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Spandana Sphoorty’s (Spandana) Q1FY23 financial performance was marred by management’s decision to write-off pre-covid related stress to the tune of Rs7bn. However, credit quality and book performance (post write-offs) appear to be in a much better shape – PAR 31-90 @3.5% and collection in restructured book stood at 80% as on June’22. Overall collections (ex arrears), including GNPL and restructured book, stood at 94% during Q1FY23. GNPL fell to 6.7% in Q1FY23 from 15% in Q4FY22. Standard restructured book stands at Rs2.4bn or 4% of AUM. Against total stress pool of ~12% of AUM, it carries total provision of 5% of AUM.

New management, in Q1FY23, continued to focus on aligning and refining processes to pave the way for achieving Vision 2025 goals and maintaining credit quality in retained portfolio of Rs55bn going forward. The company has now moved to new regime from 1st July’22. Management highlighted that over the next 2-3 quarters focus would be on building end-to-end digital process right from customer on boarding to credit monitoring and collections.

Considering the management and the operational stability, gradual recovery in earnings led by credit cost normalisation and favourable risk-reward (trading at 0.8x FY24E P/BV), we maintain BUY with a revised TP of Rs500 (earlier: Rs550) as we cut earnings estimates for FY23/24 by >20% / >10%, respectively to factor in the higher credit cost. We assign P/BV multiple of 1x on Sep-23 BVPS.

Q1FY23 washed out due to accelerated write-offs; management sounded confident about getting back to business normalcy Q2FY23 onwards. Spandana reported net loss of Rs2bn largely due to higher provision at Rs3.5bn (credit cost at annualised 24%). Accelerated write-offs at Rs7bn resulted in elevated credit cost. However, management highlighted that majority of legacy stress has been written-off and it does not foresee higher write-offs in coming quarter. It derives comfort from robust 94% collections in post write-off book at Rs55bn – of which Rs38.5bn (~70% of AUM originated post Apr’21) is having CE of 97.5%, Rs13bn (~24% AUM non-restructured book) with CE at 94% and strong 80% CE in 6% of the restructured book. Further, PAR 31-90 stands at only 3.5% in retained AUM.

AUM growth guidance for FY23 intact; incremental growth would be largely driven by new customer acquisition. Total AUM fell sharply by 16% QoQ to Rs55bn due to higher write-offs and muted disbursements at Rs13.2bn vs average Rs17-20bn during pre-covid. However, management highlighted that it disbursed Rs9bn in June’22, which is ~69% of the entire Q1FY23 disbursements. Hence, it maintained full year disbursement target of Rs80bn despite weak Q1FY23. It added 0.1mn new borrowers in Q1FY23 and plans to add 0.45mn new borrowers in FY23.

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