01-01-1970 12:00 AM | Source: ICICI Securities
Buy Spandana Sphoorty Ltd For Target Rs. 840 - ICICI Securities
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Cost-efficient business model to rescue, capital sufficiency to add comfort

Spandana Sphoorty’s (Spandana) Q4FY21 performance was characterised by prudent approach in recognising stress (written off ~Rs3.6bn in FY21) and strengthening balance sheet as reflected in its total provision of ~Rs4.1bn (~6% of on-balance sheet loans). Collections (excluding arrears) fell to 92% in April’21 & 82% in May’21 from 96% in March’21. While lower collections in near-term due to covid second wave pose risk to asset quality (expect credit loss of ~2-3% in FY22), we believe, Spandana’s cost-efficient business model will help it gain industry-leading profitability. Further, its diversified operations with ~78% districts having <0.5% exposure per district, provisioning buffer at Rs0.8bn (~1% of on-balance sheet loans), and healthy capital position (CAR 40%) will ensure the MFI gets back to normalcy quicker than peers. Maintain BUY with a revised (lower) TP of Rs840 (earlier Rs900) as we cut earnings estimate by 21% in FY22 to factor in higher credit cost due to a sharp decline in collections in April’21 & May’21.

 

Effectively managed covid-led challenges.

Most diversified operations, ~94% borrowers in rural areas, 17+ years of experience (mastered crisis management) and concentrated efforts on collections, enabled Spandana restrict PAT 0+ portfolio at 10.4% and non-paying customer pool at only 2.3% as of March’21. Further, it’s GNPL at 3.1% as of March’21 is one of the lowest within MFI space. While we note lower GNPL is also a function of its accelerated write-off, it also reflects the management’s prudent approach in recognising the stress upfront and focus on recovery. Notably, its collection efficiency stands at 53% even in written-off portfolio as on March’21. No presence in Assam and only 0.5% of AUM in West Bengal reinforce our view that Spandana will navigate the current cycle better than peers.

 

Cost optimisation continues; building infrastructure to sustain Industry-leading growth.

Its continuous focus on cost optimisation as reflected in moving to monthly collection model, preference for a flatter hierarchy (a supervisory layer between cluster manager and AVP removed) and simplified organisation structure (only HO & Branch), enabled Spandana in bringing down cost/asset to its lowest level of 3.2% in FY21. Notably, while industry was laying-off staff, it added >1,000 workforce since June’20, especially at the senior level and added ~40 branches to sustain industry-leading growth going ahead. However, sustaining cost/assets at current level will be a challenging task and a key monitorable going ahead.

 

Collections fell to 82% in May’21, after reaching 96% in March’21.

Collections, after touching 96% in March’21 - one of the highest in MFI space, fell to 92% in April’21 and 82% in May’21. Collections in states like Kerala, Rajasthan and MP remained lower than the average mainly due to its inability to conduct centre meetings, given MFIs were not included in essential service list. Customer activation remains strong as reflected in nonpaying borrowers pool falling to ~2.3% in March’21 from ~5.6% in Sep’20. GNPL stands at 3.1% excluding write-offs of ~Rs3.6bn in FY21, while NNPl stands at 1.4%.

 

Core performance improved sharply on sequential basis

NII jumped 51% QoQ largely due to higher DA & other income at cumulative Rs0.65bn vs Rs0.05bn in Q3FY21. However, its conservative approach in maintaining a highly liquid balance sheet (cash & bank balance constitute ~16% of total assets) resulted in 19% QoQ growth in interest expenses. On a positive note, taking cognisance of improved collection, the company remained committed to grow its AUM, but in a calibrated manner. AUM has grown by 19% in FY21, driven primarily by higher ticket size (up 25% in FY21), while the borrower base fell 5% YoY. Following an aggressive write-off policy, Spandana has written-off loans crossing 150-dpd worth ~Rs1.6bn.

 

Key risk -

A) stress unfolding higher than expected and

B) higher operating cost if it accelerate branch expansion to drive growth.

 

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