IPO Snapshot:

MAS Financial Services is entering the primary market on Friday 6^th October 2017 to raise Rs. 460 crore, via fresh issue of up to Rs. 233 crore and an offer for sale (OFS) of up to Rs. 227 crore by 3 investors DEG, FMO and Sarva Capital, both in the price band of Rs.456 to Rs. 459 per share. Representing 18.34% of the post issue paid-up share capital at the upper end, issue will close on Tuesday 10^th October and listing is expected on 18^th October.

Company Overview:

MAS Financial Services, formerly M/s Marketing & Allied Services, is a Gujarat headquartered NBFC lending to low and middle income groups, with assets under management (AUM) of Rs. 3,452 crore (as of 30-6-17), of which:

• 58% comprises of micro enterprise loans (average ticket size Rs. 48,000)
• 24% comprises of SME loans (tic size Rs. 80 lakh)
• 9% comprises of two wheeler loans (tic size Rs 40,000)
• 5% is housing loans (tic size Rs. 14 lakh)
• balance 4% is commercial vehicle loans (tic size Rs. 1.8 lakh).  

However, Rs. 1,816 crore, or 53% of AUM, comprises loans extended to 98 other financial institutions i.e. B2B operations, where returns are lower in comparison to lending to the end borrower. Thus, company is not entirely a retail focused lender, unlike Capital First or Bajaj Finance. Its distribution presence comprises 121 branches, covering 3,165 locations in Gujarat, Maharashtra, Madhya Pradesh, Rajasthan, Delhi, Tamil Nadu and Karnataka, serving over 5 lakh customers.

Financials:

Company’s financial growth has been robust, with AUMs rising at 33% CAGR between FY13-17, while interest income and net interest income (NII) posted CAGR of 26% and 23% respectively. FY17 revenue grew 20% YoY to Rs. 364 crore, as disbursements jumped 14% YoY to Rs.3,468 crore, while NII was up 24% to Rs. 200 crore. Net profit of Rs. 69 crore was higher by 35% in FY17, yielding an EPS of Rs. 15.33. Strong performance continued into the first quarter of FY18, with revenue of Rs. 104 crore, NII of Rs. 63 crore and EPS of Rs. 4.75.  

As of 30-6-17, company’s equity stood at Rs. 43.99 crore (FV Rs. 10 each). Post conversion of preference share and debentures, equity has now expanded to Rs. 49.57 crore, with current net worth of Rs. 439 crore, translating into BVPS of Rs. 88. Capital adequacy ratio, as of 30-6-17, at 23.87% is very strong, so are the Net Interest Margins (NIMs) at 7.1% (FY17). Despite healthy growth, asset quality has also been maintained, with gross NPAs at 1.14% and net NPAs at 0.96%, as of 30-6-17. Company has clocked return on equity (RoE) upwards of 20% throughout the years, with FY17 reporting a high RoE of 20.65%. Return on average assets (RoA) stood at 3.31% for FY17. Thus, financials indicate strong fundamental position.

Pre IPO placement and objects of issue:

On 30^th March and 19^th April 2017, company undertook a pre-IPO placement of 39.90 lakh equity shares at Rs 338 per share, aggregating Rs 135 crore, to Motilal Oswal group. Incidentally, Motilal Oswal is the sole book running lead manager to the issue! Now in the IPO at Rs. 459 per share, shares are being offered to the public at a steep 36% premium to the last transaction price, which was barely 6 months ago.

This not only questions the ethics of the merchant banker but also company’s corporate governance standards, as a primary issue, when funds were coming into the company were done at a much lower price, while exit to investors (secondary sale) currently being done at a higher price. Nevertheless, based on back-of-the-envelope calculations, the investors are not making handsome gains via the OFS either. PE investor Sarva Capital, having invested since Jan 2014 at cost per share of Rs.323, will earn 10.6% IRR, while financial institution DEG will take home IRR of 11.8% on its 5 year old investment. Thus, historic returns to investors have not been too rewarding, despite company’s strong financial growth.

Fresh issue proceeds of Rs. 233 crore will augment company’s capital base. Promoter shareholding, currently at 80.69%, will contract to 73.19% post IPO, while Motilal Oswal PE stake will be 7.30%, post IPO.

Valuation:

At Rs. 459 per share, company is seeking a market cap of Rs. 2,508 crore, which leads to PE of 30x, based on FY17 earnings, and PBV multiple of 5.2x (on current book). On FY18E performance, PE and PBV multiples are 24x and 3.4x respectively. Before taking up peer comparison, it is important to understand that company is not a pure B2C financer, as over 50% of AUMs accounts for lending to financial institutions, where margins are lower (Bajaj Finance clocks NIMs of 10%, while Shriram City Union reported 13% NIM). Hence company may never be able to command premium multiples enjoyed by the likes of Bajaj Finance etc. In simple parlance, if it was a housing finance company, it is positioned in between a Hudco (B2B) and a HDFC / Gruh Finance (B2C).

Below is a financial jist of a few listed peers, engaged in small enterprise/SME loans, with AUMs of upto Rs. 25,000 crore (excluded larger peers):

Shriram City Union Finance, with 55% of its 24,000 crore AUM comprising of small enterprise loans and another 17% coming from two wheelers, is quite an exact peer to MAS Financial, albeit 6x in portfolio size and nearly double the NIM at 13.6%, but is trading at much lower valuation of PE of 20x and PBV of 2.3x, on FY18E basis.

AAA rated Capital First (vs MAS Financial’s ‘A’ rating), with 93% share of retail in its AUM of Rs. 21,000 crore largely to MSMEs, has clocked phenomenal growth rates of 40%+ in FY17, 4 year revenue and PAT CAGR of 36% during FY13-17, versus 26% for MAS Financial, is ruling much lower at PBV multiple of 2.8x, although PE multiple is comparable with MAS Financial.

Another peer Magma Fincorp, with SME lending accounting for 12% of its loan book of Rs. 15,500 crore, is trading much lower at PBV of 1.8x. Thus, valuation multiples of MAS Financial are not cheap (PBV highest in the peer set, so it the market cap as a % to AUM), but company’s sound fundamentals and high fancy for NBFC stocks justifies them.

Conclusion:

While issue pricing is not the most attractive, strong fundamentals and large capital infusion (via pre-IPO and fresh issue) should ensure healthy growth rates going forward. Market frenzy for high growth NBFC stocks should also help the issue sail through comfortably. Hence, it is a subscribe.

Disclosure: No interest.