SBFC Finance Ltd. IPO

Published by Sharekhan Education | August 3, 2023

SBFC Finance Ltd IPO has an issue size of  ₹ 1025 Cr, price band of ₹ 54-57. The issue opens on Thursday, 3rd August and closes on Monday, 7th August 2023

Company Overview: 

SBFC Finance Ltd. is a non-banking finance company (NBFC). Focusing on customers with a strong credit history but potentially lacking formal proof of income documents, they actively serve customers in tier II and tier III cities.
Furthermore, most borrowers are small business owners, self-employed individuals, salaried, and working-class individuals. The company primarily offers secured MSME Loans and Loans against Gold. Notably, the average ticket size of secured MSME Loans was ₹0.99 million, and for Loans against Gold, it was ₹0.09 million. Additionally, with a diversified pan-India presence across 120 cities and 152 branches, they source customers directly through their sales team.

Objects of SBFC Finance Ltd IPO:

SBFC Finance Ltd. IPO consists of a fresh issue of equity shares aggregating to ₹ 600 crores, and an offer for sale (OFS) of up to ₹ 425 crores by existing shareholders.
The company will use the proceeds from the fresh issue to augment its capital base and meet future capital requirements. Investors need to apply for a minimum of 260 shares and in multiples thereafter. After allotment, both BSE and NSE will list the shares.

Industry Overview:

The lower ticket size secured MSME loan segment experiences a significant demand-supply gap.
CRISIL anticipates that the portfolio of secured MSME loans with ticket sizes ranging between ₹ 5 lakhs and ₹ 30 lakhs will experience a growth of 18-20% CAGR over FY23-26. This growth is expected to be aided by enhanced availability of data, increasing lender comfort in underwriting such loans, increased use of technology, and continued government support.. Increasing the awareness and comfort of customers with gold loans is expected to help the gold loan industry grow. CRISIL expects AUM to reach close to ₹ 7,480 billion by March’25, translating into a 10-12% CAGR over FY23-25.

Competitive Strengths:

The company can access borrowings at a competitive cost due to its credit rating of CARE A+; Stable for its long-term bank facilities. Moreover, their geographically diverse distribution network enables them to penetrate underbanked populations in tier II and tier III cities. Additionally, the company’s loan portfolio is granular and evenly spread geographically. Furthermore, they strategically focus on untapped customers with the potential for superior yield. Their in-house sourcing model further assists them in making a better credit evaluation of customers, considering a wide range of parameters after collating all customer information in their database

Business Strategy:

The company plans to undertake geographical expansion by penetrating further into states in which they are already present. Their focus will be on providing financing for affordable housing loans to individual borrowers from the EWS, LIG, and middle-income segments. Additionally, they intend to expand and diversify their lender base. The company has actively made strategic investments in its information technology systems to strengthen its offerings and derive greater operational, cost, and management efficiencies. They plan to ensure that their information technology systems continue to help them with several functions, including loan origination, credit underwriting, collections, and customer service.

Key Concerns:

The company’s business is exposed to interest rate risk. It requires capital for the business and any disruption in the sources of capital could hurt the business. The quality of the loan portfolio may be impacted due to high levels of NPAs. They depend on the accuracy of the information provided by the customers and certain third-party service providers. Reliance on any erroneous or misleading information may affect the judgment of their creditworthiness.

Financials:

Furthermore, the company has delivered an assets under management (AUM) CAGR of 44% and a disbursement CAGR of 40% respectively between FY19-23. Moreover, their average cost of borrowings was 8.2% in FY23, and the average yield on the Gross Loan Book was 15.9% in the same period. Additionally, the net interest margin stands at 9.3% as of March 31, 2023. In terms of financial performance, the Return on Equity was 12%, and the Return on Assets stood at 3% in FY23. Notably, they have maintained low Gross NPAs and Net NPAs of 2.4% and 1.4%, respectively, in FY23. At the upper end of the price band (₹54-57) the issue is reasonably priced at a P/BV of 2.6x its FY23 book value based on post-issue capital.

Source: Red Herring Prospectus

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