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Published on 20/11/2020 12:06:25 PM | Source: ICICI Securities

Buy Spandana Sphoorty Ltd For Target Rs.690 - ICICI Securities

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Business resiliency to cushion earnings volatility

We attended Spandana Sphoorty Financial’s business update call and the key takeaways include: A) Cumulative collection efficiency (April’20 to 13th Sep’20) stands at 55%; it collected >Rs14bn vs demand of Rs31bn since the lockdown, B) August’20 collection efficiency (ex arrears) stands at ~78/80%, management expects it to reach 98% (borrowers) by October’20, C) state-wise – Kerala and Odisha are lagging in collections, while Gujarat, AP, Karnataka, Telangana, MP are leading, D) Spandana is comfortably placed on liquidity - raised ~Rs15bn since lockdown, at an average cost of borrowing of 9.95% (~10.6% ex assignments) and E) company expects industry-level write/offs to remain 3-4% due to Covid-19 pandemic. While ~13% inactive customer base poses near-term risk on asset quality, improving collection across states, diversified operations, adequate provisioning buffer and comfortable capital position (CAR 53%) would ensure it navigates through the current cycle relatively better than peers. Maintain BUY.

 

Other takeaways:

* MFI industry’s resilience is reflected in its steady improvement in collections with every passing month. In-line with industry, collections for Spandana also improved from lows of 2% in April to 23%/75%/95% in June/July/August, respectively.

* Spandana is following “interest capitalisation” method and hence, unlike peers, it is not collecting interest on EMIs due during moratorium period. It already capitalised Rs80mn in Q1FY21.

* While disbursement remained muted until July’20, it gained momentum in August’20 with disbursement increases to Rs5.2bn and it further improve to Rs3.17bn in September (from 1-13 September’20).

* Including past month’s due, collection is already running at >100% since last week of August’20.

* Most banks have renewed credit lines – Spandana has not availed moratorium from any lenders.

* Abhiram marketing (group company) – Abhiram will continue to remain profit-neutral entity; leftover cash at the end of each year will be transferred to Spandana as commission income. Since 1st April ’20, Abhiram’s role has been restricted to procuring products from manufactures and lending will happen on Spandana’s balance sheet. As a result, commission income for Spandana is likely to fall but will be offset by higher interest income. Currently, ~8% borrowers have consumer loans.

 

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