Incorporated in 1995 in Kerala, Fedbank Financial Services Ltd. (FFSL) is a retail-focused NBFC, targeting MSMEs and emerging self-employed individuals (ESEIs) sector. The company has a well-tailored suite of products to match customer needs, including housing loans, small ticket loans against property (LAP), medium ticket LAP, unsecured business loans, and gold loans. The NBFC has registered third fastest AUM growth among NBFCs in the peer set in India, with a three-year CAGR of 33% during FY20-23 period and the fourth fastest annual AUM growth of 42% for three months ended June 30, 2023. As of June 30, 2023, the company’s AUM across various products stood at: 33.1% for gold loans, 25.3% for medium ticket LAP, 24.5% for small ticket LAP and housing loans and 15.8% for unsecured business loans. Additionally, FFSL is the fastest-growing gold loan NBFC in India among the peer set as of March 31, 2023, and had the fastest annual growth among gold loan NBFCs in India as of June 30, 2023. Its operations are spread across 17 states and union territories across India, with a strong presence in the southern and western regions. As of June 30, 2023, they covered 190 districts in 17 states and union territories in India through 584 branches. Due to its “Phygital” doorstep model, a combination of digital and physical initiatives for providing customised services to its customers across all products, the company can validate data and analyse the customers’ creditworthiness. Furthermore, their underwriting process has allowed them to manage defaults and NPAs across all its products.
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes:
- Towards augmenting the company’s capital base to meet future capital requirements and onward lending.
- The selling shareholders will receive the offer proceeds.
Focus on retail loan products with a collateralised lending model targeting individuals and emerging MSME sector
FFSL focuses on a collateralised lending model for its retail finance segment, targeting ESEI consumers and the emerging MSME sector. As of June 30, 2023, 86.2% of its total loan assets were secured against tangible assets. Its average ticket size was Rs. 0.13 million in the three months ended June 30, 2023. Out of the collateral for the medium ticket LAP and small ticket LAP, 77.4% of the collateral is self-occupied residential or commercial property as of June 30, 2023. As of June 30, 2023, the average LTV on its total loan assets with property collateral at the time of sanctioning the loan was 51.4%. The ESEI and MSME segment is largely unaddressed by lending institutions in India and FFSL’s products meet the specific requirements of its target customers with quick turnaround times and customised services for each customer’s unique needs.
Diversified funding profile with the advantage of lower cost of funds
FFSL’s ability to access diversified funding sources is a key contributor for their growth. They intend to continue diversifying their funding sources, identify new sources and pools of capital, and implement robust asset liability management policies to optimise their borrowing costs further and help expand the net interest margin. Their average cost of borrowing was 8.8% (annualised), 7.8%, 7.4%, and 8.3% for 1QFY24, FY23, FY22 and FY21, respectively. The company can access borrowings at a competitive cost due to their stable credit history, credit ratings, conservative risk management policies and strong brand equity. The NBFC has been rated “AA-” by CARE for its NCDs since 2022 and “AA-” by India Ratings and Research Private Limited for its NCDs and bank loans since 2018. FFSL is one of the only two long-term AA- rated players among the peer set, with a cost of borrowing less than 8.5% between FY19 and FY23. Its rating of “AA” and “AA-“ indicates resilient liability origination despite challenges faced by the Indian economy due to varied factors and the failure of other NBFC companies in India.
Valuation and Outlook:
NBFCs have shown remarkable resilience and gained importance in the financial sector ecosystem, growing from less than Rs. 2 trillion assets under management (AUM) at the turn of the century to Rs. 34 trillion at the end of FY23. 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. By catering to under-banked, lower-income and mass-market customers who are unserved or underserved by banks, NBFCs have enhanced financial inclusion and expanded the market for formal financial services. FFSL has an edge over its peers as it has access to capital from its Promoter, Federal Bank. Additionally, they have grown their liability relationships from 23 lending institutions as of March 31, 2021, to 27 institutions as of June 30, 2023. Additionally, as of June 30, 2023, they have borrowed from 12 private sector banks (including its Promoter, Federal Bank), nine public sector banks, one NBFC, one foreign bank and four other entities (such as the Small Industries Development Bank of India). It has logged the third-fastest AUM growth amongst NBFC peers set in India, with a three-year CAGR of 33% during FY20-23 period. FFSL has also marked steady growth in its top and bottom lines over the last three years. Moreover, the NBFC has an effective underwriting capability due to its experienced underwriting team and established processes, which is likely to keep asset quality issues at bay going forward. On the valuation front, the issue is valued at a P/BV of 3.3x on the upper price band based on the FY23 book value. With most of the positives seemingly priced in, we advise investors to “SUBSCRIBE” to the issue for the benefit of listing gains.