Buy SBFC Finance Ltd For Target Rs. 124 By Ambit Capital Institutional
The rising star
Lack of formal documentation and high distribution costs starve microenterprises of formal, affordable credit. Still, MSME’s ~30% contribution to GDP and increasing land record digitisation drove ~24% CAGR (FY20- 25) in secured MSME credit. SBFC’s wide presence, function-specific verticals and early tech adoption aided 41% AUM CAGR (FY18-25). Given <Rs.1mn ticket LAP’s low rural penetration, expect 22% industry AUM CAGR (FY25-30E). SBFC’s LAP would clock 25% CAGR. Stable spreads (8.1%) given low competition and efficiency improvement would aid 16.2%/17.4% RoE by FY28/30. Prioritising credit over sales, prudent provisioning and higher collections vs peers reflects proactive risk management. Management team led by long-time HDFC Bank veteran. Affordable home loan foray can enhance long-term growth by ~200bps. For higher growth/RoE, micro/small-ticket LAP commands 30-60% premium over affordable HFCs. Risks: Higher competition, staff attrition.
Poised for market share gains in a high-growth segment
<Rs.1mn ticket size LAP penetration is ~3% among rural households, indicating high growth prospects for secured MSME credit. We expect 22% industry CAGR in FY25-30. Expect 25% CAGR for SBFC’s MSME LAP AUM (FY25-30E) and market share expansion of ~45bps to 4.2% (FY30). Key advantages: geographical diversification, tech integration and credible management team.
Pricing power, efficiency improvement to drive RoE expansion
<Rs.1mn-ticket LAP has pricing power as operational difficulty restricts competition. SBFC’s spreads should be stable at 8.1% (FY25-28). Higher branch staff (21 vs peers’ 11-22) vs branch expansion indicates a cost-flexible approach to growth. 13% CAGR in disbursements/branch vs peers’ 6-10% should reduce opex by 65bps to 3.9%, leading to core RoE of 16.2% (FY28E) vs 12.7% (FY25).
Asset quality at par with industry peers
Priority for credit quality over sales is indicated by higher rejection rates in FY25. SBFC’s stage 3 ECL cover of 2.1x of estimated LGDs vs 0.9-1.8x for peers reflects prudent provisioning. Reducing unsecured exposures ahead of the stress cycle reflects proactive risk management and foresight. Considering conservative underwriting and provisioning, expect credit cost to be stable at 90-100bps.
Superior execution in high-growth industry warrants a premium
For SBFC, we expect 21%/16-17% AUM CAGR/average RoE (FY25-35E) vs 19%/15-16% for affordable HFCs. Existing infra can support affordable home loan foray, potentially adding ~200bps to long-term growth. Prefer micro/smallticket LAP plays (SBFC/Five-Star) to affordable HFCs due to 400bps/100-200bps higher AUM growth/RoE potential, driving 40-70% premium to AHFCs.
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