Broker's call: Spandana Sphoorty (Buy)

CMP: ₹927.65

Target: ₹1,100

We initiate coverage on Spandana Sphoorty Financial Limited (SSFL) with a BUY rating and a target price of ₹1,100. SSFL has overcome significant challenges in the past — before being impacted by the AP crisis, it was the second largest MFI (micro-finance institution) in terms of AUM, and also the most profitable (FY10). SSFL was significantly impaired by the AP ordinance (October 2010), and the company went into corporate debt restructuring (CDR) in FY12.

SSFL sustained its operations post the crisis and the equity capital infusion by Kedaara Capital in FY17, restored the company’s financial health. SSFL is now the most profitable large NBFC-MFI: delivering an RoA (return on asset) of 7.1 per cent in FY19. It is also the most frugal — with cost-to-income at an industry-leading 25 per cent. This, despite the fact that SSFL still operates significantly below full capacity — AUM per client for SSFL was ₹17,100, as of FY19 versus ₹37,000 for the micro-loan industry. We expect SSFL to deliver a strong 36 per cent AUM CAGR over FY19-21E, which we largely attribute to the scaling up of branches/ticket sizes to full capacity. SSFL’s strong growth trajectory and frugal cost architecture is expected to be supported by its asset quality — SSFL’s GNPLs (excluding the fully-provided-for old AP portfolio) was at 0.1 per cent, as of FY19. We value Spandana at 2.2x FY21E BVPS to arrive at our target price, which still implies a 22 per cent discount to its closest peer, CreditAccess Grameen.

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