This is the eighth and the last post in our quarterly update series for Q2 FY20.
In this post, we’re sharing the latest updates of the stocks from our watchlist. Please don’t treat this as a buy recommendation. We find these businesses interesting and we may build position (or buy more of those that are already in our portfolio) in them in the future. The purpose of this post is to bring clarity to our understanding of the businesses we are tracking. We make our notes on the quarterly results and conference calls. Putting it up here makes it easier for us to refer them at a future date.
You can see the earlier updates here.
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Please click on the read more button for more details on each stock.
AU Small Finance Bank
AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring themselves early as a commercial bank accepting savings and term deposits. The company made good progress in the quarter in almost all operational metrics and has been performing well in the tough economic conditions and establishing its brand in the market. The company’s focus on core banking products and secured lending provides good assurance of prudent risk management on the company’s part and its improving operational metrics provide good evidence of operating leverage kicking in. It remains to be seen how the company will establish itself in its new product categories which already have many incumbent players. Nonetheless, given the growth momentum that the company has sustained for so long and the improving performance of their core banking division, AU Small Finance Bank has established itself as a good small finance bank.
Credit Access Grameen
Credit Access Grameen has emerged as one of the most reliable microlenders in the country. Their revolutionary JLG model has helped bring communities of borrowers together and helped reduce overall risk from their lending to a very large extent as seen in their low NPA numbers. The company has maintained its good growth momentum where profit growth has been a little stressed mainly due to the rise in expenses arising from setting up new branches and hiring new employees at these branches. These branch expansions are expected to be yielding their share from Q4 onwards which has brought up future expectations of revenues. The management maintained that despite the wide footprint of the industry and its players, there is still a lot of room for the industry to grow mainly on the back of the overall under-penetration of the industry. It remains to be seen whether the company will be able to maintain its impressive growth momentum once it has expanded to all the states in the country. Nonetheless, given the latent potential of the industry and the consistent performance history of the company, Credit Access Grameen cements its place as one of the country’s top Microfinance companies. Valuation, however, at current levels is very stretched at more than 4 times the book leaving almost no margin of safety at the current price.
Equitas Small Finance Bank
Equitas Holdings has been one of the important players in the MFI industry in India. The company has successfully formed its own SFB which is expected to get listed in the next 6 months. The company’s performance has been considered good given the current economic conditions and the company’s reliance on vehicle finance and small business loans which make up more than 65% of the company’s loans. The company has done well to diversify into and grow different lending segments like the ones mentioned above and reduce its reliance on unsecured MF loans. The biggest risk for the company currently comes from its overwhelming geographical concentration in Tamil Nadu which is responsible for over 50% of all loans. The company was still in expansionary mode until a few quarters ago and should see good value creation and leveraging of opportunities as the branch establishments bear fruit. It remains to be seen how the company will reduce the geographical concentration risk and how long will it take for the newly created branches to run at full optimization. Nonetheless, given the company’s position in the MFI industry, Equitas Holdings remains a good MFI stock to watch out for.
Satin Creditcare
Satin Creditcare is one of the leading players in the MFI industry in India. The company boasts of the largest customer base for any MFI in India. It is also doing encouraging and innovative work in constantly reinventing and refining the operational process to harness greater efficiencies. This is evident in their ambitious efforts to integrate psychometric testing in all of the company’s products and the development of LoanDost which is a digital lending platform which aims to optimize and shorten the loan disbursal process and eliminate the need for human intervention thus looking to achieve greater cost optimization while maintaining high efficiency. The company’s results in the year so far have not been ideal with revenue declining slightly in Q2 despite robust growth by most of the industry players. This has seen the company’s share performance go down a lot. But despite such setbacks, the management remains committed to its current resolution of prioritizing credit quality above growth. It remains to be seen whether the company will be rewarded in due time for its efforts and whether it will return back to its previous growth track with the rest of the industry once the backend reengineering is complete. Nonetheless, just given the reach and size of the company’s customer base and the history of innovations associated with the company, Satin Creditcare is a good MFI stock to watch out for, particularly considering the high valuations of almost all the other players in the industry.
Spandana Sphoorty
Spandana Sphoorty Financial Ltd is one of the oldest MFIs in India. The company boasts a rich history and experience of weathering a lot of game-changing events in the industry since its inception in 1998. SSFL is one of the few players in the MFI industry which is overwhelmingly skewed towards rural markets where market penetration is low and the size of the market in terms of population is much bigger than the urban geographies where there is a lot of competition already. The company has also done well to reduce its operating costs and improve efficiencies which are evident in their improving operational metrics. The company appears to be on a good growth track given the relatively low competition in its operating areas and the long-standing brand and operational performance. It remains to be seen how the company will cope with the entry of other major MFI players into its existing rural markets and how the management plan to expand the territorial outreach of the company in general. Nonetheless, given its unique market positioning and longstanding presence in the industry, Spandan Sphoorty is a good MFI stock to look out for.
Ujjivan Financial
Ujjivan Financial Services has been one of the top players in the MFI industry. It is the biggest company in this sector in terms of geographical reach. The company’s foray into Small Finance Banking has been good with consistent operational performance in the recent past and the latest quarter. The upcoming IPO for its small banking division should prove vital for the company. The company is doing good to move into secured lending for all of its non-microfinance products and stopping issuing any unsecured loans from this business. The management has confidently laid out its vision to become a universal bank in the future. It remains to be seen what challenges the SMB will face given the high number of credible competitors in this sector and whether the company will be able to maintain their 30-35% growth guidance in the next 2-3 years. Nonetheless, given its position as one of the industry leaders and the potential of the industry sector and the upcoming IPO, Ujjivan Financial Services is a good stock to watch out for, particularly for those investors banking on the microfinance and small banking sector in India.
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