IPO: Akme Fintrade

Akme Fintrade, a non-banking finance company (NBFC), will launch its initial public offering (IPO) on June 19, 2024. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: The NBFC's three-year average ROE is 7.8 per cent. Its average gross non-performing assets (NPA) were 4.3 per cent during FY21-FY23.
  
• Growth: During the same period, its AUM (assets under management) declined by over 8 per cent per annum and profit after tax by 1.6 per cent.
  
• Valuation: The stock is valued at a price-to-earnings ( P/E ) and price-to-book (P/B) ratio of 32.4 and 1.5 times, respectively.
  
• Overview: India's financially underserved rural and semi-urban regions provide an untapped growth opportunity for NBFCs like Akme Fintrade. However, it's the quality of loans that dictates the health of a financial business.

About Akme Fintrade

Incorporated in 1996, Akme Fintrade primarily deals in vehicle and small business loans with a major focus on rural and semi-urban regions. The company's 12 branches span across Rajasthan, Maharashtra, Madhya Pradesh and Gujarat. It is developing a digital lending platform named 'Aasaan Loans', that is aimed to initially focus on two-wheeler finance.

The company saw a more than 8 per cent annual decline in its AUM during FY21-23 as it held back on loan disbursals during the economic downturn spurred by the Covid-19 pandemic. However, at the same time, it strengthened its capital base and reduced its leverage (borrowings) by more than 40 per cent.

Strengths of Akme Fintrade

• Strong capital base: Its capital adequacy ratio (CRAR) was a healthy 42 per cent as of Q3 FY24. The IPO proceeds will further raise its CRAR, providing enough firepower for future growth.

Weaknesses of Akme Fintrade

• Regional concentration: The company's business spans across four states, with more than 80 per cent of its AUM concentrated in Rajasthan alone. In the event of an upheaval in this state, the company's business could get severely impacted.
  
• High cost of borrowing: The company has the highest cost of borrowing, at 13.6 per cent as of FY23, amongst its peers. Although it disburses secured loans, the high cost of borrowing forces it to cater to riskier borrowers more.

Risk report

Management

• Is Akme Fintrade free from regulatory penalties?
  Yes. The management is free from regulatory penalties.
  
• Does the company provide for its NPAs adequately? Specifically, is the provision-to-gross NPA ratio more than 50 per cent?
  Yes. Its provision coverage ratio stood at 51 per cent as of December 31, 2023.
  
• Are the top five managers compensated through employee stock ownership plan (ESOPs) of more than 50 per cent?
  No. As per its Red Herring Prospectus (RHP) filing, the company has not granted any ESOPs.

Financial strength and stability

• Does Akme Fintrade have a fresh slippage-to-total advances ratio of less than 0.25 per cent?
  Yes. The ratio of net slippage to total advances was negative for FY23 and nine months ending Q3 FY24 as recoveries outdid gross slippages. Fresh slippages are loans that become NPAs in the last one financial year.
  
• Is the company's current return on equity (ROE) and return on assets (ROA) more than 12 per cent and 1 per cent, respectively?
  No. The company reported an ROE and ROA of 7.7 and 4.1 per cent, respectively, in FY23.
  
• Has the company increased its loan book by 20 per cent annually over the last three years?
  No. Its AUM declined by more than 8 per cent per annum during FY21-23.
  
• Has the company increased its net interest income (NII) by 20 per cent annually over the last three years?
  No. Its NII remained stagnant during FY21-23 due to an overall decrease in its AUM.
  
• Is there a direct relationship between the increase in its loan book and net interest income?
  Yes. Although its gross interest income fell during FY21-23 in line with the declining AUM, the net interest income (interest income-interest expense) slipped at a much lower pace due to reduced leverage (as interest expense eased sharply by 42 per cent). However, as its AUM strengthens ahead, the NII growth will follow suit.
  
• Is the company's capital adequacy ratio more than 15 per cent?
  Yes. It reported a capital adequacy ratio of 42 per cent as of December 31, 2023.
  
• Can the company run its business without relying on any external funding in the next three years?
  Yes. Its healthy capital adequacy ratio, coupled with the IPO proceeds would ensure that its business operations run smoothly without needing external funding.
  
• Did the company generate an average net interest margin (NIM) of over 3 per cent in the last three years?
  Yes. Its three-year average net interest margin (NIM) stood at 8.6 per cent. NIM is the difference between the interest income earned and the interest paid by an NBFC.
  
• Are the company's three-year average gross NPA and net NPA ratios below 1 per cent and 0.5 per cent, respectively?
  No. It reported an average gross NPA of 4.3 per cent and an average net NPA of 3.5 per cent in the last three years.
  
• Is the company's current cost-to-income ratio less than 50 per cent?
  Yes. It reported a cost-to-income ratio of 43.6 per cent in FY23.

Growth and business

• Will Akme Fintrade be able to scale up its business?
  Yes. The company will be able to scale up its business due to high under penetration of organised lending in rural and semi-urban areas.
  
• Does the company have a loan book of more than Rs 1 lakh crore?
  No. It reported an AUM of Rs 380 crore as of December 31, 2023.
  
• Does the company have a recognisable brand valued by its customers?
  No. The vehicle and small business loans segment is catered to by many banks, NBFCs and small finance banks (SFBs).
  
• Does the company have a credible moat?
  No. It operates at a small scale in a highly commoditized financing industry with zero product differentiation.
  
• Is the level of competition faced by the company relatively low?
  No. The market is crowded with the presence of many banks, SFBs and NBFCs.

Valuations

• Is Akme Fintrade's price-to-earnings ratio lower than its peers' median level?
  No. It is valued at a P/E ratio of 32.4 times, higher than its peers' median level of 16.3 times.
  
• Is the company's price-to-book ratio lower than its peers' median level?
  Yes. It is valued at a P/B ratio of 1.5 times, lower than its peers' median level of 2.84 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.