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Spandana delivered yet another strong quarter and reported a PAT of INR 1.2bn (+4.7% QoQ, +135% YoY, +5.4% JMFe) driven by a) strong growth in AUM to INR 97.8bn (+10.6% QoQ, +69.2% YoY) led by a robust growth in disbursement (+51% QoQ, +81% YoY) and healthy customer addition of 0.35mn and b) stable NIMs at 14.1% (+113bps YoY, -11bps QoQ). The management indicated this growth to sustain with AUM expected to reach INR 120bn+, AUM/Loan officer (INR 12mn in H1FY24) to improve to INR 14-15mn and Borrowers/Loan officer (317 in H1FY24) to increase to 380-400 by the end of FY24E. Further, in order to improve the scalability of the business in the future, the management has undertaken Project Parivartan, whereby the current monthly repayment system has been changed to a weekly repayment system. As a result of this transition, the SMA0+ bucket increased to 2.04% (vs 1.36% in Q1FY24), while collection efficiency saw a marginal decline to 97.7% (vs 98.1% in Q1FY24). However, 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. GNPA/NNPA continued to improve to 1.4%/0.42% (-23bps QoQ, -7bps QoQ). Over the past year SSFL’s leadership has stabilized operations, ringfenced past stress and gradually accelerated growth. We believe SSFL is now well placed to deliver RoA/RoE of 5.08%/18.9% by FY25E and therefore increase our earnings estimate by 10.7%/19.8% for FY24E/FY25E. We maintain a BUY with a revised TP of INR 1065 (1.8x FY25E BVPS).

* Robust AUM growth led by healthy disbursements: AUM grew to INR 97.8bn (+10.6% QoQ, +69.2% YoY) driven by healthy disbursements (+51% QoQ, +81% YoY) and healthy customer addition of 0.35mn. The management indicated that they expect AUM to grow to INR 120bn+ by FY24E. Further, management guided that AUM/Loan officer (INR 12mn in H1FY24) to improve to INR 14-15mn and Borrowers/Loan officer (317 in H1FY24) to increase to 380-400 by the end of FY24E. In order to reduce geographical concentration, management had identified 7 focus states last year, the shares of which have now increased to 22%. Management expects this share to increase to c.26% by FY24E and to c.44% by FY25E. The aim is to restrict share of each state to c.12% by FY25E.

* Strong operational performance with stable NIMs: Operating profit stood at INR 2.4bn (+40.2% QoQ, +143% YoY) driven by a strong growth in NII to INR 3.6bn (+24.2% QoQ, +100% YoY) and stable operating expenses at INR 1.5bn (+11.1% QoQ, +41.5%). Yields increased to 24.5% (+41bps QoQ) while cost of borrowing remained sequentially flat at 12.5%. NIMs however remained stable at 14.1% (-11bps QoQ) due to an increase in leverage to 2.31 (vs 1.98 in Q1FY24). The management indicated that leverage is to be increased to 3.5-4x in the future thereby leading to some pressure on margins. The management expects NIMs to stabilize at 12-12.5%.

* Asset quality metrics continue to remain steady: In order to improve future scalability of businesses, the management has introduced Project Parivartan, whereby current monthly repayment system has been changed to a weekly repayment system. Of the 1502 branches currently, 370-380 have already been converted, with this number expected to reach 450+ by the end of the year. As a result of this transition, the SMA0+ bucket increased to 2.04% (vs 1.36% in Q1FY24), while collection efficiency saw a marginal decline to 97.7% (vs 98.1% in Q1FY24). However, 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. GNPA/NNPA continued to improve to 1.4%/0.42% (-23bps QoQ, -7bps QoQ) with a provision coverage >70%. We expect the asset quality to remain stable and build in an average credit cost of 2.2% for FY24E/25E

Valuation & view: Over the past year SSFL’s leadership has stabilized operations, ringfenced past stress and gradually accelerated growth. We believe SSFL is now well placed to deliver RoA/RoE of 5.08%/18.9% by FY25E and therefore increase our earnings estimate by 10.7%/19.8% for FY24E/FY25E. We maintain a BUY with a revised TP of INR 1065 (1.8x FY25E BVPS).

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SEBI Registration Number is INM000010361