SBFC finance IPO- A detailed report

A new NBFC in market, SBFC Finance is coming up with an IPO of Rs. 1200 Crores in august. Mainly the company provides funds to three asset classes- MSMEs, gold and infrastructure. The company has strong financials and has posted better results in recent years. This report covers all the important Information about the company in detail.

Overview of the company

SBFC Finance is an RBI registered Non banking finance company (NBFC) whose focus is to provide secured MSME loans and gold loans. The company incorporated in 2017 under the name “SBFC Finance private limited” and has headquarters in Mumbai. The company mostly focus upon entrepreneurs, small business owners, self-employed individuals, salaried and working class individuals. Currently the NBFC has network of 137 branches across 16 states and 2 UTs and has served more than 95000 customers with total asset under management of Rs. 4475 Crores. The company is led by former HDFC Bank senior executive Aseem Dhru as CEO and former Kotak Mahindra Bank senior executive Mahesh Dayani as Chief Business Officer. In 2017, SBFC acquired the retail lending book along with the existing infrastructure, branch network and employee team of Karvy Financial Services Limited.

Overview of sector

NBFC or non banking finance companies registered under the Companies Act, 1956. They engage mostly in lending activities such as microfinance, loans, leasing, insurance etc. NBFCs can, however could not accept saving deposits from public. They could raise the funds either by VC investments, Diluting equity, raising debt and accepting term deposits.

The main competitor of NBFCs in India are banks, banks have an advantage of excess funds by deposits and their intensive branch network across nation, In this competition most NBFCs have found niche segment of serving customers of unbanked regions which are not catered by traditional banks due to high risks and low asset quality. Majority of NBFCs serve microfinance to these populations, others provide secured loans such as gold loans and others provide MSME loans to boost small scale industries. NBFCs also provide specialised finance to asset areas such as Housing, automobile, other infrastructure etc.

Growth of NBFC sector

The NBFC sector in India has shown remarkable over the years the sector's assets under management have grown to ₹29 trillion by the end of Fiscal 2022. From having less than ₹2 trillion AUM at the beginning of the century. This growth has resulted in NBFCs' share in the overall credit market increasing from 12% in Fiscal 2008 to 18% in Fiscal 2022.

Leading research and rating organization, CRISIL MI&A predicts that NBFCs would remain a major player in the Indian loan market.

Moreover, the NBFC sector has undergone significant transformations in recent years, embracing technological advancements and exploring newer areas of financial services and products.

As a result of recent developments and the ability to provide differentiated solutions to their target customers, the market share of NBFCs in the overall systemic credit has been steadily increasing, reaching approximately 18% in Fiscal 2022. Looking ahead to Fiscal 2023 and beyond, the growth of the NBFC sector is projected to grow at a Compound Annual Growth Rate (CAGR) of 11%-12% between Fiscal 2023 and Fiscal 2025. Notably, the retail credit segment offered by NBFCs is expected to grow at an even faster rate with a projected CAGR of 12%-13% over the same period.

Distribution of NBFC Finance

As of Fiscal 2022, the distribution of NBFC credit across various asset classes shows that housing loans and infrastructure loans account for the majority share of the overall NBFC portfolio. These segments have consistently been significant contributors to the NBFC credit market. Housing loans have been particularly successful, with an outstanding book that grew at a healthy CAGR of 15% from Fiscal 2015 to Fiscal 2020. The growth was driven by increasing demand from Tier II and III cities, rise in disposable incomes, and various government initiatives aimed at promoting affordable housing. 

While housing loans saw a slowdown in the first half of Fiscal 2021 due to the COVID-19 pandemic, there was a fast revival in the second half, leading to a growth of 7% for year 2021. With much recovery across most sectors and increasing demand for housing, CRISIL MI&A expects NBFC housing credit to continue its momentum and grow at 13% - 15% for year 2023.

Auto finance is another significant segment for NBFCs, and it saw 4.6% growth in Fiscal 2022, driven by increased sales in the passenger vehicle and commercial vehicle segments. The growth in Fiscal 2023 is expected to be led by further growth in sales across all asset classes and easing of chip shortages.

Gold loan finance, which experienced demand in Fiscal 2022, is projected to grow at a CAGR of 11% - 13% year-on-year between Fiscal 2023 and Fiscal 2025. This growth is attributed to better economic stability, an expanding gold loan market, and the efforts of NBFCs to improve reach through various initiatives. Both banks and NBFCs are aggressively promoting gold loan products, with innovations such as doorstep gold collection and disbursements are expected to aid market growth.

Overall, NBFCs have been able to gain or maintain a reasonable market share across various segments due to their strong origination skills, extensive reach, customer service, and faster processing. By catering to underbanked, lower-income, and mass market customers, NBFCs have played a crucial role in enhancing financial inclusion and expanding the formal financial services market. The emergence of fintechs has further fueled rapid growth in the NBFC sector by offering innovative solutions and reaching new customer segments.

Overview of MSME Sector

MSME, or micro, small and medium enterprises according to government of India, re entities that are involved in production, manufacturing and processing of goods and commodities.

The concept of MSME was first introduced by the government of India through the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006. The following table shows the

Classification of MSMEs-

According to the 73rd wave of the National Sample Survey in 2016, there are around 63.5 million MSMEs in India. The number of MSMEs is predicted to have grown further since that time, reaching over 70 million as of Fiscal 2022. MSMEs serve as suppliers or direct customers for large corporations. By creating abundant employment possibilities in rural and underdeveloped areas. Currently, the sector supports economic growth and development by contributing 30% of the GDP, over 40% of exports, and around 110 million jobs nationwide.

Competitive strengths and USP of the company

1. Company has wide network of presence over India:

Company has diversified presence of nearly 105 location across India through their 137 branches, with district level penetration of 26.18% in their operating states. The main perk the company has is their understanding of local characteristics of the market and their customers, which allowed them to address the needs of low and middle income customers. According to CRISIL report, less than 15% of MSMEs have access to formal credit, which gives the company much potential to expand in financing the deprived populations.

2. Company has 100% in house loan portfolio:

To this day, 100% of loan portfolio has in-house origination, limiting the reliance on direct selling agents or connectors in order to ensure a more direct, thorough understanding of their customer’s profile. Company has adopted a direct sourcing model through branch-led local marketing efforts, repeat customers or through walk-ins, which has helped them maintain contact with customers, high levels of customer satisfaction and increased loyalty. The AUM per employee has also increased from ₹ 14.29 million as of March 31, 2020, to ₹ 15.10 million as of March 31, 2021, to ₹ 15.59 million as of March 31, 2022 and was ₹ 16.81 million as of December 31, 2022.

3. Comprehensive credit assessment, underwriting and risk management framework of the company

The company employs a robust credit assessment and risk management framework to serve underserved small enterprise borrowers. They focus on borrowers with good credit behavior, utilizing various data points, including credit history and cash flows. Collateral-backed lending is common, with self-occupied properties as the primary collateral. They use a scorecard-based approach for customer segmentation and have different grades based on credit performance. The company's loan origination platform, Leviosa, automates loan processing and underwriting, minimizing human error. Loans against Gold have specific product programs and follow approved valuation guidelines for risk management.

4. Consistent financial performance backed by profitable growth

The company has shown robust financial performance, with significant growth in its loan portfolio, particularly in Secured MSME Loans and Loans against Gold. Their average yield on the Gross Loan Book is 11.82%, and they have consistently improved their balance sheet position over the years. They have reduced concentration risk and primarily focus on secured lending. The Loan against Gold portfolio serves as a hedge against cyclicality in the retail lending industry and has been a profitable product due to its secure nature. Additionally, the company provides loan management services to third-party financial institutions.

About Management

Aseem Dhru is the Managing Director and Chief Executive Officer of our Company. He holds a bachelor’s degree in commerce from Gujarat University. He is a member of the Institute of Chartered Accountants of India and has been certified by the Institute of Cost and Works Accountants of India. He has over 25 years of experience in the banking industry and has been associated with our Company since September 28, 2017. Prior to joining our Company, he was associated with HDFC Bank Limited as a group head – business banking working capital & retail agri business, HDFC Securities Limited as managing director and chief executive officer and was a director on the board of HDB Financial Services Limited.

Narayan Barasia serves as the Chief Financial Officer since October 24, 2018. He oversees financial management, accounts, tax, treasury, secretarial, and legal matters. He holds a commerce bachelor's degree from the University of Calcutta, is an associate of the Institute of Chartered Accountants of India, and a member of the Institute of Company Secretaries of India. With over two decades of experience, he has worked with notable companies like Godrej Foods Limited and Greaves Cotton Limited. In Fiscal 2022, he received a compensation of ₹ 30.58 million.

Mahesh Dayani is the Chief Business Officer since November 1, 2017. He is responsible for driving profitable growth by developing the Company's distribution, products, and marketing strategies. With a bachelor's degree in commerce from the University of Calcutta and a post-graduate diploma in business administration from ICFAI Business School, Hyderabad, he has over 22 years of experience in wholesale and retail banking. Prior to joining the Company, he held a senior executive vice president position at Kotak Mahindra Bank.

VM Maneesh is the Chief Operations Officer since March 21, 2022. He is responsible for managing critical systems and processes that support the Company's nationwide operations. With a bachelor's degree in commerce and a master's degree in financial management from the University of Mumbai, he possesses over 19 years of experience in credit, risk, and operations in the financial services industry. Before joining the Company, he worked at ICICI Bank, HDFC Bank Limited, HSBC Bank Limited, and Bajaj Finance Limited. In Fiscal 2022, his compensation was ₹ 2.54 million.

Financial performance

1. Income statement

2. Cash Flow Statement

3. Balance Sheet

Objective of the Issue:

The purpose of the Issue is to raise funds to increase the Company's capital base. Company plans to use the Net Proceeds to meet future capital needs, which will arise from the expansion of business and assets in future. This includes providing loans in different lending segments like MSME loans and loans against gold while ensuring compliance with relevant regulations. Additionally, the funds will be used to cover operating expenses and support the growth of the mentioned lending verticals.

Risks of the Issue:

1. There is significant risk of non-repayment or delay in repayment by the borrowers, mostly in times of adverse economic situations.

2. There is risk of high NPA rates and company could fail to maintain rates as that of now

3. There is risk of asset quality, mostly by the collateral submitted by the borrowers, other than gold loan

4. Business of the company is vulnerable to interest rate risks, any volatility in this could adversely affect the business.

5. There is macroeconomic risk of sudden changes in policy. makers, mostly by governing bodies such as RBI or finance ministry.

6. There is a lot of increase in competition in the industry, mostly by traditional banks, small finance banks and other NBFCs in recent years, and company could fail to keep up their market share, income and NIMs in future.

Shareholding-

Details of the issue (as of 27th July 2023)

Final Thoughts

The company has seen relatively good growth from past three years, the Net profit growth has seen increase of 66% and margins of 20.7%. The assets are increasing and poised to increase more after the expansion of services in other states around India, still company faces strong competitors from other NBFCs and Banks but has maintained portfolio of good customers and has strong team of professionals which has long term vision for company’s growth. The issue price is in range of Rs. 54 and 57, at this rate the issue is reasonably priced with asking P/E OF 38. Investors could apply in this IPO for better listing gains and could hold for long term for large gains.

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