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NIMs miss drags overall earnings

In 3QFY24, Spandana Sphoorty Financial(Spandana’s) profits at INR1.3bn missed our and consensus estimates due to NIM compression of -80bps QoQ led by decline in yields by - 40bps QoQ. This was due to lower DA income (INR 200mn vs INR 400mn QoQ) and interest reversal of INR 60mn. Also cost of funds declined -20bps QoQ. Opex growth of (+7.3% QoQ, +46% YoY) led to a PPoP of INR 2.4bn (-6.6% QoQ, +71% YoY) while credit costs remained elevated (3.3% vs 4.6% QoQ). The transition from monthly to weekly disbursal cycle during the quarter led to a shortfall in its disbursements (+1.2% QoQ, +7.7% YoY), however, AUM growth was still healthy at (+6.3% QoQ, +52% YoY). Mgmt guided for INR 115-120bn AUM and expects to reach INR 280bn by FY28E. Asset quality showed slight deterioration with a) DPD0+ bucket moving up +45bps QoQ to 2.49%, b) GNPA/NNPA inching up (+21bps QoQ/+6bps QoQ) to 1.61%/0.48% and c) collection efficiency marginally declining to 97.2% (vs 97.7% in Q2FY24) on account of transitioning from monthly to weekly collection cycle. Management indicated the transition to further affect the asset quality for next quarter as well, while guiding for credit costs to decline in Q4 with full year guidance at less than 2%. Management is confident that this is transient in nature and will normalize in next 3-4 months once all borrowers align to the new system. Over the past few quarters Spandana’s leadership has stabilized operations, ring-fenced past stress and gradually accelerated growth. We believe, Spandana has positioned itself well to deliver RoA/RoE of 4.4%/18.2% by FY26E. We maintain a BUY with a TP of INR 1400 (2.0x FY26E BVPS).

Healthy AUM growth: : AUM grew to INR 104bn (+6.3% QoQ, +52% YoY) despite subdued growth in disbursements (+1.2% QoQ, +7.7% YoY) due to more focus towards change in disbursement cycle from monthly to weekly disbursals. Customer addition was healthy at 0.26mn. Mgmt targets to reach INR 280bn AUM by FY28 while ending FY24 with INR 115-120bn. In order to reduce geographical concentration, company had identified 7 focus states last year for expansion while it aims to limit its single state focus to 11-13% of total AUM. Currently, top 3 states account for 41% of total AUM which is expected to move down to 35-36% going forward by FY25E. The plans to diversify its book by adding 2 new products viz. LAP (secured – INR 0.4-0.5mn ticket size) and Nano Enterprise loans (small ticket loans to shopkeepers, etc) is expected to play key role in delivering strong growth moving ahead. Company plans to reach 250-300k borrowers under these new business segments by FY28 which currently stands at less than 1.5k. We are optimistic about the continued positive growth prospects within the MFI sector and expect Spandana to deliver 30% AUM CAGR for FY23-26E.

Margins compression due to one-offs: NII stood at INR 3.5bn (-1% QoQ, +65% YoY) as NIMs declined -80bps QoQ led by decline in yields by -40bps QoQ. This was due to lower DA income QoQ (INR 200mn vs INR 400mn QoQ) and interest reversal of INR 60mn adjusting for which yields would have moved up ~+60bps. CoFs was down -20bps QoQ at 12.3% under the guided levels of sub 12%. Opex growth of (+7.3% QoQ, +46% YoY) led to a PPoP of INR 2.4bn (-6.6% QoQ, +71% YoY) while sequential decline in credit costs (3.3% vs 4.6% QoQ) led to a PAT of INR 1.3bn (+79% YoY, +1.7% QoQ).

Slight deterioration in asset quality: In order to improve future scalability of businesses, the management had introduced Project Parivartan, whereby monthly repayment system was changed to weekly repayment system. As a result of this transition, the DPD0+ bucket increased to 2.49% (vs 2.04% in Q2FY24), while collection efficiency saw a marginal decline to 97.2% (vs 97.7% in Q2FY24). GNPA/NNPA saw a marginal increase to 1.61%/0.48% (+21bps QoQ/ +6bps QoQ) with a provision coverage of 70.3%. However, management is confident that this is transient in nature and asset quality will normalize in next 3-4 months once all borrowers align to the new system. We expect the asset quality to largely remain stable on a long-term basis while mgmt guides for some deterioration in the short-term due to on-going change in collection cycle. We build in an average credit cost of 2.1% for FY24-26E.

Valuation & view: Over the past few quarters Spandana’s leadership has stabilized operations, addressed historical stress issues, and incrementally propelled growth. Moreover, by outlining an ambitious future roadmap till FY28, the management has conveyed robust confidence in the company's prospective performance going ahead. In our virw, Spandana has positioned itself well to deliver RoA/RoE of 4.4%/18.2% by FY26E. We maintain a BUY with a TP of INR 1400 (2.0x FY26E BVPS).

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