Spandana Sphoorty Financial IPO – Should you Invest or Avoid?

Spandhana Sphoorthy IPO ReviewSpandana Sphoorty Financial IPO Review

Spandana Sphoorty Financial IPO would open for subscription on 5th August, 2019. Spandana Sporty Financial Limited is the 4th largest NBFC micro financial institution (MFI) in India. Its revenue grew by 3x in the last 5 years. Recent news about a political leader accusing about Rs 1 Lakh Crore Scam about a leading NBFC company is scaring investors whether to invest in NBFC companies or not. What are the various positive factors an investor should consider before investing in Spandana Sphoorty Financial IPO? Should you invest in the Spandana Sphoorty IPO or avoid? In this article, let me do Spandana Sphoorty Financial IPO Review.

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About Spandana Sphoorty Financial Limited

They are a leading, rural focused NBFC-MFI with a geographically diversified presence in India. They offer income generation loans under the joint liability group model, predominantly to women from low-income households in Rural Areas. As of March 31, 2019, they were the fourth largest NBFC-MFI and the sixth largest amongst NBFC-MFIs and SFBs in India, in terms of AUM update. Further, according to ICRA Research, its operating expense to average managed assets ratio was better than the industry as a whole for Fiscal 2019.

Spandana Sphoorty Financial IPO Issue details

Spandhana Sphoorthy Financial Limited IPO Issue Details

 Spandana Sphoorty Financial IPO RHP Prospectus can be downloaded at this link

What are the Objects of the Spandana Sphoorty IPO?

Here are the objects of the IPO issue.

1) Offer for the sale (OFS) of 9.35 Mn equity shares by the Selling Shareholders totaling to approx. Rs 800 Crores. The company will not receive any proceeds from the Offer and the entire proceeds from the Offer will go to the Selling Shareholders.

2)  Funding and working capital requirements of the company and General corporate purposes to the tune of Rs 400 Crores.

Who are the Company Promoters?

Mrs Padmaja Gangireddy and Kangchenjunga Limited are the promoters of the company.

How is the company doing in terms of Financial Performance (Reinstated-Standalone)?

1) Company revenues increased from Rs 325.4 Crores for the year ended Mar-15 to Rs 1,041.7 Crores for the year ended Mar-19.  This shows 3x growth in the revenue in the last 5 years.

2) Company profits increased from Rs 105.8 Crores for the year ended Mar-15 to Rs 308.7 Crores for the year ended Mar-19.  Even profit margins are grown by 3x.

3) Its EPS for FY2019 is Rs 52.9 and 3 years average EPS is at Rs 76.79. 3 Year avg is abnormal considering some of the exceptional tax deferral reversals happened in FY2017.

Spandhana Sphoorthy Financial Limited IPO - Financial Status from FY2015 to FY2019

What is the of Spandana Sphoorty Financial Credit Rating?

The credit rating is not required for issue of equity shares, hence, they have not approached any credit rating agency for credit rating.

What is the Spandana Sphoorty Financial IPO GMP now?

Currently there is no GMP available for Spandana Sphoorty Financial Limited IPO GMP.

What is the allocation portion in this Spandana Sphoorty IPO?

The information is not yet available, we would update as soon as this info is available.

What are the key strengths of Spandana Sphoorty Financial Limited?

Every investor should understand the company’s key strengths so that one can compare with its competitors to know how unique is such company in their business. Their investment decision would change based on these facts. Here are the key strengths of the company.

1) Seasoned business model with resilient performance through business cycles.

2) High degree of client engagement and robust risk management, leading to superior asset quality and collections.

3) Streamlined systems and processes and high employee productivity leading to lower operating expense ratio.

4) Its focus on the highest potential and under-served rural segment.

5) Geographically diversified operations leading to risk containment and business resilience.

6) Significant industry experience of its Promoter and management team.

What are the various strategies of Spandana Sphoorty Financial Ltd?

Company strategies would help investors to know what company is intending to do in the future and whether these strategies would help in revenue or margin growth. Such information would help investors to decide whether to invest for short term, medium term or for the long term. Here are the company strategies.

1) Leverage its popular income generation loan products to drive organic business growth.

2) Leverage its existing branch network by increasing loan portfolio and enhancing employee productivity.

3) Increase its presence in under-penetrated states and districts.

4) Further diversify its borrowing profile and reduce its cost of borrowings.

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Positive Factors to invest Spandana Sphoorty IPO

1) Its revenues have increased by 3x in the last 5 years.

2) Its profits have improved in the last 5 years. One can ignore FY2016 and FY2017 abnormal margins, which are due to exceptional items. Improved margins would always reward investors by share price appreciation and by way of dividends.

3) The company is the 4th largest NBFC Micro Financial Institution in India that has good brand in MFI segment.

Major risk Factors to consider before investing in Spandana Sphoorty IPO

These risk factors can impact company revenue and margins which would affect its share price. Investors should go through and understand these risk factors before investing.

1) Its operations are concentrated in the states of Karnataka, Madhya Pradesh, Orissa, Maharashtra and Chhattisgarh and any adverse developments in these states could have an adverse effect on its business, financial condition, results of operations and cash flows.

2) There is outstanding litigation against the company, its Directors, one of its Promoters and one of its Subsidiaries which, if adversely determined, could affect its business and results of operations.

3) They have had negative cash flows in the past and may continue to have negative cash flows in the future.

4) They have certain contingent liabilities that have not been provided for in its financial statements, which, if they materialize, may adversely affect its results of operations, financial condition and cash flows.

5) In order to support and grow its business, they must maintain a minimum capital to risk weighted assets ratio, and a lack of access to the capital markets may prevent us from maintaining an adequate ratio.

6) They are subject to certain conditions and restrictions in terms of its financing arrangements, which could restrict its ability to conduct its business and operations in the manner they desire.

7) Its business is vulnerable to interest rate risk, and volatility in interest rates could have a material adverse effect on its net interest income, net interest margin and its financial performance.

8) One of its Promoters and certain of its Directors have entered into, and may enter into, ventures that may lead to real or potential conflicts of interest with its business.

9) Third-party industry and industry-related statistical data and peer comparison and benchmarking of company with major micro finance players presented in this Red Herring Prospectus may be incomplete.

10) Micro finance loans are unsecured and are susceptible to various operational, credit and political risks which may result in increased levels of non-performing assets, thereby adversely affecting its business, results of operation and financial condition.

11) For complete internal and external risk factors, you can refer the IPO RHP of the company.

Spandana Sphoorty Financial IPO Schedule

Offer Opens – 5-August-2019

Offer Closes – 7-August-2019

Finalization of Basis of Allotment – 14-August-2019

Unblocking of ABSA and Initiation of Refunds – 14-August-2019

Credit of shares to Demat Accounts – 16-August-2019

IPO Shares Listing Date – 19-August-2019

Is the issue price of Spandana Sphoorty Financial IPO reasonably priced or over priced?

If we consider its standalone EPS for last year FY2019 of Rs 52.9 on the higher price band of Rs 856 the P/E works out to be 16x. Last 3 years Average EPS is abnormal due to exceptional items, hence not comparable. Its competitors like Bajaj Finance is trading at P/E of 44x (Highest) and Satin Credit Care is trading at 8.8x (Lowest). Hence Spandana Sphoorty Financial IPO Price at Rs 856 and P/E of 16x is reasonably priced.

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Spandana Sphoorty IPO – Should you Invest or Avoid?

Company revenues have grown by 3x in the last 5 years. Company’s margins have improved in the last 5 years after excluding periods of FY2016 and FY2017. Company issue price is reasonably priced. However, recent NBFC crisis has scared investors and they are in dilemma whether to invest in NBFC companies are not. Few days back one of the political leader has accused of Rs 1 Lakh Crore Scam in a leading NBFC company. NBFC companies are finding difficult to mobilize funds from the market in the current scenario. NBFC companies are defaulting the repayment of several commercial papers and NCDs. Considering these latest developments, I would be neutral about investing in this IPO. I would feel let the NBFC sector stabilize for us to make fresh investments into it.

Readers, What is your view about investing in the NBFC sector now?

Disclaimer: The information in this article is for information only. This is not a recommendation to invest in this IPO. Please consult your investment advisor before you invest in such high risk IPOs.

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Suresh KP

Spandana Sphoorty Financial IPO – Should you Invest or Avoid

Suresh KP

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