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Accelerated provision marred earnings; capital sufficiency to help tackle current cycle

Spandana Sphoorty’s (Spandana) Q3FY21 performance was characterised by aggressive write-offs to the tune of ~Rs2bn (>120-dpd) and clear focus on pursuing growth but in calibrated manner, as reflected in 14% YTD-FY21 growth in AuM. Further, a provision buffer of ~Rs3.6bn (~5% of AuM) against a non-paying customer pool of ~2.2% and proforma NNPL at 1% would cushion earnings in coming quarters. Collection efficiency (ex-arrears) improved steadily to ~93% in Q3FY21 from ~89% in Q2FY21. While the company’s PAR 60+ portfolio of 5.7% poses risk to asset quality, we believe Spandana will navigate through the current cycle relatively better than peers on the back of: 1) its diversified operations with ~80% of districts having <0.5% exposure per district; 2) provisioning buffer at Rs3.6bn (~5% of AuM); and 3) healthy capital position (CAR 39%). Maintain BUY with a target price of Rs900.

* Aggressive write/offs and muted revenue impacted earnings. NII fell 15% QoQ largely due to higher interest expense due to negative carry on higher liquidity and higher feerelated NCD issuance. Further, ~120bps reduction in lending yields during 9MFY21 and derecognising of Rs0.16bn interest income kept revenues lower. However, on a positive note, taking cognisance of improved collection, the company remained committed to grow its AuM, but in a calibrated manner. AuM has grown by 14% YTD-FY21 driven primarily by higher ticket size (up 15% YTD-FY21) while the borrowing base remained flat at ~Rs2.5mn during 9MFY21. Following an aggressive write-off policy, Spandana has written-off loans crossing 120-dpd worth ~Rs2bn, wiping out PPoP of Rs1.6bn and the company reporting loss of Rs297mn.

* Collections continue to trend well at ~93% (ex arrears) in Q3FY21. Spandana’s collection efficiency at 93% (ex-arrears) in Q3FY21 is one of the highest in MFI space. Collections in states like Maharashtra, Odisha and Chhattisgarh remained lower than the average due to extended lockdown and a few instances of political interference. Customer activation remains strong as reflected in the non-paying borrowers pool falling to ~2.2% in Dec’20 from ~5.6% in Sep’20. Proforma GNPL stands at 2.7% excluding write-offs of ~Rs2bn while proforma NNPL stands at 1%. Considering the company carries a total provisioning buffer of ~Rs3.6bn or 5% of AuM, it expects credit cost to normalise from Q4FY21 onwards. Further, strong PPoP margin at an average of 14% over past five quarters and adequate capital would ensure Spandana navigates through the current challenging cycle relatively better than peers.

* Outlook. While we cut our FY21E/FY22E earnings estimates by ~45%/11% respectively to factor-in higher credit cost and sharp yield compression, we believe Spandana’s comfortable capital position (CAR at 39%), industry-leading profitability (PPoP margin at average 14%) and ~500bps of provisioning buffer would ensure it achieves normalcy quicker than peers. Current valuation, at 1.6x / 1.4x FY22E / FY23E P/BV respectively, captures near-term asset quality risk. Maintain BUY with a target price of Rs900, valuing the stock at 1.6x FY23E BVPS. Key risks – A) stress unfolding higher than anticipation and B) lower AUM growth.

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