Spandana Sphoorty Financial IPO: should you subscribe?

The huge potential for micro-credit in India and the success of the joint lending group model is well-proven. But, while in the aftermath of the Andhra Pradesh crisis, many believed that the systemic risks within the sector had abated, post-demonetisation, fresh concerns within the sector have come to the fore. The fundamental challenge for MFIs to raise capital persists.

Against this backdrop, Spandana Sphoorty Financial’s sombre past performance, calls for attention. The Andhra Pradesh crisis that led to the promulgation of the AP Ordinance 2010 had severely impacted its ability to service debt, leading it to CDR (corporate debt restructuring); about half of its portfolio was from the State.

Incurring substantial losses (owing to provisions relating to the AP portfolio), the company failed to meet the RBI’s minimum net-owned funds (NOF) requirement, and its capital-to-risk weighted asset ratio (CRAR) turned negative as of March 2015 and March 2016. Aided by profits generated by its non-AP portfolio, the company was able to restructure its debt and raise funds from lenders and exit CDR in March 2017. Capital infusion from Kangchenjunga — the company’s corporate promoter (currently holding 59 per cent stake) — and Kedaara AIF – 1, enabled the exit (with the issue of negative net worth being addressed).

Demonetisation in November 2016 also impacted the company — the total loan outstanding that are overdue for 90 days or more (excluding the old AP portfolio) stood at 6.9 per cent of loans in FY17. This has come down to 0.1 per cent in FY19. The company has about ₹360 crore of old AP portfolio on its books, which has been entirely provided for.

While over the past two years — after coming out of CDR and weathering demonetisation — Spandana’s assets under management (AUM) grew sharply, it has come on a low base (after a rough patch between 2012 and 2016); sustainability of this growth needs to be monitored. Also, 95 per cent of its portfolio pertains to the rural segment, making it more vulnerable to risks. Spandana offers loans predominantly to women from low-income households.

Valuation

Against this backdrop, the asking price for Spandana IPO is not cheap. At the upper band of ₹856, the IPO values the company at about 2.4 times the FY19 book (post issue) and about two times FY20 book (post issue). This assumes a 30-40 per cent growth in earnings, on a low base. Satin Creditcare Network — the second-largest MFI — trades at about one time FY20 book value. CreditAccess Grameen — the third-largest MFI — trades at about 2.5 times the FY20 book value; a good track record of growth and profitability has aided Grameen’s valuation.

Given Spandana’s rocky performance in the past, exposure to riskier rural segment, limited track record of sustainable growth in AUM and profit, the IPO appears pricey. Investors can avoid the issue and monitor the performance over the next year, before considering investing.

The IPO is a combination of fresh issue of shares worth ₹400 crore and an offer for sale (OFS) for 93 lakh equity shares.

Business performance

Spandana offers loans to women under the JLG (joint lending group) model without any collateral. These loans focus on areas such as agriculture, agriculture allied activities, small-scale activities etc. and constitute 84.6 per cent of the company’s gross AUM, as of March 2019. Other categories of loans, comprise 15.4 per cent of AUM.

The company’s AUM fell by 6 per cent in FY16, lagging others such as Satin Credit and Grameen that grew their AUM by a robust 50-70 per cent. Post exit from CDR in 2017, the AUM growth zoomed to 144 per cent in FY18 and 34.7 per cent in FY19. Profit-after-tax in FY19 has grown by 66 per cent with return on equity at 19 per cent.