IPO: SBFC Finance

In a nutshell

• Quality: It reported a three-year average ROE of 7.6 per cent. Moreover, it achieved an average net interest margin of 10.1 per cent in the last three financial years.
  
• Growth: Over the last three years, it grew its AUM (assets under management) by 49.2 per cent annually and its PAT by 32.7 per cent annually.
  
• Valuation: The stock is expected to be listed at a higher P/E than its peers' median level but a lower P/B than its peers' average level.
  
• Overview: Rising credit demand in the MSME and retail segment should help it grow. Also, the untapped demand in the smaller cities and rural markets (where it is setting up shop) should drive growth. However, intense competition and declining asset quality due to economic downturns pose a risk.

About SBFC Finance

SFBC Finance is a non-deposit-taking NBFC. It offers secured MSME loans (79.3 per cent of FY23 AUM), gold loans (17.5 per cent), and unsecured loans (three per cent). It primarily operates out of tier 2 and tier 3 cities.

Strengths of SBFC Finance

• A pan-India presence: It has 152 branches spread across 120 cities.
  
• Close relationships with its customers: It secures 100 per cent of its customers through its in-house sales team.
  
• Superior capital adequacy ratio (CAR): It maintained a CAR of 30.9 per cent in FY23 against the regulatory requirement of 15 per cent.

Weaknesses of SBFC Finance

• Low provision coverage ratio: an average of 40.2 per cent in the last three years.
  
• The NBFC segment is highly competitive , especially since banks entered the gold loan segment.

Risk report

Management

• Is SBFC Finance free from regulatory penalties?
  Yes, the management is free from regulatory penalties.
• Does the NBFC provide for its non-performing assets (NPAs) adequately? Specifically, is the provision-to-gross NPAs ratio more than 50 per cent?
  No, its provision coverage ratio for FY23 stood at 42 per cent.
• Do the top five managers have stock as a significant part of their compensation (more than 50 per cent)?
  No. While ESOPs have been offered in the past, stock-based compensation does not form a significant part of the top five managers' income.

Financial strength and stability

• Does SBFC Finance have a fresh slippage-to-total advances ratio of less than 0.25 per cent? (fresh slippages are loans that became NPAs in the last financial year)
  Yes, the ratio stood at 0.22 per cent as of FY23.
• Did the NBFC generate a current return on equity (RoE) of more than 12 per cent and a return on assets (RoA) of more than 1 per cent?
  No, the NBFC reported an ROE and ROA of 9.9 and 2.9 per cent, respectively, in FY23.
• Has the NBFC increased its loan book by 20 per cent annually over the last three years?
  Yes, the NBFC increased its loan book by 49.2 per cent annually between FY21 and FY23.
• Has the NBFC increased its net interest income (NII) by 20 per cent annually over the last three years? (Net interest income is the difference between the revenue that is generated from a NBFC's assets and the expenses associated with paying out its liabilities).
  Yes, it achieved an annualised growth rate of 29.2 per cent in net interest income between FY21 and FY23.
• Is there a direct relationship between the increase in the loan book and the increase in net interest income (NII)?
  Yes, higher advances have translated into higher net interest income.
• Is the SBFC Finance's capital adequacy ratio more than 15 per cent?
  Yes, it reported a capital adequacy ratio of 31.9 per cent in FY23.
• Can the NBFC run its business without relying on any external funding in the next three years?
  Yes, its capital adequacy ratio stood at 31.9 per cent as of FY23. The financial strength, coupled with the IPO proceeds, would ensure the sustainability of business operations without external help.
• Did the NBFC generate an average net interest margin (NIM) of more than 3 per cent in the last two years? (Net interest margin or NIM denotes the difference between the interest income earned and the interest paid by a NBFC or financial institution relative to its interest-earnings assets like cash).
  Yes, its average three-year net interest margin (NIM) stood at 10.1 per cent.
• Is the NBFC's average gross NPA ratio (Gross NPAs/Total advances) over the last three years less than 1 per cent and the average net NPA ratio (Net NPAs/Total advances) less than 0.5 per cent?
  No, it reported an average gross NPA of 2.8 per cent and an average net NPA of 1.7 per cent in the last three years.
• Does the NBFC have a cost-to-income ratio of less than 50 per cent?
  Yes, it reported a cost-to-income ratio of 49.8 per cent in FY23.

Growth and business

• Will SBFC Finance be able to scale up its business?
  Yes, adequate capital and a foray into affordable housing finance, which has lower capital adequacy requirements, should help it grow. The untapped demand in Tier 1 and Tier 2 cities should also help it scale up.
• Does the NBFC have a loan book of more than Rs 1,00,000 crore?
  No, it reported an AUM of Rs 4,943 crore in FY23.
• Does the NBFC have a recognisable brand truly valued by its customers?
  No, there are many NBFCs lending to the MSME and retail segment.
• Does SBFC Finance have a credible moat?
  No, it operates at a small scale in a highly competitive market.
• Is the level of competition faced by the NBFC relatively low?
  No, the lending business experiences intense competition.

Valuations

• Is SBFC Finance's price-to-earnings ratio lower than its peers' median level?
  No, it will trade at a price-to-earnings ratio of 40.5, higher than its peers' median level of 29.3.
• Is the NBFC's price-to-book ratio lower than its peers' average level?
  Yes, it will trade at a price-to-book ratio of 2.6, lower than its peers' median level of 4.1.

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

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