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A well diversified MSME KEY CHANGES: -focused non TARGET -banking finance company

 SBFC Finance Ltd. (SBFC), headquartered in Mumbai, is a systemically important nondeposit-taking non-banking finance company (NBFC) offering Secured MSME loans (80% of AUM), Loans against Gold (17%), and unsecured     loans (3%). The company focuses on disbursing loans with a ticket size in the range of Rs.0.5 million to Rs.3.0 million, and as of March 31, 2023, 87.27% of their AUM had a ticket size within this range

* Between FY23 and FY25, NBFC credit is projected to witness a growth rate of 12% to 14%, driven by the retail vertical, comprising home, car, and microfinance segments (Source: CRISIL Report).

* SBFC maintains a diversified pan-India presence across 120 cities, spanning 16 Indian states and 2 union territories, with 152 branches.

* Among MSME-focused NBFCs in India, SBFC have one of the highest asset under management growth rates (44% CAGR between FY19 and FY23) and disbursement growth of 40% CAGR during the same period.

* The company   has a co-origination agreement with ICICI Bank for loan sourcing. 21.2% of the business is sourced through this channel.

* SBFC Finance is backed by marquee institutional investors such as the Clermont Group, the Arpwood Group   and the Malabar Group..

* SBFC has undertaken a Pre-IPO Placement of 27,272,727 equity shares at a price of Rs.55/- per share, aggregating to Rs.150cr, to Amansa Investments.

* The company has an AUM of Rs.4,943cr and is well diversified across India, with 31% in the North, 38% in the South, and 31% in the West and East.

* The advances grew by 48% YoY to Rs.4,415.3cr in March 2023 and the net profit of SBFC increased 33% CAGR between FY21-23, from Rs.85cr to Rs.150cr.

* Net interest income grew by 50% YoY to Rs 378cr, while Net interest margin dropped to 9.3% in FY23 from 9.4% in FY22, while return on assets rose to 2.92% from 1.48% during the same period.

* SBFC’s portfolio quality metrics are improving, as their respective Gross NPA ratios for FY21, FY22, and FY23 were 3.16%, 2.74%, and 2.43%, and their respective Net NPA ratios were 1.95%, 1.63%, and 1.41%.

* At the upper price band of Rs.57, SBFC is available at a P/B of 2.6x (FY23), lower than industry peers' valuations. Considering the lower valuation, consistent improvement in asset quality, and decent business performance, we       assign a “Subscribe” rating for the issue on a short-to medium-term basis.

Purpose of IPO

The IPO is a combination of a fresh issue (Rs.600cr) and an OFS portion (Rs.425cr). The net proceeds from the fresh issue will be utilised for expanding its capital base to satisfy future capital requirements.

Key Risks

* Concentration of loans to MSMEs, which are perceived to be higher-risk customers than large corporate borrowers.

* Lower NIM compared to peers. Additionally, margins have shown a declining trend for the last 3 years

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