Spandana Sphoorty Financial - Q2 FY21 Result Update - YES SECURITIES

Spandana Sphoorty Financial - Q2 FY21 - BUY (Target Rs1,000, Upside 34.2%)

Strong PPOP delivery utilized to cover probable risks; even as Collection and Customer Activation better than industry

Spandana delivered a reasonably strong performance in Q2 FY21 with key highlights being a much stronger-than-expected AUM growth (8% qoq/36% yoy), encouraging recovery in collections and provisioning buffer being significantly enhanced based on prudential assessment. Q2 disbursements at Rs16.3bn were only 10% lower yoy; September disbursements at Rs9bn+ marked an all-time high. Disbursements continuing on similar lines in October and November, and management's aspiration to reach Rs85-90bn AUM by fiscal end suggest that liquidity availability (incl. off-BS) is not a major challenge. The pace of fresh client acquisition/group formation has increased after September.

Current collection efficiency of 93% in October is one of the highest in the industry and non-paying borrowers at 5-6% of AUM among the lowest. By augmenting the Covid provision buffer by Rs1.1bn in Q2 (cumulative Rs3.3bn, 6.1% of on-BS portfolio), the co. has insulated itself from the currently visible risk, and thus sees no more provisions if collection trends improve. Without the additional provision, the annualized RoA/RoE stood at 10%/26% for the quarter, as operating cost remained well controlled. We continue to remain positive on the stock and have upgraded price target to Rs1,000 (earlier Rs880) as our earnings estimates witness upward revisions (largely from better growth and cost assumptions).

Management Commentary

Collection trends

- November collection efficiency at 117% w/o pre-closures - compared to 110% in October and 103% in September.

- 93% current collection efficiency (even excl. overdues/arrears) for October.

- 1.56 lac borrowers have not paid at all - this is 6% of total borrowers and 5.5% of AUM - 1 lac of these borrowers are in Maharashtra, Orissa and MP.

- Another 6% borrowers paying partially - 88% paying full installments.

- PAR 30 in-line with pre-Covid level as of Sept 30 (in abs. terms was ~Rs300mn).

- Most South and Central branches clocking 98% collection efficiency,

- Bihar and Orissa has seen significant improvement in collections during recent months.

- Orissa, Chhattisgarh and Kerala have collection efficiency below 85%.

Provisioning & Credit Cost

- Made Rs1.14bn prov. in Q2 - cumulative Rs3.3bn, 6.1% of on-BS portfolio and 4.5% of overall AUM.

- Made prudential provisions to cover uncertainty on collections wrt. borrowers not paying thus far and those paying partially.

- Collections have exhibited some volatility in pockets of CH and MH due to political interference, ring leader issues and inconsistent borrower behavior.

- Much lower political intervention during this crisis when compared to the post Demonetization period - limited to certain parts of MH, CH and few other states this time.

- If situation remains as is, then no more provisions would be required in H2 FY21.

- Covid-related credit cost will be higher than earlier anticipated 3-4%.

Disbursements & Growth

- Disbursed Rs9bn+ in September which was an all-time high - disbursed loans only to existing borrowers closing their loans.

- In the last few days of October, held back disbursements and asked LOs to focus on collection of residual amounts from borrowers paying partial installments.

- ATS increase is due to change in cycle mix - decline in % of first cycle borrowers - as no new borrowers acquired in H1 FY21.

- Added near 1 lac new clients in Oct and Nov v/s about 50K in Q2.

- AUM could grow to Rs85-90bn by March 2021.

- Focus is on hiring loan officers - reaching out to loan officers who left after outbreak of Covid.

Funding & Liquidity

- Added four new banking relationships including Indian Bank and Federal Bank.

- Rs30bn worth sanctions in pipeline - SBI has committed for Rs20bn of assignment transactions in H2 FY21.

- Market for MLD and PTC is opening up - completed 1 PTC deal with Federal Bank - 3 more in pipeline.

Source : Equity Bulls

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