EQUITY RESEARCH: SATIN CREDITCARE NETWORK

One of the biggest companies in the MFI sector, SCNL has a broad regional reach. Through subsidiaries, the corporation entered the MSME and home finance segments, which might stimulate development despite weaker asset quality. Additionally, by diversifying geographically, it is lowering its risk. A reliable source of additional income is growing for Indusind Bank's BC (Banking Correspondent) business.

SATIN CREDITCARE NETWORK

ABOUT

• Satin Creditcare Network is one of India's largest Microfinance Institutions (MFIs) based in Gurugram with a significant presence in North India. Urban merchants were the target audience when it first began offering loans and savings services in 1990.
• In 1998, it registered with the RBI as an NBFC, and in 2013, it changed its status to an NBFC-MFI.
• Taraashna Financial Services Limited (TFSL), Satin Housing Finance Limited (SHFL), and Satin Finserv Limited (SFL) are the other three subsidiaries of SCNL (SFL). For four Banks/FIs, TFSL serves as a business correspondent. Through its subsidiary TSL, SCNL provides a wide range of financial products geared toward financial inclusion in the MFI and Non-MFI segments. Even though it operates in 23 states, most of its operations are in UP, Bihar, MP, and Punjab thanks to a network of 1031 branches.
• In order to provide economically active women in rural and semi-urban regions with access to microcredit without the need for collateral, SCNL's operation is primarily based on the joint liability group model of lending (JLG Model) service companies. The field team of SCNL arranges its clients into specialized groups and offers Compulsory Group Training (CGT). After the training, a Group Recognition Test (GRT) is administered; passing this test results in the extension of credit. Due to the model's reliance on the idea of social collateral, the company does not demand any security in order to advance loans to customers. When the company began its group lending operation in 2008, it used the JLG model, which made up 94.5% of its portfolio as of March 31, 2022.
• MSME loans made up the remaining AUM at that time. MSME loans comprise corporate loans to other MFIs of Rs 3-10 CR and unsecured loans with a ticket size of Rs 1–10 lakh for a term of 1–10 years. 23 states and UTs, including Uttar Pradesh, Madhya Pradesh, Bihar, Punjab, Delhi-NCR, Uttarakhand, Rajasthan, Haryana, Chandigarh, Jammu & Kashmir, Maharashtra, Chhattisgarh, Jharkhand, Himachal Pradesh, West Bengal, Gujarat, Odisha, Assam, Karnataka, Meghalaya, Tripura, Sikkim, and Pondicherry, are where SCNL's operations are Approximately 25.4 lakh active borrowers (JLG and MSME) with a total AUM of Rs 6,409cr (including BC book for IndusInd of Rs 60cr and allocated portfolio of Rs 1,204cr) were SCNL's borrowers as of March 31, 2022.

SHAREHOLDING PATTERN

BUSINESS HIGHLIGHTS

• INDIA'S GVA CONTRIBUTION FROM MICROFINANCE IS LIKELY TO INCREASE:

According to research by the National Council of Applied Economic Research, the microfinance industry contributed roughly 2% of India's gross value added (GVA), while the overall contribution of the entire financial industry was about 5.5% in 2018–19. (NCAER). With all its forward and backward connections and the ability to generate jobs, it was stated that the microfinance sector makes a substantial contribution to the economy.

According to the economic research organization, under the best-case scenario, the entire microfinance industry, including the backward and forward connections, is expected to contribute 3.52% of GVA. Under the base case, the sector's contribution might increase to 2.7%, but under the worst-case scenarios, it could decrease to 1.54%.

• EASING OF MICROFINANCE REGULATIONS BY RBI:

In March 2022, the Reserve Bank of India (RBI) lifted the cap on interest rates for loans provided by microfinance institutions (MFIs), among other significant changes to bring all microlenders—including banks, small finance banks, NBFCs, and not-for-profit organizations—onto a single regulatory framework. The RBI also increased the threshold for a loan without collateral to qualify as a microloan to Rs 3 lakh annually. These loans have been categorized as microfinance loans up to this point if they are issued to households with an annual income of Rs. 1.25 lakh in rural India and Rs. 2 lakhs in urban and semi-urban areas.

• INCREASING SHARE OF SECURED PRODUCTS:

SCNL has expanded its secured lending portfolio and diversified its product offerings over time. Through its subsidiary Satin Housing Loan Ltd. (SHFL), it entered the affordable housing finance market in 2017 for clients from middle and low-income groups in outlying tier-II and below cities. In order to offer secured retail loans to MSMEs and other borrowers, it established Satin FinServ Ltd. (SFL) in 2018. The MSME book increased from Rs 378 crore in FY20 to Rs 603 crore in Q2 FY23 despite the difficulties brought on by the Covid epidemic, while the housing finance book increased from Rs 139 crore to Rs 362 crore during the same period.

• DIVERSIFYING GEOGRAPHIC CONCENTRATION:

Since borrowers in the microfinance sector tend to be low-income, lending is not generally opposed to political meddling.

The political risk for microfinance lenders is increased when a state's loan portfolio is concentrated, as was the case in Andhra Pradesh in 2012. The geographic concentration of SCNL is gradually decreasing as it grows. In Q2FY23, UP, which made up more than 50% of its portfolio in FY16, commanded a stake of about 25%. The aggregate share of the top 3 states dropped from over 74% in FY16 to about 47% in Q2 FY23.

Between FY16 and Q2FY23, the average exposure per district decreased from 0.50% to 0.25%. From 27% in FY16 to 14% in 2018, the top 10 districts' aggregate exposure to AUM has decreased. In order to further diversify its business and lessen its reliance on any one state, SCNL intends to expand its presence in the southern states.

• BALANCE SHEET CLEANED UP; CREDIT COSTS TO MODERATE

In order to give a moratorium where it was required, SCNL restructured 21.4% of the loans during the pandemic, totaling Rs 1,151 crore. The company kept track of the performance of this portfolio and discovered that a certain group of clients continue to experience economic instability, making it impossible for them to make their loan repayments. As a result, the company made the decision to write off debts totaling Rs. 483 crores in H1FY23. After the write-off, the restructured book's percentage of total book AUM, or Rs 318 crore, has dropped to 6.4%, with an ECL provision of Rs 76 crore and a collection efficiency of 77.6%, as of Q2FY23. GNPA for SCNL dropped from 8% (Rs 412cr) at the end of FY22 to 4.0% (Rs 198cr) in Q2FY23. It holds a Rs 148 crore provision or 3% of on-book AUM. As a result, it is protected from any extra stress brought on by the previous lending.

• COLLECTION EFFICIENCIES SHOWING IMPROVEMENT:

SCNL's collection efficiency has increased over the past year, and many of the arrears have also been paid. With a highly clean portfolio after the write-off, the business should be able to keep up a high collection efficiency. The top 4 states, which make up 53% of the portfolio, have also experienced significant improvement.

EQUITY RAISE PROVIDES ROOM TO GROW

Aarti Agri feeds LLP, Adesh Agricare LLP, Adesh Agri farm LLP, and Trimudra Trade & Holdings Private Ltd received a total of 30,76,916 shares (i.e. 7,69,229 shares apiece) from SCNL at a price of Rs 81.25 per share. Additionally, it has granted 2,46,15,384 warrants (i.e., 1,23,07,692 warrants apiece) to Florin tree Ventures LLP (non-promoter), led by Mathew Cyriac, a former head of Blackstone India, and Trishashna Holdings & Investments Pvt Ltd (promoter & promoter group), convertible at Rs 81.25 per share. This has improved capital sufficiency and given leeway for additional payments after writing off a sizable portion of the loan book. At the conclusion of Q2FY23, the CAR was 24.1%.

RISKS & CONCERNS

• 1. High competition from existing and new players

Numerous businesses have entered this market given the microfinance sector's great development prospects. Margin erosion would result from increased competition brought on by new players entering the market and established competitors expanding.

• 2. Absence of dividends could deter some investors

Due to SCNL's failure to pay dividends, some investors seeking stable income may be turned off.

• 3. Recent trend of loan waivers could result in asset quality deterioration

Political meddling is rife in the microfinance industry. In the past, a lot of state governments have announced loan waivers, which disrupts the company's cycle of repayment.

• 4. High proportion of term loans

With a large percentage of term loans, SCNL's borrowing costs are typically on the higher side. It will have access to low-cost CPs and other instruments as its credit rating improves.

• 5. Delayed recovery in Assam

SCNL owes Assam a total of Rs 207 crore, of which Rs 105 crore is now non-performing assets. Since SCNL and the state have an MoU, it is likely that it will be able to collect most of these loans. Relief for almost 11 lac microfinance borrowers was agreed by the Assam cabinet, although the company's recovery may take longer.

FINANCIAL:

• SCNL reported a tepid operating performance for Q2FY23 as loan growth remained muted. The company wrote off Rs 209cr of restructured loans largely from the provisions made earlier bringing down GNPA levels from 4.3% to 4.0% sequentially. Net interest income grew by 1.4% YoY to Rs 143cr. NIMs expanded 254 YoY to 11.87% as collection efficiency improved and disbursements have started to pick up. AUM was higher by 3% YoY but remained flat sequentially due to write-offs.
• Disbursements stood at Rs 1709cr (+30% YoY). It has on book provision of Rs 148cr as of Q2FY23 which is 3% of on-book AUM and Rs 76cr against restructured assets. SCNL does not expect any more stress in the restructured book. It wrote back a provision of Rs 1cr in Q2FY23. PPoP improved by 72% YoY to Rs 82cr and SCNL reported a profit of Rs 55cr against a profit of Rs 12cr in Q2FY22.
• Cumulative collection efficiency for Q2FY23 stood at 100% (excluding restructured portfolio), while the restructured portfolio (~6.4% of AUM) reported 77.6% collection efficiency. SCNL has sufficient liquidity of ~Rs 700cr and has undrawn sanctions worth Rs 445cr as of Q2FY23. The subsidiaries are doing well with SHFL/SFL/TFSL reporting PAT of Rs 0.5/1.2/0.1 crore against Rs 0.6/0.7/(4.5) crore in Q2FY22.

SUBSIDIARIES

Taraashna Services Limited (TSL)

In September 2016, SCNL bought 7.8 billion equity shares in TSL, representing 87.83% ownership in the company. Following Satin's acquisition of TSL, the Board of Directors of SCNL distributed 10.87 lakh equity shares worth Rs 10 each on a preferential basis to individuals and organizations associated with the promoter and non-promoter groups in exchange for TSL shareholders' shares, at an issue price of Rs 457.82 per share (including premium of Rs 447.82 per share). Satin became the sole stakeholder of TSL in FY19 after purchasing the remaining shares from its previous shareholder, MV Mauritius Limited. In rural and semi-urban areas, TSL serves as a business correspondent for banks and offers comparable services to other financial organizations.

TSL has 158 branches spread across 6 states at the end of FY22, with an AUM of Rs 674cr. TSL reported gross revenue of Rs 70 crore and a loss of Rs 22 crore in FY22, compared to Rs 59 crore and a loss of Rs 5 crore in FY21.

Satin Housing Finance Limited (SHFL)

Incorporated in April 2017, SHFL successfully launched its activities in February 2018. In order to make it possible to buy, build, extend, and repair affordable housing units, SHFL offers a variety of cutting-edge and adaptable home loan products. Additionally, the business offers loans secured by real estate, with a particular emphasis on disadvantaged groups of the population that are at the bottom and middle of the socioeconomic pyramid. In addition to 22 branches, SHFL maintains its registered office in Azadpur (Delhi).

The company had a minimal NPA as of Q2FY23 and an AUM of Rs 362cr. In contrast to its FY21 results of Rs 30cr and Rs 1.4cr, it recorded an income of Rs 38cr and a PAT of Rs 3cr for FY22. SCNL invested Rs 5 crore in the business in FY22.

Satin Finserv Limited (SFL)

SFL was established in August 2018 with the goal of offering business loans to corporate, SME, and MSME borrowers. The company had Rs 184cr in AUM as of Q2FY23. The portfolio's GNPA was 4.9% (ECL provision: 3.3%), with 6% of it restructured. As opposed to Rs 25 and Rs 4.8 in FY21, it recorded an income of Rs 28 crore and a PAT of Rs 1.8 crore in FY22. The SCNL has approved a resolution to combine TFS and SFL.

VALUATION AND RECOMMENDATION

• One of the biggest companies in the MFI sector, SCNL has a broad regional reach. Through subsidiaries, the corporation entered the MSME and home finance segments, which might stimulate development despite weaker asset quality. Additionally, by diversifying geographically, it is lowering its risk. A reliable source of additional income is growing for Indusind Bank's BC (Banking Correspondent) business.
• Increasing profitability and hence improving return ratios should be made possible by improving asset quality. It has provided for all known and anticipated NPAs in H1FY23 and fully absorbed the discomfort. It may now concentrate on expansion with consistent asset quality.
• The corporation has had success from its portfolio diversification approach, and its subsidiaries have developed significantly over time. At the conclusion of Q2FY23, the non-MFI portfolio's portion of AUM climbed to 12.7%. On a medium to long-term horizon, SCNL wants to contribute 25% of its secured lending portfolio.
• The considerable experience of the promoters, the history of consistently maintaining appropriate capitalization well above regulatory requirements through regular equity infusions from the promoters and other investors, the diverse resource profile, and the ease of liquidity all support SCNL. The ratings also consider the long history of operations, as SCNL, one of the biggest microlenders in India, has been a joint liability group (JLG), lender, since 2008. Given that it has taken enough preparations for past asset quality difficulties, SCNL appears to be passed its worst financial period. While there is still a chance that NPAs will continue to climb, we believe SCNL will still offer high-risk investors a respectable return.
• We expect SCNL to be Rs 188 over 3-4 quarters., currently it is trading at a favorable price of Rs 155, Investors can buy the share within the range of 149-156 and add on dips between Rs 120 and Rs 130.

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