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ICICI Securities Report
Spandana Sphoorty Financial Ltd. has embarked on a transformation journey to build a sustainable long-term micro-finance lending model since the management change in March 2022.
While most building blocks are in place like revamped HR practices, strengthened mid-level management team, significantly reduced stressed asset pool (gross non-performing loan at 2.1% with ~70% provision coverage ratio as on March 2023) and growth revival in FY23 (assets under management growth of 29% in FY23 versus 19% decline in FY22), management is now intending to migrate to the most preferred ‘weekly collection' model from current monthly collections.
However, change in collection frequency would be gradual –
in phase I, only new branches would be rolling out weekly collections,
in phase II, new loans at existing branches would be disbursed on a weekly model and
in the last phase, all outstanding loans would move to the weekly collection model.
As on March-23, 100 branches of 1,227 are following the weekly collection model. We believe migration to weekly collection is a right step towards ensuring lower credit cost in next credit cycle.
Our interaction with micro finance institution borrowers during the past couple of months suggests that contrary to the prevailing perception of customer preference for monthly collections, borrowers are incrementally preferring weekly collection given low EMIs versus monthly EMIs (which have risen on the back of increasing ticket size and a series of rate hikes by lenders in H2 FY23).
Considering the operational stability, gradual recovery in earnings led by credit cost normalisation and improved visibility on achieving more than 4% return on asset by FY24E, we maintain 'Buy' on Spandana with an unchanged target price of Rs 815, valuing the stock at price/book value multiple of 1.5 times Sep-24E book value per share.
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