Fedbank Financial Services Limited IPO

About the company:

Fedbank Financial Services Limited (“Fedfina”) is a retail focused non-banking finance company (“NBFC”) promoted by The Federal Bank Ltd. It was incorporated on April 17, 1995 in Kochi. The company focuses on catering to the MSMEs and the emerging self-employed individuals (“ESEIs”) sector. The Company’s Gross Loan book as of FY23 stood at INR 8,102.7 crore. Out of its total loan book 38% is Gold Loan, 47% is Mortgage, 14% is unsecured Business Loan and remaining are others. The company has a total of 584 branches with its presence in 17 states and UTs.

The Objectives of the Offer

The Offer comprises of the Fresh Issue and the Offer for Sale.

Key Strengths:

- Present in large, underpenetrated markets with strong growth potential
The Indian retail credit market grew at a strong pace over the last few years from ? 30 trillion in Fiscal 2018 to ? 60 trillion in Fiscal 2023, and it constituted 32% of total systemic credit in India. Retail credit is expected to further grow at a CAGR of 14- 15% between Fiscals 2023 and 2025. The credit gap is much larger in case of ESEIs and Fedfina has focuses on catering to the financial needs of such ESEIs. Given that the market is large, has good growth prospects, is under penetrated and profitable, retail credit is expected to continue to remain a key focus area for banks and NBFCs. This gives the company with a large opportunity to grow.

- Focus on retail loan products with a collateralized lending model targeting individuals and the emerging MSME sector
The company is largely focused on a collateralized lending model for their retail finance segment, targeting ESEI consumers and the emerging MSME sector. As on June 30, 2023, 86.24% of their total Loan Assets are secured against tangible assets, namely their customer’s gold or property. Out of the collateral for their medium ticket LAP and small ticket LAP, 77.37% of their collateral is self-occupied residential or commercial property as of June 30, 2023. As on June 30, 2023, average LTV on their total Loan Assets with property collateral at the time of sanctioning the loan was 51.37%.

- Well diversified funding profile with an advantage of lower cost of funds
The company’s ability to access diversified sources of funding is a key contributor to their growth. Their average cost of borrowing was 2.22%, 1.86%, 7.77%, 7.44% and 8.30% for the 3-months periods ended June 30, 2023 and June 30, 2022, and Fiscals 2023, 2022 and 2021, respectively. They have the 2nd and 3rd lowest cost of borrowing among the MSME, gold loan and MSME & gold loan peer set in India in Fiscal 2023 and 3-months period ended June 30, 2023, respectively. They have been rated “AA-” by CARE for their NCDs since 2022, and “AA-” by India Ratings and Research Pvt Ltd for their NCDs and bank loans since 2018. They have historically secured financing from diversified sources of capital from banks, financial institutions, mutual funds and other financial institutions.

- Strong underwriting capability and presence in select customer segment combined with robust risk management capabilities focused on effective underwriting and collections
Fedfina has an effective underwriting capability, built on their experienced underwriting team and established processes, which assess the quality of their potential customers’ business and collaterals, and then reasonably estimate the possibility of defaults, prior to disbursal of loans. The percentage of their retail instalment loans which are underwritten is represented by the sanction to login ratio, which was 40.05%, 44.01%, 45.30%, 45.83% and 43.51% for the 3-months periods ended June 30, 2023 and June 30, 2022, and Fiscals 2023, 2022 and 2021, respectively.  While they focus on the underserved category of the Indian retail loan market, they follow prudent customer selection policies with 86.71% of their customers having an established credit history, and 77.94% of their credit rated borrowers rated with a CIBIL score greater than 650 or CMR score less than or equal to 6 as on June 30, 2023.

Key Risks

As on June 30, 2023, 93.65% of their gross AUM was located in Gujarat, Maharashtra, Telangana, Andhra Pradesh, Tamil Nadu, Karnataka, Puducherry and Delhi. Accordingly, their operations are concentrated in six states and two union territories and any adverse developments in these regions could have an adverse effect on their business and results of operations.

The RBI recently announced an increase in risk weights for certain unsecured consumer loans. As of FY23, the company has 14% of its book into unsecured lending. Thus, their inability to maintain their capital adequacy ratio could adversely affect their business growth.

Their business depends on a well-regarded and widely known brand, as well as the brand and reputation of their Promoter, Federal Bank, and the Federal Bank group entities, and any failure to maintain, protect and enhance the promotor group brand could adversely impact the Fedbank Fin’s business too.

Key Financials

Conclusion

Fedbank Financial Services Ltd operates in a segment that is highly underpenetrated and has sufficient legroom to grow. This is evident from the fact that the company has been growing its AUM by 27%, 27% and 47% in FY21, FY22 and FY23 respectively. The bank operates in a niche segment both geographically and in product category making it less prone to be disturbed by bigger banks. It generates handsome yields of 15.8% and NIM of 8.99% as of FY23. Close to 85% of its book is secured and therefore these high yields and NIMs are not coming at a very high risk. This is reflected on its Average GNPA over FY20-23 which stands at is 1.7%.

On the bottom line, the ROA of the NBFC stands at 2.3% as of FY23.
At its upper price band, the bank demands a price to book of 3.8x as of FY23. We are optimistic about the industry and the company growth but also believe that the Issue is fully priced in. Thus, Investors with a short-term view and those who likes to exploit the listing gains might not benefit from this. Investors with a long-term view can consider Subscribing to this IPO.