IPO Analysis: SBFC Finance Limited

IPO Rating: Apply for long term

About the issue:

Incorporated in 2008, SBFC Finance Limited is a systemically important, non-deposit-taking Non-Banking Finance Company (NBFC-ND-SI). The company is coming out with its initial public offering (IPO) of equity shares with a face value of Rs 10 per equity share. The price band of the issue has been fixed at Rs 54 to Rs 57 per equity share. The issue size is Rs 1,025.00 crore at a higher price band.

The IPO opening date is August 03, 2023, and it will be closing on August 07, 2023. The issue is likely to be listed on the exchange on August 16, 2023. The IPO market lot size is 260 Shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 13 lots (3380 shares or Rs 192,660) at the upper price band.

Objects of the Issue

The company proposes to utilize the Net Proceeds towards augmenting the company's capital base to meet their future capital requirements arising out of the growth of the business and assets.

Promoter holding

The pre-issue shareholding is 78.83 per cent, post the IPO the promoter stake will be 64.03 per cent.

About the company:

SBFC Finance Ltd (SFL) is a systemically important, non-deposit taking non-banking financial company offering loans including secured Micro, Small and Medium Enterprises loans and loans against gold, with a focus on ticket size in the range of Rs 5 lakh to Rs 30 lakh. As of March 31, 2023, it has a footprint in 120 cities, spanning 16 Indian States and two Union Territories, with 152 branches.

Among MSME-focused NBFCs in India, SFL has one of the highest assets under management (AUM) growth, at a CAGR of 44 per cent in the period from Fiscal 2019 to Fiscal 2023. It has also witnessed healthy disbursement growth, at a CAGR of 40 per cent between Fiscal 2021 and Fiscal 2023. As of June 20, 2023, approximately only 16.9 million MSMEs have registered on UDYAM, of the estimated 70 million MSMEs in India, leaving a large number of MSMEs without access to organized finance owing to their unregistered status.

SFL serve customers in tier II and tier III cities and as of March 31, 2023, it served 102722 customers. Its average cost of borrowing was 8.11 per cent, 7.65 per cent and 8.22 per cent for Fiscal 2021, 2022 and 2023, respectively. It enjoyed a net interest margin (NIM) of 11.73 per cent (FY21), 9.39 per cent (FY22), and 9.32 per cent (FY23). Thus, NIM has marked declining trends, that raise concern.

Financial

On the financial performance front, for the last three fiscals, SFL has posted a Total income/net profit of Rs 511.53 crore /Rs 85.01 crore (FY21), Rs 530.7 crore/Rs 64.52 crore (FY22), and Rs 740.36 crore/Rs 149.74 crore (FY23).

Valuation and Outlook

The issue is priced at a P/BV of 2.96 based on its NAV of Rs. 19.26 as of March 31, 2023, and at a P/BV of 2.45 based on its post-IPO NAV of Rs. 23.22 per share (at the upper cap). This company has had a return on average asset of 2.14 per cent for last three years.

Amongst the listed peers, Aavas Financiers, Home First Finance, Aptus Value Housing, AU Small Finance Bank, and Five Star Business Finance has P/BV of 3.78x, 4.04x, 3.93x, 4.37x and 4.97x, respectively. Hence, the issue appears fairly priced if we compare the valuation with P/BV.

The company has not paid any dividend for the reported periods of the offer document. It has a formal dividend policy approved by its Board of Directors on July 12, 2023.

Its GNPA/NNPA improved consistently from 3.16 per cent/1.95 per cent in FY21 to 2.43 per cent/1.41 per cent in FY23.

The company’s NIM has declined over the last 3 fiscal years. However, the NPAs have been consistently improving. Owing to all the reasonable valuation, and improving asset quality, we recommend subscribing to the issue for long term.