Analyst Corner: Maintain ‘buy’ on Spandana Sphoorty

We attended Spandana Sphoorty Financial’s business update call and the key takeaways include Cumulative collection efficiency (April’20 to 13th Sep’20) stands at 55%; it collected >Rs 14bn vs demand of Rs 31bn since the lockdown, August’20 collection efficiency (ex arrears) stands at ~78/80%, management expects it to reach 98% (borrowers) by October’20, state-wise – Kerala and Odisha are lagging in collections, while Gujarat, AP, Karnataka, Telangana, MP are leading, Spandana is comfortably placed on liquidity – raised ~Rs 15bn since lockdown, at an average cost of borrowing of 9.95% (~10.6% ex assignments) and E) company expects industry-level write/offs to remain 3-4% due to Covid-19 pandemic. While ~13% inactive customer base poses near-term risk on asset quality, improving collection across states, diversified operations, adequate provisioning buffer and comfortable capital position (CAR 53%) would ensure it navigates through the current cycle relatively better than peers. Maintain BUY.

MFI industry’s resilience is reflected in its steady improvement in collections with every passing month. In-line with industry, collections for Spandana also improved from lows of 2% in April to 23%/75%/95% in June/July/August, respectively. Spandana is following “interest capitalisation” method and hence, unlike peers, it is not collecting interest on EMIs due during moratorium period. It already capitalised Rs 80m in Q1FY21. While disbursement remained muted until July’20, it gained momentum in August’20 with disbursement increases to Rs 5.2bn and it further improve to Rs 3.17bn in September (from 1-13 September’20). Including past month’s due, collection is already running at >100% since last week of August’20. Most banks have renewed credit lines – Spandana has not availed moratorium from any lenders.

Abhiram marketing (group company) – Abhiram will continue to remain profit-neutral entity; leftover cash at the end of each year will be transferred to Spandana as commission income. Since 1st April ’20, Abhiram’s role has been restricted to procuring products from manufactures and lending will happen on Spandana’s balance sheet. As a result, commission income for Spandana is likely to fall but will be offset by higher interest income. Currently, ~8% borrowers have consumer loans.

Between April and July’20, it collected Rs9.3bn and disbursed only Rs 2.4bn. From 1st Sep’20, Spandana is presenting revised loan repayment schedule to borrowers and expects activation rate to improve from September’20 onwards. In- active borrower base stands at 13% as on June’20. Spandana is the sole lender to ~40% borrowers, ~50% of its borrowers will have 2-MFI and one more lender and 5-6% will have more than three lenders. Moving to monthly collection model – Nov’19 onwards, all fresh loans have been disbursed with “monthly collections”. Currently, ~40% of its AuM is on monthly collection and by April’21, it expects ~90% of loans to be serviced on monthly basis. Center attendance has reached ~70-75%, and will take 2-3 months to reach pre- Covid level of over 80%.