Usha Financial NSE SME IPO review (May apply)

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Review By Dilip Davda on October 21, 2024

•    The company is engaged in the business of financial services with major focus on B2B.
•    It posted steady growth in its top and bottom lines for the reported periods.
•    IPO money will be utilized for augmenting its capital base and increased lending business.
•    Based on FY25 annualized earnings, the issue appears aggressively priced.
•    Management is confident of maintaining the PAT margins going forward.
•    Well-informed investors may park moderate funds for long term. 

ABOUT COMPANY:
Usha Financial Services Ltd. (PLL) is a non-banking finance company ("NBFC") incorporated in the year 1995 registered with the Reserve Bank of India as a NBFC-ICC (Investment & Credit) - base layer- non-systemically important non-deposit taking NBFC with over 9 years of lending experience. It provides lending solutions to fellow NBFCs and corporates, MSMEs, and individual, particularly to women entrepreneurs. Its services also extend to Electric vehicle (EV) financing. It provides a diversified range of financial products to individuals, body corporates, NBFCs and MSMEs.

The company evaluates borrowers before providing them with the loans and financing. It has a dedicated team to conduct the evaluation. Its customer due diligence procedures encompass multiple levels of checks and controls designed to assess the capacity of customers and to confirm that they meet stringent selection criteria and include comprehensive evaluation of repayment capacity and detailed cash flows analysis of the customer.

The company ensures that the loan disbursement process is efficient, smooth, and transparent, with a quick turnaround time (TAT) and a strong focus on customer satisfaction. These loans are EMI-based with competitive interest rates and other favourable terms. All disbursements are conducted through banking channels, directly into the customer's account. As of the date of filing this offer document, it had 43 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 5860000 equity shares of Rs. 10 each to mobilize Rs. 98.45 cr. (at the upper cap). The company has announced a price band of Rs. 160 - Rs. 168 per share. The issue opens for subscription on October 24, 2024, and will close on October 28, 2024. The minimum number of shares to be applied is for 800 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.96% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, the company will utilize Rs. 70.00 cr. for augmenting the capital base, and the rest for general corporate purposes. 

The IPO is jointly lead managed by Narnolia Financial Services Ltd., and Unistone Capital Pvt. Ltd., while Skyline Financial Services Pvt. Ltd. is the registrar to the issue. SS Corporate Securities Ltd., is the Market Maker for the company. The issue is underwritten to the tune of 50.01% by Narnolia Financial and 49.99% by Unistone Capital. 

Having issued/converted initial equity shares at par value, the company issued further equity shares in the price range of Rs. 30.00 - Rs. 527 per share between March 2007, and July 2023. It has also issued bonus shares in the ratio of 1 for 5 in June 2024. The average cost of acquisition of shares by the promoters is Rs. 20.10, Rs. 24.44, Rs. 50.00, Rs. 50.36, and Rs. 61.07 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 15.88 cr. will stand enhanced to Rs. 21.74 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 365.19 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 25.31 cr. / Rs. 4.14 cr. (FY22), Rs. 46.19 cr. / Rs. 10.17 cr. (FY23), and Rs. 63.96 cr. / Rs. 13.45 cr. (FY24). For H1 of FY25 ended on September 30, 2024, it earned a net profit of Rs. 5.04 cr. on a total income of Rs. 26.81 cr. 

For the last three fiscals, the company has reported an average EPS of Rs. 7.38 and an average RoNW of 13.91%. The issue is priced at a P/BV of 2.40 based on its NAV of Rs. 69.95 as of September 30, 2024, and at a P/BV of 1.74 based on its post-IPO NAV of Rs. 96.38 per share (at the upper cap). There appears to be some typo error on page 92 of RHP which shows NAV as of September 30, 2024 at Rs. 7.00 (which is wrong).

If we attribute FY25 annualized super earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 36.21, and based on FY24 earnings, the P/E stands at 27.14. The issue relatively appears aggressively priced. However, the management is confident of maintaining the margins, if not improved going forward. The second half is always better than the first half as per historic data. 

For the reported periods, while PAT margins details are missing, it reported RoCE margins of 12.71% (FY22), 14.88 % (FY23), 15.40% (FY24), 12.02% (H1-FY25). On request to lead manager, PAT margin info provided by whatsapp which are 16.56% (FY22),22.28% (FY23), 21.27% (FY24), 19.02% (H1-FY25). They are issuing corrigendum to this effect shortly. 

DIVIDEND POLICY:
The company has not paid any dividends for any financial year so far. It will adopt a prudent dividend policy post listing, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown IBL Finance as their listed peers. It is trading at a P/E of 78.07 (as of October 18, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 15th mandate from Narnolia Financial in the last two fiscals (including the ongoing one).  Out of the last 10 listings, 2 opened at discount, and the rest opened with a premiums ranging from 15% to 110.36% on the date of listing.

This is the 21st mandate from Unistone Capital in the last three fiscals (including the ongoing one). Out of the last 10 listings, all listed with premiums ranging from 7.41% to 125.93% on the date of listing.

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