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Spandana reported weak results in 1Q25, with provisions coming in at INR 2,018mn (+128.6% QoQ, +743.5% YoY), or 7.8% of AUM, annualised. PPOP was a beat on JMFe – with NII at INR 4.15bn (+5.6% QoQ, +44.7% YoY), other income at INR 286mn (-25.4% QoQ, +41.3% YoY) and operating expenses at INR 1.7bn (-3.9% QoQ, +28.4% YoY). Gross loan portfolio was at INR 117.2bn, down 2.1% QoQ, as disbursements moderated to INR 22.8bn, -42.5% QoQ. With the elevated credit costs, PAT came in at INR 513mn (-58.0% QoQ, -53.8% YoY), against our estimate of INR 904mn. Management attributed the elevated credit costs to elevated attrition, coupled with elections and heat wave. The company has taken strong steps to control credit costs from here - disbursal to new-to-credit customers has been stopped, new customer acquisition stopped in 14% of branches, new centre addition stopped in 39% of branches, support provided to 20% of the Branch Managers by designating a seasoned internal employee as a second hand, movement to weekly collections has been made more gradual than previously planned, tech-enabled tools provided to supervisors monitoring the branches - being the key. The management has guided for credit costs of 3.75% for FY25 and an AUM of INR 140bn by Mar’25 – we believe that these targets are achievable with sustained efforts, given that the management has already initiated strong steps. However, we recognise the pressures on profitability in FY25 and wait for 3Q25 to stability. We cut FY25e PAT by 32% to INR 4.2bn, however, we expect PAT to normalise in FY26, with RoA/RoE of 4.2%/17.9%. Even after revising our estimates downwards, valuations remain un-demanding at 1.1x FY26e BV. We value the company at 1.5x FY26e BV of INR 64.9bn to get a revised Target Price of INR 950. Maintain BUY.

*  Credit costs elevated at INR 2,018mn, 7.8% of AUM: Credit costs for the standalone entity came at INR 2,018mn – 7.8% of average AUM. Management attributed the elevated credit costs to five states– Rajasthan, Gujarat, Madhya Pradesh, Maharashtra and Odisha – these states comprised 59% of the GNPA while contributing to 32% of the overall AUM. This was attributed to 10.5% attrition at Branch Manager level in these states, coupled with elections and heat wave. The company has adopted a six-pronged approach to check credit costs hereon –

*  acquisition of new-to-credit customers stopped, - new customer acquisition paused in 14% of branches,

*   new centre addition restricted in 39% of branches,

*  support provided to 20% of the Branch Managers by designating a seasoned internal employee as a second hand – to be scaled to 50% of branches by Sep’24,

*   bench strength of 20% added to 60% of branches,

*  tech-enabled tools provided to supervisors monitoring the branches. The management has guided for credit costs of 3.75% for FY25.

Management believes much of the attrition is attributable to fatigue amongst employees, as weekly collections were being rolled out across the branches. The company will, henceforth, move to weekly collections only in a gradual manner. The company mentioned that net collection efficiency was 98.1% in weekly collections, compared to 94% on a blended-level. The company guided for FY25 credit costs of around 3.75%

*  AUM contracted with a cautious approach to disbursements: AUM contracted 2.1% QoQ to INR 117.2bn (+32.6% YoY). This was due to the curbs placed by the management on customer acquisition and the discontinuity in branches, on account of the elevated attrition. Management mentioned that they expect to return to growth, and target an AUM of INR 140bn by Mar’25.

*   NIMs and capital adequacy remains strong: Reported NIMs expanded by 58bps QoQ to 15.2%. This was led by reduced costs of borrowings at 11.6%. Marginal rate reduced to 10.8% due to PTC transactions. The company has reduced its rates of interest only for borrowers on their 6th cycle. Capital adequacy remained strong at 32.7%.

*   Valuation and view: The company targets credit costs of 3.75% for FY25 and an AUM of INR 140bn by Mar’25 – we believe that these targets are achievable with sustained efforts, given that the management has already initiated strong steps. However, we recognise the pressures on profitability in FY25 and wait for 3Q25 to see stable asset quality. We cut FY25e PAT by 32% to INR 4.2bn, however, we expect PAT to normalise in FY26, with RoA/RoE of 4.2%/17.9%. Even after revising our estimates downwards, valuations remain un-demanding at 1.1x FY26e BV. We value the company at 1.5x FY26e BV of INR 64.9bn to get a revised Target Price of INR 950. Maintain BUY.

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SEBI Registration Number is INM000010361