Spandana Sphoorty – A Giant in Micro-Lending Space?

Reading Time: 8 minutes

This article has been written by K.Kowshick for the FinMedium Research Desk.

Introduction

It was August 19, 2019.

The day where I took my step in the Bombay Stock Exchange for the first time in my life and it was one of the most excited and a memorable day for me and it was also an important day for Spandana Sphoorty Financial Ltd as it got listed on the very same day.

Though the listing was not that a stellar performance but the company managed to get my attention. So, here is my unbiased article about the company.

About the Company

Spandana Sphoorty Financial Ltd was established in 2003 and is registered as a non-banking financial company – a microfinance institution (NBFC-MFI) with the Reserve Bank of India (RBI).

Spandana Sphoorty Financial is primarily engaged in the business of micro finance providing small value unsecured loans to low-income customers in semi-urban and rural areas.

As of September 30, 2020, Spandana Sphoorty was catering to more than 25.2 lakh active borrowers through a network of 986 branches spread across 282 districts in 18 states (including 1 Union Territory) with assets under management (AUM) of Rs. 7,057 crore.

The Outreach of Spandana Sphoorty
Source: Annual Report

The Geographical Mix

Currently, ~98% of Spandana’s portfolio consists of unsecured microfinance loans.

The company has a predominantly rural presence with rural borrowers accounting for almost 95% of its total borrower base.

Spandana Sphoorty portfolio is diversified with no state accounting for more than 18% of the portfolio.

The concentration of the top three states in the company’s portfolio reduced to 48.4% as on March 31, 2020 (48.3% as of June 30, 2020) from 51.58% as on March 31, 2019.

As on June 30, 2020, its largest state, Odisha, accounted for 17.3% of the portfolio followed by Madhya Pradesh (17.5%), Maharashtra (13.5%) and Karnataka (12.8%).

The Product Mix

Spandana Sphoorty offers various products to its customers and its major product baskets are:

  • Abilasha (JLC LOANS)

Abilasha stands for “Aspirations”. This product is especially for lower-income households

  • Loan against Property (LAP)

Sometimes big ideas require small help. This product is designed for people who requires loan against property.

  • Personal loans

These loans are given exclusively for business developments and also purchase of live stocks or any other emergency needs.

  • Gold Loans (Keertana)

These loans are given against gold as mortgage. It is also a fact that Indian house wives hold 11 percentage of world’s gold.

  • Interim Loans

This product was introduced to help customers are struggling with short term liquidity.

What is a Small Finance Bank?

Small Finance Banks are just like Corporate banks that can accept deposits and can lend money but their existence is to serve the communities where the banks can’t be reached.

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Most of their customers will be the small scale businessmen, The farmers, and the other unorganized entities.

The major guidelines for the Small Finance banks are:

  • They should operate 25 percentage of their outlets at rural areas where the banking services are not available or not penetrated
  • Their 50 percentage of their loans have to be limited to the size less than 25 Lakhs

The CEO’s Message

“Even while sailing through these tough times, our strong resolute helped us deliver value for all our stakeholders. This approach, backed by our undeterred grit and spirit to bounce back, pushed us to propel onto a steady growth orbit. With our firmly rooted values and belief in our mission of serving low-income households and individuals, we steadfastly kept growing to improve the quality of life for our customers”.

Well what does the management do when they are optimistic about their growth prospects?

They EXPAND!!!

In our case Spandana Sphoorty has expanded to 16 new districts taking their total district count to 280.They made a new addition of 1430 loan officers taking their total count to 6103 as of March 31,2020.

Industry Overview

India is considered as a land of villages. There are a total of 5,93,732 villages and 5,161 towns in India.

Assume India as a tree, then the cities and towns as its branches and the villages as the root. Without the strength of the root the tree can’t stand tall even if the branches are beautiful and strong.

Ninety percent of the population lives in villages which means the development of rural India is more important for the growth of the economy.

The reality is that the rural India needs a lot of development in terms of Infrastructure, Education and so on but then here is the good news in the chaos.

The MFI industry in India has seen promising growth in the previous few years on account of the rapid economic progress.

The industry not only aids the financial inclusion of millions of people living in rural India but has also been instrumental in increasing the GDP contribution of lower and middle-income households and MSMEs.

MFIs have an extensive presence across 599 districts of 36 states and Union Territories with an aggregate Gross Loan Portfolio (GLP) of ` 73,447 Cr as on March 31, 2020. Out of these, agriculture loans account for 55.8%, non-agriculture loans account for 41.4% and household finance loans account for 2.8%

Market Share of Spandana Sphoorty

market-share-spandana-sphoorty
Source: Annual Report

The company has performed well in most of the parameters which is a positive factor about the company which has to be noted with diligence.

The Threats for Spandana Sphoorty

“To Put the Devil in Detail” – The major problem threat faced by the Micro Finance lenders is that most of the loans disbursed are without any collateral which is puts them in the highest credit risk.

Though the default ratio in the micro finance sector is low but then the future is not guaranteed.

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The industry is also vulnerable to income shocks, political interference and other domestic events

The Unique Way to Conquer the Threats

Ninety eight percent of the loans disbursed by the company is unsecured loan but the company has a stringent due diligence policy.

The staff makes a personal call to the customer to check the persons authenticity and the staff pays a visit to the customers home before sanctioning any loans.

The company has diversified itself to various districts and no district contributes more than 4 percentage of its revenue which helps the company to absorb any kind of domestic events.

Was COVID-19 a Boon or a Bane for the Industry?

There is no question when it comes to the impact on the banking sector due to the Covid – 19. Most business were shut and the banks pumped up their provisions and one can never promise on the recovery path of the banks and the road ahead is going to be harsh.

But then There is a Catch!!!

Yes, Covid did have its impact on the micro finance industry but it also made them to take a step ahead which they always were afraid in the past.

According to RBI – The pandemic has also has also incentivized the industry to Digitalise itself. This has helped them to be regulate the cost and took a leap towards a better future.

How well is an analysis of Finance industry without looking at its Numbers.

Let’s Crunch Some Numbers

We can’t judge a fish by its ability to climb a tree just like the same you can’t analyze a banking sector just like the other companies.

Banking Industry is different from the rest of the sectors. The key ratio metrics are different for this sector.

You have to look at other Financial ratios to which will anchor your analysis in the right direction.

financial-ratios-spandana-sphoorty
Source: Annual Report

Managing the NPA’s (Erstwhile, known as Non – Performing Assets) is a nightmare for the Industry and it is the first parameter the investor looks into while analyzing the Industry and the company has managed to outrun this parameter by just having a 0.07% as Net NPA’s.

With 6829 CRS as Assets under Management, Spandana Sphoorthy is India’s third-largest company in the MFI industry India.

The company has a decent cost Income ratio of 19.9 a reduction of 500bps from the previous year. The lesser the cost of Income ratio is the better is the profitability of the company.

The Performance Snapshot of Spandana Sphoorty

The company had its highest ever sales in the March quarter owing to the increase in Agricultural activities in the rural area.

performance-snapshot-spandana-sphoorty
Source: Screener.in

The company is also enjoying a higher Operating Profit Margin of around 50percentage. Though the OPM has seen decreasing in recent quarters and that is because of the high provisions made by the company.

Quarterly Performance

quarterly-performance-spandana-sphoorty
Source: Screener.in

Spandana Sphoorty is showing a splendid track record with a gradual but significant increase in sales during every quarter.

The only issue is the Operating profit margin but then the year 2020 was different for al of us.

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In the days to come one can look at whether they are able maintain this sales growth without any further deterioration of the OPM.

Profit & Loss Statement

p&l-spandana
Source: Screener.in

The above is the Standalone profit and loss statement of the Spandana Sphoorthy.

We can clearly see that the company’s performance for the last two years is nothing less than being Phenomenal.

There has been a decrease the OPM because of 20 percentage increase in the other costs and the company has also managed to decrease its Employee costs.

In the coming days, we could expect the OPM to go back to its usual level of 75 percentage.

Though the company is reaping a greater profits, They are paying out any dividends instead they are using their funds for their growth of business.

Balance Sheet Analysis

balance-sheet-spandana
Source: Screener.in

The Debt – Equity of the company is 1.22 percent. The people who analyse the banking Industry would know that this is an amazing Number.

Its close competitor Ujjivan Small Finance bank has a Debt to Equity of 4.63 percentage.

We can see that the company is able to keep its borrowings under control despite a broader growth in the business which means that they have utilized the Profits in a better way.

On MAR – 2018, the company had a reserve of 218 crs and now the reserves have been increased to 2685 crs.

The size of the balance sheet has been almost doubled within two years without any un organic growth.

If I were to assess the company on the basis of the Balance sheet then nothing would stop me from providing the highest mark.

Shareholding Pattern

shareholding-spandana-sphoorty
Source:TijoriFinance

The promoters hold a 62.6 percent stake in the company and in the past three years, they have increased their stake up to 7.5 percent. There is no pledging made by the promoters

Foreign Institutional Investors holds 18.8 percent stake. Goldman sachs also holds a 1.8 percent stake at the company.

The Road Ahead for Spandana Sphoorty

Covid – 19 was not the first crisis and Covid – 19 will not be the last crisis either. It’s only the resilient company that will tide over it and come out with a successful color.

Spandana Sphoorty did well both during the Demonetization and the Covid – 19. During both these crisis, the company has outdone itself and proved to be a resilient company.

Rural India is growing.

The backbone of our nation is becoming stronger day by day and Spandana Sphoorty has positioned itself in such a way that they will be a part of this growth.

Thanks for reading!

This article has been written by K.Kowshick for FinMedium Research Desk.


Cover Image: Business Standard

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