Buy SBFC Finance Ltd For Target Rs. 125 By JM Financial Services
Strong, consistent and in-line
SBFC Finance (SBFC) reported an in-line PAT of INR 944mn (+29% YoY, +7% QoQ) resulting in RoA/RoE of 4.5%/12% during the quarter. This was driven by i) NII growth of +5% QoQ, +25% YoY,-3% JMFe, as NIMs (calc.) declined -14bps QoQ, ii) operating leverage resulting - 36bps YoY reduction in opex/AAUM ratio leading to PPoP growth of +33%YoY, +7% QoQ, iii) stable asset quality leading to lower credit costs of 99bps (vs 96bps QoQ). However, 1+DPD was up +57bps QoQ due to impact on collections in Karnataka. Management does not foresee any material movement here though and thus maintained a guidance of ~1% credit costs going forward. Besides, the company also carries INR 40mn management overlay on its book. AUM growth was strong at (+28% YoY, +7% QoQ) led by healthy disbursements of INR 7.6bn (+6% YoY, +10% QoQ). Management guided for consistent 5- 7% QoQ growth in the coming quarters, and operating leverage will aid in 50bps reduction in opex ratio in FY26E. NIMs are likely to remain steady as MCLR linked borrowings re-pricing would largely take effect in 2H of FY26 which will also be passed on to customers. SBFC has successfully demonstrated strong resilience to the industry trends as visible in small ticket SME space. Further, SBFC has tightened underwriting in certain geographies where collections are showing signs of weakness (KA and TN). We expect SBFC to continue delivering strong growth of ~26% CAGR over FY25-27E on a smaller base and expect strong return ratios of 4.5%/13.8% RoA/RoE by FY27E which should account for a target valuation multiple of 3.3x FY27E BVPS entailing a revised TP of INR 125. Maintain BUY.
* Growth momentum continues: SBFC reported a robust AUM growth of (+28% YoY, +7% QoQ) at INR 87.5bn led by MSME disbursements of INR 7.7bn (+6% YoY, +10% QoQ). The growth was led by Loan against gold (+45% YoY, +14% QoQ) and secured MSME (+27% YoY, +7% QoQ). Management maintains guidance for sequential AUM growth of 5-7% QoQ going forward on a sustainable basis and guided to cross INR 100bn in FY26E with gold loan book to be maintained in the range of 15-17% of total AUM over the long-term. We expect SBFC AUM to grow at ~26% CAGR over FY25-27E.
* Inline operational performance: NII growth during the quarter stood at +25% YoY, +5% QoQ, -3.3% JMFe as calc. NIMs declined -14bps QoQ to 10%. However, spread improved 3bps QoQ led by +7bps increase in yields and +4bps increase in CoFs. Opex/AAUM ratio remained steady at 4.6% (-36bps YoY) led to PPoP growth of +33%YoY, +7% QoQ. The management continued to guide for -50bps reduction in FY26E led by improving operating leverage and continued scale up in the business. Credit cost was steady at 99bps (vs 96bps of AUM QoQ) which led to an in-line PAT of INR 944mn (+29% YoY, +7% QoQ). Management guided for margins to remain largely steady as MCLR linked borrowings repricing would largely take effect in 2H of FY26 which will also be passed on to customers. We build in largely steady NIM (on on-book loans) for FY26E and -25bps decline in cost to assets aiding EPS CAGR of 24% over FY25-27E.
* Largely stable asset quality; credit costs guidance intact: Headline asset quality metrics remained largely stable with GS3/NS3 at 2.75%/1.51% (+4bps QoQ/-13bps QoQ). 1+DPD for secured MSME inched up +57bps QoQ mainly due to collections from Karnataka. Management does not foresee any material movement here though and thus maintained a guidance of ~1% credit costs going forward. Besides, the company also carries INR 40mn management overlay on its book. The company has tightened its underwriting practices in certain geographies (Karnataka and Tamil Nadu) where collections are showing signs of weakness.
* Valuation and view: We expect SBFC to continue delivering strong growth of ~26% CAGR over FY25-27E on a smaller base and expect strong return ratios of 4.5%/13.8% RoA/RoE by FY27E which should account for a target valuation multiple of 3.3x FY27E BVPS entailing a revised TP of INR 125. Maintain BUY.
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SEBI Registration Number is INM000010361
