SBFC Finance Ltd. (SBFC) is a systemically important, non-deposit taking non-banking financial company offering loans including secured Micro, Small and Medium Enterprises loans and loans against gold, with a focus on ticket size in the range of Rs. 5 lakhs to Rs. 30 lakhs. As of March 31, 2023, it had a footprint in 120 cities, spanning 16 Indian states and two Union Territories, with 152 branches. Among MSME-focused NBFCs in India, SBFC has one of the highest assets under management growth, at a CAGR of 44% in the period from FY19 to FY23 (Source: CRISIL Report). It has also witnessed healthy disbursement growth, at a CAGR of 40% between FY21 and FY23. SBFC primarily focuses on small enterprise borrowers, whose monthly income is up to Rs. 1.5 lakhs, with a demonstrable track record of servicing loans such as gold loans, and loans for two wheeler vehicles and have a CIBIL score above 700 at the time of origination. SBFC has a diversified pan-India presence, with an extensive network in its target customer segment. Their geographically diverse distribution network spread across the North, South, East and West zones, allows it to penetrate underbanked populations in tier II and tier III cities in India. As of March 31, 2023, their AUM is diversified across India, with 30.84% (Rs. 1,524.2 crores) in the North (in the states of Chandigarh, Delhi, Haryana, Punjab, Rajasthan, Uttar Pradesh and Uttarakhand), 38.53% (Rs. 19,04.8 crores) in the South (in the states of Karnataka, Andhra Pradesh, Telangana, Tamil Nadu and Puducherry), and 30.63% (Rs. 1,513.8 crores) in the West and East collectively (in the states of Gujarat, Madhya Pradesh, Maharashtra, West Bengal, Assam and Bihar). They source customers directly through their sales team of 1,911 employees as of March 31, 2023, and have adopted a direct sourcing model through branch-led local marketing efforts, repeat customers or walk-ins.
Objects of the issue:
The IPO proceeds will be used towards the following purposes:
- To utilize the Net Proceeds towards augmenting the Company’s capital base to meet its future capital requirements arising out of the growth of the business and assets.
Investment Rationale:
Diversified pan-India presence with an extensive network to cater to its target customer segment
SBFC is a lender that provides loans to entrepreneurs, small business owners, self-employed individuals, and salaried and working-class individuals. As of March 31, 2023, they had an expansive footprint in 120 cities, spanning 16 Indian states and two union territories, with 152 branches. The extent of SBFC’s network allows them to service its existing customers and attract new customers as a result of personal relationships cultivated through proximity and frequent interaction by its employees. Their extensive and geographically diverse distribution network allows them to penetrate the underbanked population in tier II and tier III cities in India. The branches are also spread across India to reduce concentration risk, with 28.95% in the North, 31.58% in the South, and 39.47% in the West and East collectively, as of March 31, 2023. Through its 152 branches, the company strategically focuses on untapped customers with the potential for beneficial yield.
Healthy liability franchise with low cost of funds
SBFC has the ability to access borrowings at a competitive cost due to its stable credit history, credit ratings, conservative risk management policies and brand equity. Their average cost of borrowing was 8.11%, 7.65% and 8.22% for FY21, FY22 and FY23, respectively, and their incremental cost of borrowings (which represents the weighted average rate of interest on fresh borrowings in the relevant period) was 8.76% for FY23. As of March 31, 2023, their outstanding borrowings included Rs. 2,912.2 crores from public and private sector banks and Rs. 3,67.3 crores from NBFCs and other financial institutions. As of March 31, 2023, their total borrowings aggregated to Rs. 3,745.83 crores, comprising primarily of term loans of Rs. 3,279.4 crores, working capital demand loans from banks of Rs. 60.0 crores, non-convertible debentures of Rs. 43.0 crores and other collateralized borrowings of Rs. 3,63.4 crores.
Valuation and Outlook:
NBFCs have shown remarkable resilience and gained importance in the financial sector ecosystem, growing from less than Rs. 2 trillion AUM at the turn of the century to Rs. 34 trillion at the end of FY23. CRISIL MI&A expects NBFC credit to grow at 12-14% CAGR between FY23 and FY25. Their share in the overall credit pie has increased from 12% in FY08 to 18% in FY23 and is projected to remain stable in FY24. NBFCs will remain a force to reckon with within the Indian credit landscape, given their inherent strength of providing last-mile funding and catering to customer segments that are not catered by banks. We believe that SBFC is one of the decent NBFCs in the space growing at a healthy pace. With the management having vast experience, an HDFC background and an in-house sales team, we remain comfortable on the credit profiling and corporate governance front. Moreover, the lender has a strategic focus on diversifying its loan portfolio across the states, thereby avoiding concentration risk and helping it to grow at a faster pace. With the company’s limited leverage position and the current P/BV multiple of 2.9x, we believe that the company is fairly valued and advise investors to “Subscribe” from a medium to long-term perspective
