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In 4Q23, Spandana continued on its improving trajectory and reported a standalone PAT of INR 1.2bn (+67% QoQ, +16% vs JMFe) aided by a) strong AUM growth of +24% QoQ /+29% YoY as disbursements accelerated (+29% QoQ), b) improvement in NIMs (adj for assignment) by +40bps QoQ due to repricing of AUM and c) improving asset quality metrics with current book (0-dpd) now at 96.6% vs 92.1% QoQ. Headline asset quality was also helped by INR 1.3bn sale to ARC and steady improvement in net collection efficiency to 97.6% vs 94.5% QoQ. After a turbulent couple of years, SSFL is now gradually turning towards a sound microfinance business with new leadership team on board and operational transformation underway. The new mgmt. aspires to achieve MFI AUM of INR 150bn by FY25E with steady state profitability of 4-4.5% RoA (driven by credit costs of sub 2.0%) and healthy capital efficiency (CAR at 36.3%). Further, Spandana plans to start 2 new business lines: a) Lap and b) small ticket MSME in FY24 and plan to increase these books to INR 15- 17bn each by FY25E. With the current book now inching up to 96.6% in 4Q23, pre-Apr’21 book down to 2% of AUM and provision coverage now shored up to c.70%, we believe past stress is under control and we build credit costs to normalize to c.2.3% of loans for FY24E/FY25E. Stability in leadership team, strong capital levels and tailwinds in microfinance give us confidence that SSFL could deliver avg. RoE/RoA of 15.2%/4.2% over FY24E/FY25E, despite near term headwinds of higher opex on account of branch/employee additions.. Maintain BUY with target price of INR 800, valuing SSFL at 1.4x FY25E P/B. Spike in credit costs and/or inability to demonstrate sustainable growth trajectory are key risks to our call.

* Strong AUM growth aspirations; healthy operating performance: Spandana’s AUM grew by +24% QoQ/+29% YoY to INR 85.1bn on the back of strong disbursements (INR 30.5bn, +29% QoQ). Focus on acquisition of new customers continues, 50% of the disbursements in FY23 were to new customers. Management aspires to increase the MFI AUM to INR 115bn by FY24E and INR 150bn by FY25E driven by new customer acquisition from 7 focus states and it plans to increase its branch network to 1,500 (from current 1,227) by end of FY24E. Further, Spandana plans to start 2 new business lines: a) Lap and b) small ticket MSME in FY24 and plan to increase these books to INR 15-17bn each by FY25E. PPOP increase to INR 2.4bn (+83% QoQ) aided by a) strong AUM growth with 40bps QoQ improvement in NIMs (adj for assignment) and b) INR 0.7bn income on assignment transaction, despite a tad elevated opex levels (+10% QoQ). Opex levels may remain elevated in the near term driven by new branch additions, though mgmt. aspires of achieving a BAU ROA of 4.5% aided by strong NIMs and controlled credit costs.

* Asset quality normalisation continues: GNPA/NNPA improved to 2.1%/0.6% (-320bps QoQ/-190bps QoQ) and the current book (0-dpd) now stands at 96.6% vs 92.1% QoQ aided by INR 1.3bn sale to ARC and steady improvement in net collection efficiency to 97.6% vs 94.5% QoQ. Spandana increased provision coverage to c.70%; we expect credit costs to normalize to 2.3% of loans for FY24E/FY25E.

* Valuation: Stability in leadership team, strong capital levels and tailwinds in microfinance give us confidence that SSFL could deliver avg. RoE/RoA of 15.2%/4.2% over FY24E/FY25E, despite near term headwinds of higher opex on account of branch/employee additions. Maintain BUY with target price of INR 800, valuing SSFL at 1.4x FY25E P/B.

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