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Strong growth likely to sustain; stressed asset formation being subsidised to ensure lower credit cost

We hosted Mr. Ashish Damani (president & CFO) and Mr. Vishal Sharma (chief operating officer) at our Singapore conference on 23rd May’23. Management highlighted that Spandana Sphoorty’s (Spandana) underlying business trend remains strong and the company is well positioned to sustain its current AUM growth momentum (it delivered 29% YoY AUM growth in FY23). Further, the new management has laid a strong foundation for sustainable, scalable and profitable growth with new hiring of 13 people at CXO levels and 1-below CXO in past 12 months. Management also highlighted, with the PAR portfolio settling at 1.5%, net collections at 97.6% and NNPL at 0.6% as of Mar’23, credit cost is likely to settle at <2% in FY24.

Considering the operational stability, gradual recovery in earnings led by credit cost normalisation and improved visibility on achieving >4% RoA by FY25E, we maintain BUY with an unchanged target price of Rs815, valuing it at a P/BV multiple of 1.5x Sep’24E BVPS.

Key takeaways from conference:

* As per Spandana’s Vision 2025 programme, it plans to scale AUM to Rs180bn by FY25, of which Rs150bn is likely to be MFI loans under JLG, while new products would account for about Rs15bn-17bn each. New businesses will be completely different from the JLG business – with separate teams, branches, customers, geography, credit etc.

* Company has re-launched its LAP business (Rs1.25bn peak book) and, during FY24 it is planning to launch bottom-of-the-pyramid MSME loans (nano-MSMEs) as well.

* During Q4FY23, Spandana opened 112 branches and it now aims to reach a total network of 1,500 branches by FY24-end. As of Mar’23, total branch count stands at 1,227.

* Company is currently offering Rs35,000 ticket-size on first disbursement in new branches. In old branches, the disbursement ticket-size is Rs42,000. It will look to reduce the ticket-size starting from Q3-Q4FY24. As per management, AUM per customer at current levels has peaked out.

* MP, Odisha and AP are the top-3 states in terms of AUM contribution. However, 30% of the loans are coming from chosen 7 states where Spandana’s market share is <0.5%. Company aims at having 22% of the portfolio from these 7 states by the end of FY24 and 40% by FY25.

* Marginal cost of borrowing was 12.55% during Q4FY23. Costs are likely to rationalise going forward as the company targets increased funding from PSU banks over the next two quarters.

* Steady-state RoA is likely to remain around 4.5%, which is very positive, and it should start stabilising at this level in the near future.

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