Started in 2003, Spandana Spoorthy Financial Limited is a Hyderabad based rural focused NBFC-MFI with a geographically diversified presence in India. Company offers 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 (as ICRA Research). In October 2010, the MFI industry was severely impacted due to external regulatory action, as the Government of the formerly unified Andhra Pradesh promulgated the AP Micro-finance Ordinance 2010, which enforced several restrictions on the operations of MFIs. This severely impacted the collections and the consequent cash-flow shortage impacted the ability to service the debt, which in turn impaired the growth and profitability. Company's lenders referred to the corporate debt restructuring ('CDR') mechanism of the RBI to develop a plan to restructure the borrowings and revive the business. Company agreed on a CDR plan with the lenders, which allowed them to get cash-flow relaxations to enable them to continue the efforts towards portfolio diversification, process improvement and cost rationalization. These measures helped them turn the operations profitable from the year ended March 31, 2014. Further during the time that company was under CDR, they deployed efforts to recover dues in AP, such as continuing to keep the branches open and continuing to engage with borrowers. As a result of the collections from the old AP portfolio and the profits generated from the operations in other states, company was able to restructure the outstanding debt as well as raise refinancing debt from the existing CDR lenders. They also received capital infusion from Kangchenjunga, the Corporate Promoter, and Kedaara AIF – 1, which enabled them to exit from CDR mechanism successfully in March 2017 with approvals from the RBI and the lenders. As per ICRA Research notes that Spandana was one of only two major companies that were able to successfully exit from CDR. Post the exit from CDR in March 2017, company increased the lender base, diversified the borrowings to new banks and NBFCs and also issued NCDs in the capital markets (leading to a reduction in Average Effective Cost of Borrowing to 12.84% for FY19, 14.74% for FY18 from 16.31% for FY17). As a result, during Fiscal 2018, with increasing flow of capital, company expanded the operations and were able to effectively utilize the existing branch network and employees. Company's operations focus on women from low-income groups in Rural Areas. The main lending product is 'Abhilasha' loans, which are income generation loans designed to empower women by enabling them to set up and expand income generating activities. They offer Abhilasha loans primarily to women, who are willing to borrow in a group and are agreeable to accept joint liability for the loans. For the income generation loans, they presently focus on areas such as agriculture, agriculture allied activities, small-scale activities and emergent needs. The Abhilasha loans amounted to 90.19%, 87.81% and 84.62% of the Gross AUM as of March 31, 2017, 2018 and 2019, respectively . Its gross and net NPAs were 0.01% as on 31.03.19. As of June 30, 2019, Company covers 74,749 villages in 269 districts in 16 states and 1 UT across India through 929 branches. As of June 30, 2019, company had 7062 employees. As per financial performance, Spandana has posted total income/net profits of Rs. 325.41 cr. / Rs. 105.10 cr. (FY15), Rs. 348.80 cr. / Rs. 243.24 cr. (FY16), Rs. 378.67 cr. / Rs. 443.26 cr. (FY17), Rs. 587.53 cr. / Rs. 187.95 cr. (FY18) and Rs. 1048.53 cr. / Rs. 356.52 cr. So company has posted consistent growth over last couple of years. Spandana has posted an average EPS of Rs. 49.74 and average RoNW of 15.51% for last two fiscals on consolidated basis. Issue is priced at a P/BV of 2.7 as per NAV of 316.84 on 31.03.19. If we attribute latest earnings on fully diluted equity post issue, then asking price is at a P/E of around 17.6. As per RHP, industry average P/E ratio is 21.3 and listed peers comparison shown in above table. So issue looks reasonably priced. On BRLM's front, six merchant bankers associated with this issue and have handled 79 public issues in the past three years. When we take recent 10 IPOs of each BRLM then out of those 4 issues opened below their offer price and 6 opened at par on listing dates. As per financials, company's growth is consistent and very good, RoNW is 15.51% for last two fiscals and issue is priced at P/E of around 16 as per latest earnings. Company is an NBFC-MFI with principal lines of business, namely micro financing to women from low income house holds in rural areas. Company has shown very high growth, very low NPA and its only one of two companies which were able to exit from CDR. So we give SUBSCRIBE rating to this IPO.
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