IPO Size: Rs. 777 cr

• Rs. 500 cr Fresh Issue for growth capital and to strengthen CRAR from 18% to 23%, against RBI requirement of 15%
• Rs. 277 cr Offer for Sale (OFS) by financial investors Leapfrog, Eight Roads, 360 One, Japan’s SMBC, Dvara, Accion (69% combined stake to reduce to 55% post IPO)

Price band: Rs. 249-263 per share

M cap: Rs.4,243 cr, implying 18% dilution

• This is company’s 2nd attempt at going public, as July 2021 DRHP filing and SEBI approval got lapsed.

IPO Date: Mon 16^th Sep to Thu 19^th Sep 2024, Listing Tue 24^th Sep 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Diversified Financial Services Company

Northern Arc is a 15 year old professionally-managed (without an identifiable promoter) non-banking finance company (NBFC), with 3 business segments:

1. Lending – Assets under management (AUM) of Rs. 11,700 cr, growing at 31% CAGR since FY21, of which, half is retail and half wholesale. Focused across 7 sectors – MSME, micro finance, consumer, vehicle, affordable housing, agri and climate.  
2. Placement – tech-enabled credit market place, which placed Rs. 11,750 cr credit FY24, garnering Rs. 33 cr or ~30 bps in fee income
3. Fund Management – managing Rs. 2,858 cr debt funds under AIF and PMS

Thus, company earns a mix of interest income and fee income.

Strong Financials

FY24 net interest income rose 67% YoY to Rs. 986 cr as cost of borrowing was contained at 9.23%. Average cost of borrowing rose only 68 bps between FY22-24 when repo rate rose 250 bps, as credit rating strengthened one notch from A+ to AA-. Company clocks high average yields of 16.7% (due to unsecured book of consumer loans and micro finance) leading to strong net interest margin (NIM) of 8.4% and spread of 7.5%. However, fee income has been stagnant at Rs. 85 cr for the past 3 fiscals, despite rise in placement volumes from Rs. 7,330 cr in FY22 to Rs. 11,760 cr in FY24.

Healthy Asset Quality

To clean-up asset quality before IPO, and rightly so, provisions tripled YoY to Rs. 122 cr in FY24, shrinking net NPA to only 0.08%, as of 31.3.24. This is very healthy percentage, given sizeable portion of operations being B2B, which is considered higher risk. Even pre-covid, in FY19, company’s net NPA was at 0.05%.

Even after the provision, FY24 PAT rose 30% YoY to Rs. 318 cr, translating into an EPS of Rs. 22.

Reasonable Valuation

On expected book value per share of about Rs. 200 as of 31.3.25, PBV multiple on current year basis is at 1.3x, and PE is at 11x, which are both reasonable for historic growth, high NIM, asset quality and 3% RoA (fee income a vital contributor). Most micro-finance and consumer lending NBFCs are ruling at much higher multiples. 

Priced 22% Lower, in 5 months

IPO price of Rs. 263 per share is 22% lower than the previous price of Rs. 338 per share, wherein Rs. 382 cr was raised from IFCI and a domestic corporate in April 2024. Some financial investors are part-exiting at a poor return of just 5-10% IRR in past 5-8 years, which seems more to do with a higher entry price during 2016-2019 fiscals.

Pre-IPO and fresh issue proceeds of nearly Rs. 900 cr (combined) provide healthy visibility for future growth.