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CE improving despite transition; management and operational stability a key monitorable

While the core operating performance showing improving trend, the series of events occurred during past two months like MD & CEO resigning, transfer of holding company IT system to new vendor, ongoing evaluation to streamline compensation structures and covid led uncertainties, disrupted the business momentum. However, board had proactively took two steps – A) Constituted a management Committee (with long serving Directors) to provide strategic direction and B) set-up an Interim Management Team by on-boarding two industry veterans namely Mr Nitin Agarwal – Interim CEO and Mr Amit Mittal – Interim CFO. Further, board has already identified suitable candidate for full-time MD & CEO post and actively the process is going on. Amid all noises, the company added 0.16mn borrowers, opened 58 new branches, which retraced AUM growth trajectory. After falling by sharp 9% QoQ in Q1FY22, AUM grew 2% QoQ in Q2FY22. Concentrated efforts on collections & realignment of employee pay-outs as per market levels, enabled improvement in CE to 97.4%. However, taking cognizance of 17% restructured portfolio, it continued to build provision buffer (credit cost at 3.2% in Q2FY22). Total provision buffer stands at Rs8bn or ~12.4% of AuM as on Sep’21. Considering 50% coverage on existing NPL, ~17% restructured book, PAR 31-60 at 2.4% and possibility of third-wave, we increase our credit cost assumption to 8% / 3% in FY22/23e from 4% / 2% respectively earlier. Similarly, we trim our earnings estimate by 80% / 40% for FY22/23e and revised TP to Rs460 (earlier Rs840). Downgrade to ADD.

* Management and operational stability – a key thing to watch out for in near-term. While the board had ensured medium term business continuity by setting up interim management team, it had also appointed Mr. Shalabh Saxena as MD & CEO and Mr. Ashish Damani as CFO. However, their appointment is subject to RBI approval and them relived by current organization without any cooling period. Ongoing challenge in gold loan portfolio (AUM of Rs0.3bn as on Dec’21) due to operational disturbance at Criss financials gold loan branches and a process migration to advance IT platform (post change in IT vendor) poses risk of financial as well as franchise loss. While, we recon its successful history of weathering various challenging events in past, ongoing operational and management transition would be key thing to watch out for in near-term.

* Incremental provision continued to remain elevated; covid third-wave poses nearterm asset quality risk. Spandana’s collection remains healthy despite ongoing transition as reflect in CE at 97.4% in Q2FY22. Improved collections led to sharp reduction in PAR 31-60 to 2.4% and 61-90 at only 0.9%. Further, bulk of restructuring request (~78% of total requests) flow from March’21 PAR 0 portfolio. Total restructured book stands at ~Rs13bn (~17% of AUM) with entire book is up for repayments. It carry total provision of Rs8bn or ~12.4% of AUM against total stress pool of ~22% (17% restructured + 6% GNPL). Occurrence of third-wave led restriction and elevated stress pool is likely to keep credit cost higher in FY22e.

* Key risk - A) stress unfolding higher than expected and B) higher operating cost if it further accelerates branch expansion to drive growth.

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