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Result Highlights

* Spandana’s Q4 FY21 performance was characterized by an in‐line AUM growth, a significant beat on revenue and PPOP, strong collections causing mild improvement in asset quality and high credit cost to raise coverage on stress funnel.  

* Supported by highest‐ever quarterly disbursements of Rs24.3bn, AUM grew by 5% qoq/19% yoy to reach Rs81.6bn despite write‐off of Rs1.66bn (2% of portfolio). The growth continues to be driven by existing clients having stable repayment record (borrower base shrunk 4% qoq), who were offered much higher loan tickets for their subsequent cycles.  

* AUM/Borrower crossed Rs33000 (up 9% qoq/25% yoy), with Spandana having closed a large part of the gap with its peers. Rising ATS along with suppressed employee cost (lower variable payouts linked to business & collections) underpinned sustained low Opex/AUM delivery.  

* Q4 FY21 had lumpy income components viz. Rs330mn upfront income from assignment transactions and Rs234mn recovery income from written‐off accounts.

* After adding back, the write‐off, there was a mild improvement in PAR 30 portfolio from 9.4% to 8.7%. The Balance Sheet provisions were maintained at Rs4.1bn despite the sizeable write‐off, and thus credit cost was high at annualized 8%. The provision stock stands at 5% of AUM and 75% of PAR 30 portfolio.  

* Collection Efficiency (with arrears) stood at 101% in Q4 FY21 v/s 96% in the preceding quarter, and without arrears was 96% in March v/s 93% in December (improvement driven by increase in full‐paying customers).

Our view –

Extended uncertainty and credit cost pain to weigh on stock performance in the near term: Collection efficiency has dipped sharply in April‐May (coming down from 96% to around 80%) and if the lockdowns/restrictions are extended to June (couple of states have done so), then PAR metric could see a substantial deterioration. This would call for elevated provisions for ensuing quarters as well, notwithstanding the significant provionsing buffer held as of March. Disbursements have been on pause and approach will be calibrated in the near term.

Our earnings and BV estimates for FY22/23 witness a significant downgrade, as we slash AUM growth forecast and build a materially higher credit cost (more than management’s assessment of 3.5‐5%) for FY22. Equipped with higher capital and pre‐provisioning profitability, Spandana should be able to withstand the pain and even grow when situation normalizes. Retain BUY with a lowered price target of Rs875. The stock trades at 0.9x FY23 P/ABV.

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