SBFC Finance Limited IPO

About the company:

SBFC Finance Limited (SBFC) was incorporated on January 25, 2008. The company has its focus on catering to the needs of small businesses in tier 2 and beyond cities. As of March’31, 2023, the Gross Loan Portfolio Stood at INR 4,942.82 crore. The company deals in two types of Loans – Secured MSME and Loan against gold. As of March’31, 2023, out of its total loan book the secured MSME was 79% and Loan against Gold was 17%. The company has a presence in 16 Indian states and 2 Union territories. Geographically the NBFC is well diversified with 30.84% of loans coming from the North, 38.53% from the South, and 30.63% from the West and East collectively, as of March 31, 2023.

IPO Details:

The Objects of the Fresh Issue

The object of the Issue is to augment the capital base of the Company. Accordingly, they intend to utilize the Net Proceeds to meet their future capital requirements, which are expected to arise out of the growth of their business.

Key Strengths:

A Massively Underpenetrated MSME Credit Market

Owing to a large population and a lower purchasing power, India is a sachet economy and not a bottle economy making it an ideal condition for MSMEs to prosper. India accounts for approximately 63 million MSME enterprises the highest in the world. However, a large part of them has been financially untouched. As of March 2022, less than 15% of MSMEs have access to credit in any manner and traditional institutions have historically refrained from providing credit to underserved or unserved MSMEs and self-employed individuals, leaving them to resort to credit from informal sources. The credit gap was estimated at around INR 92 trillion in Fiscal 2023. This scarcity of credit in this space offers a high growth potential for a long period of time to NBFC and Banks involved in this segment.

Diversified Geographical Presence Reduces Risk

The company has a presence in 16 Indian states and 2 Union territories with a total of 152 branches across the country. As a result of their active management of state concentration, they have been able to maintain low levels of AUM concentration per state despite their growth over the years. The NBFC is well diversified with 30.84% of loans coming from the North, 38.53% from the South, and 30.63% from the West and East collectively, as of March 31, 2023. The Share of the top state (Karnataka) stands at 17% for SBFC finance which is the lowest among its MSMSE-focused NBFCs. Geographic diversification becomes crucial as it aids the business in reducing its risks in an event of a major crisis in its core states. Further, this geographic diversification also provides an edge over its peers helping it grow higher for longer.

Healthy Liability profile with Low cost of funds

The company has the ability to access borrowings at a competitive cost due to its stable credit history, credit ratings, conservative risk management policies, and brand equity. They received a rating of CARE A+; Stable for their long-term bank facilities in April 2023. This has aided the company to receive borrowings at a lower rate. Its cost of borrowings stands at 8.3% as of FY2023 which is at similar levels to its leading peers.

Consistent Improvement in its financial performance

The NBFC has demonstrated solid performance over the past three years its AUM as of FY2023 stands at INR 4,942.82 crores. The AUM has grown at a robust pace of 34.77%, 43.71%, and 54.84% YoY in 2021, 2022, and 2023 respectively. The fast pace of growth has not come at the cost of poor asset quality. Its Gross non-performing assets (GNPA) have steadily declined over the years from 3.16% in FY2021 to 2.43% in FY2023. Owing to faster growth and better asset quality the NBFC’s ROA has improved from 2.01% in 2021 to 2.92% in 2023.

Key Risks:

Dependences on the MSME segment

As of FY2023, the MSME segment comprises 79% of its loan book. MSME as a segment is closely linked with the core economy. Therefore MSME segments are severely impacted in case of any downturn in the macro environment.

Asset Quality needs to be monitored

The NBFC’s GNPA has been on a declining trend falling to 2.43% in FY2023 from 3.16% in FY2021. However, the GNPA is higher than its close peers. As the company has rapidly expanded across the country and entered into new markets it has impacted its asset quality. However, as it is on a declining trend it is not a red alert but will be closely watched going ahead.

Conclusion:

SBFC Finance operates in a segment that has a large market and is underpenetrated. Further, the fact that the company has diversified its book and is present across India gives an edge to the company over its peers. This geographic diversification will help the company to grow higher for longer. The NBFC’s asset quality is on an improving trend as the book is secured we don’t see a big bad loan risk going ahead. The growth across the topline and bottom line has been strong. This is partially due to a low base but considering the segment it is in, these high growths could be sustained in the medium term.
At the upper price band, the company demands a price to book 3.51x which is certainly not cheap. However taking into account Industry tailwinds, secured and high growing book, and experienced management we recommend a Subscribe rating for SBFC Finance IPO.