cr. for FY19.  For the said periods, its net worth increased from Rs. 1390.64 cr. to Rs. 1889.44 cr. (on a consolidated basis).
 
ISSUE DETAILS/CAPITAL HISTORY:
To augment its capital base to meet future capital requirements and listing benefits,  SSFL is coming out with a maiden combo offer of fresh equity issue as well as Offer for Sale via book building issue. It has fixed the price band of Rs. 853 – Rs. 856 per share having a face value of Rs. 10 per share. Minimum application is to be made for 17 shares and in multiples thereon, thereafter. The issue opens for subscription on 05.08.19 and will close on 07.08.19. Post allotment, shares will be listed on BSE and NSE.
 
The company mulls issuing fresh equity worth Rs. 400 cr. (Approx. 4672897 shares at the upper price band). It is also offering 9356725 shares via offer for sale from the existing stakeholders. Thus the total issue size will be approx. 14029622 shares are being issued to mobilize Rs. 1196.73 cr. - Rs. 1200.94 cr. (based on lower and upper price bands).
 
BRLMs to this issue are Axis Capital Ltd., ICICI Securities Ltd., IIFL Securities Ltd., JM Financial Ltd., IndusInd Bank Ltd. and Yes Securities (India) Ltd. Karvy Fintech Pvt. Ltd. is the registrar to the issue. Post issue SSFL's current paid-up equity capital of Rs. 59.63 cr., will stand enhanced to Rs. 64.3 cr. approx. Thus the issue consists of dilution of 21.82% of the post issue paid-up equity capital.
 
Having issued initial equity at par, SSFL raised further equity in the price range of Rs. 12 to Rs. 656.95 between August 2007 and June 2018. It has also issued bonus shares in the ratio of 2.5 shares for every 1 share held in November 2005.
 
The average cost of acquisition of shares by the promoters is Rs. 108.96 and Rs. 237.47 per share while the selling stakeholder is Rs. 3.33, Rs. 237.47, Rs. 279.21, Rs. 304.05 and Rs. 322.81 per share.

FINANCIAL PERFORMANCE:
On the financial performance front, on a consolidated basis, SSFL has posted revenue/net profits of Rs. 587.31 cr. / Rs. 187.95 cr. (FY18) and Rs. 1043.10 cr./ Rs. 311.90 cr. (FY19). On a standalone basis, for the last three fiscals, it has posted revenue/net profits of Rs. 377.06 cr. / Rs. 443.41 cr. (FY17), Rs. 587.27 cr. / Rs. 187.97 cr. (FY18) and Rs.1036.28 cr. / Rs. 308.75 cr. (FY19). According to management, super-profits for FY17 were on account of restated differed tax provisions. Its AUM posted 85% CAGR while PBT 222% CAGR for these periods. Its gross and net NPAs were 0.01% sd on 31.03.19.
 
For the last two fiscals, on a consolidated basis, SSFL has posted an average fully diluted EPS of Rs. 49.74 and an average RoNW of 15.51%.  The issue is priced at a P/BV of 2.70 on the basis of its consolidated NAV of Rs. 316.84 as on 31.03.19. If we consider the latest earnings and attribute it on a fully diluted equity post issue, then asking to price it at a P/E of around 17.6 against the industry average of 21.3. Thus issue appears fully priced.
 
As per offer documents, it has shown Bharat Financial, Satin Creditcare, Ujjivan Financial, Bandhan Bank, Bajaj Finance, Cholamandalam Inv. Shriram City, Sundaram Finance and M & M Fin Services as its listed pers. These peers are currently trading at a P/E s of around 13, 7, 148, 26, 45, 17, 9, 24 and 14 (as on 31.07.19).  None of them is truly comparable on an apple to apple basis as SSFL is focusing only for MFI segment.
 
Credit Access (CAGL) is much nearer listed peer that is currently trading at a P/E of around 23 (as on 31.07.19)
 
MERCHANT BANKER'S TRACK RECORDS:
On BRLM's front, six merchant bankers associated with this offer have handled 47 public issues during the last three fiscals including ongoing one. Out of which 16 public issues closed below the issue/offer price on listing date.
 

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