IPO Size: Rs. 1,025 cr 

• Fresh Issue of Rs. 600 cr for augmenting capital base
• Offer For Sale (OFS) of Rs. 425 cr by the promoters PE Arpwood & Eight45 PE

Price band: Rs. 54-57 per share  

• Rs.150 cr pre-IPO placement of 2.73 cr shares at Rs. 55/sh on 23^rd May23
• Rs.250 cr private placement of 6.25 cr shares at Rs. 40/sh on 8^th
• Apr22

M cap: Rs. 6,066 cr, implying 17% dilution

IPO Date: Thu 3^rd Aug to Mon 7^th Aug 2023, Listing Wed 16^th Aug 2023

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

6-year-old NBFC

SBFC Finance, earlier known as MAPE Finserve, came under current management’s fold in Aug 2017, through acquisition of Karvy’s Financial Services for Rs.1,080 cr. Company is promoted by 3 financial investors, holding 80% of pre-IPO stake - SBFC Holdings Pte. Ltd/Singapore based Clermont Financial Pte. Ltd. owns 66% of pre-IPO shareholding, PE Arpwood 14% and Eight45 Services 1% stake.

Post IPO, promoter shareholding will contract to 66% as Arpwood is selling 7.6% stake, post 6 years of investment. As all the promoters are financial investors, Arpwood’s balance 6% stake and even Clermont’s 59% post IPO holding may come up for sale, sooner or later, which can lead to pressure on share price, especially after expiry of the 6 month lock-in period.

SBFC: Small Business Finance Company

Assets under management (AUM) grew strongly between FY20-23, at 44% CAGR, from Rs. 1,648 cr to Rs. 4,943 cr, as of 31.3.23. Of this, 79% is secured MSME loans and 18% comprises gold loans. Company operates mainly in Karnataka, Uttar Pradesh, Maharashtra, Telangana, Madhya Pradesh, which together account for 62% of AUM.

Attractive AUM Growth, but High Net NPA

MSME loans are secured against borrowers’ residential/commercial property, with long tenure of 11 years and average ticket size of Rs. 10 lakh. These loans demonstrate elements of Loan Against Property (LAP), which although secured, are on the riskier side. Asset quality also supports this view, with net NPAs high at 1.41% (as of 31.3.23) as against below 1% for most peers lending to MSMEs such as Five Star (0.79%), Poonawalla Finance (0.78%), AU Small Finance (0.42%), IDFC First (0.55%). Going forward, asset quality may not improve much, given company’s underwriting skills and target customer profile.

Financial Performance  

FY23 net interest income stood at Rs. 434 cr, with PAT of Rs. 150 cr, leading to an EPS Rs. 1.6 for FY23, against Rs. 0.8 for FY22, a year hit by covid. FY23 provisions of Rs. 32 cr were only marginally lower than FY22’s Rs. 36 cr. Yet net NPAs remain elevated at 1.4%, vis-à-vis 1.6% as of 31.3.22 and 2.0% as of 31.3.21 during peak covid. FY23 Net Interest Margin (NIM) stood at 9.3%, down from 12.0% in FY20.  

Not Much Valuation Upside

Post-money book value per share (BVPS) of Rs. 23.30 leads to a historic PBV multiple of 2.45x which is in line for 10% RoE, A+ credit rating and 1.41% net NPA. On FY24E BVPS of Rs. 26, PBV multiple is 2.2x and PE multiple is 26x, which leaves little room for upside, as peers are ruling at similar valuation multiples.

IDFC First Bank, which specializes in MSME loans, reported 24% YoY growth in advances to Rs. 1.6 lakh cr (even on a large base), with just 0.86% net NPA (0.55% net NPA, excluding infra loans) and 11% RoE, is ruling at historic PBV of 2.1x. MSME loan provider MAS Financial, with double SBFC’s loan book of Rs. 8,100 cr, higher RoE of 15%, similar net NPA levels, and one-notch higher credit rating of AA-, is trading at FY23 PBV multiple of 2.8x. Both IDFC First and MAS Financial are ruling at FY24E PE multiple of 19x, lower than SBFC’s 26x.

It would be imprudent to compare SBFC to home loan providers like Aptus or Aavas, as loan products vary, or even with Five Star Business Finance, having net interest margin (NIM) of 18%, double of SBFC’s 9.3%. AU Bank’s net NPA of 0.42% also puts it in a different league vis-à-vis SBFC.