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Pan-India MSME financier; high visibility on >30% AUM growth in near term

SBFC Finance (SBFC) is a direct play on ‘increasing formalisation of MSME financing,’ with its a) most diversified distribution network (presence in >15 states with no single state contributing >20% of AUM), targeting formal MSME customers (ITR is mandatory for all borrowers), b) in-house operations divided into six independent verticals, and c) highly experienced management team having the potential to drive >25% AUM growth in the near term. Further, strong focus on collection (average >1 collection person per branch) and score-card based underwriting could help credit cost remain at <100bps in the near term. We build in 36% AUM CAGR over FY23-25E with RoA / RoE at 3.8%/10.4% by FY25E. We initiate coverage on the stock with a BUY rating and a target price of INR 115, valuing it at 4x FY25E PBV.

Creating a space in small-ticket MSME financing differently…

While small-ticket MSME financing is a go-to product for most financiers in India, there is a huge difference in the way these financiers approach MSME lending. One set of financiers (banks) caters to large-ticket formal segment and other set (NBFCs, SFBs and others) caters to small-ticket informal segment, leaving open space for small-ticket formal segment. That is where SBFC is acting as a ‘category creator’ and building a tech-based scalable, sustainable and profitable business model. For all its customers, ITR is mandatory and >80% of its customers have >700 CIBIL score. Further, most MSME financiers are running a concentrated portfolio with their home state contributing >30-40% of total MSME AUM, wherein SBFC has built a strong network of >150 branches covering 16 states and is now focusing on deepening presence in existing geographies.

…the same to help drive >25% AUM CAGR in near term

SBFC has delivered industry leading 44% AUM CAGR between FY20-23 – despite covid-led disruption – driven by 152 branches spread across >15 states and focus on left-out formal small-ticket (36 months vintage (~54% of branches) having o/s AUM at INR 390mn vs branches with >12 month to <36 months’ vintage (~27%) o/s AUM at INR 350mn and branches (19%) with <12 months’ o/s AUM at INR 8mn), we expect SBFC to sustain a high growth trajectory in the near term.

Strong focus on collection and formal customer segment…

SBFC has approached MSME financing in a different way – strategically it is focusing on formal self-employed segment, given the banks are targeting big-ticket MSMEs while NBFCs and SFBs are targeting small-ticket informal self-employed segment, leaving small-ticket formal self-employed segment financing open. Credit cost trajectory for banks (formal MSME) and NBFCs (informal MSME) suggests informal self-employed segment is more vulnerable to credit cycles.

In any lending business, irrespective of customer and product segment, building a strong collection mechanism is a must and SBFC has learnt this very early in its lending journey. The company has an independent collection infrastructure with a minimum of one resource per branch deployed for collection. The hierarchy would have a supervisory role for zonal heads, regional heads, area collection heads and the feet on street. It also has an independent legal structure that facilitates the recovery in delinquent pool. As on Mar’23, it has total 170 collection staff.

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