Satin Creditcare Network Ltd

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About the Company

Satin Creditcare Network is a non-deposit accepting Non-Banking Financial Company (NBFC-ND) and is registered as a Non-Banking Financial Company Micro Finance Institution (NBFC-MFI) with the Reserve Bank of India (RBI) on November 2013. The Company is engaged primarily in providing microfinance services to women in the rural areas of India who are enrolled as members and organized as Joint Liability Groups.

Q2 2020 Updates

Financial Results & Highlights

Detailed Results

1. 1. The company has a flat quarter with a 1% YoY decline in consolidated revenues. There was a marginal dip in gross income since DA and BC revenue is booked as net income.
   2. The profits for the company rose by 18% YoY mainly due to a fall in tax expenses.
   3. The company made disbursements of Rs 1819 Cr in the current quarter which was up 43.6% YoY.
   4. The gross loan portfolio has risen to Rs 7182 Cr registering a YoY growth of 16%.
   5. Net Interest Income rose 7.2% YoY.
   6. The collection efficiency stood at 99.6%.
   7. The company maintained a CRAR of 30.13% which was up 19.4% YoY.
   8. The company saw an Equity infusion in H1FY20 via Conversion of warrants worth Rs 60 crore by Promoter and OCCRPS worth Rs 45 crore by IndusInd Bank Ltd at Rs 335 per share.
   9. Percentage of Promoter pledge has gone down from 52.88% in Dec ’18 to 20.8% in Sep ’19.
   10. GNPA in Q2FY20 improved to 3.1% from 4.1% a year ago. The company has zero NNPA.
   11. Psychometric tool implemented across all branches with a collection efficiency of 99.8%.
   12. The company has also implemented cashless disbursement across all branches and saw a 12% collection in cashless mode.
   13. 58% of customers have only Satin as their sole lender while 52% of customers are first cycle borrowers.
   14. The rejection rate for all products was 18% with 51% of those rejected for borrowing from multiple MFIs.
   15. The company maintains strong liquidity of Rs 1883 Cr.
   16. The company maintains a positive ALM difference with an average maturity of assets at 10.3 months while the average maturity of liabilities is 23.9 months.
   17. Cost to income ratio remains stable at 54.7% while Opex to GLP decreased 20 bps YoY to 6.7%.
   18. The company maintains its FY20 PAT guidance at Rs 260 Cr.
   19. Taraashna AUM increased 9% YoY to Rs 591 Cr.
   20. Satin Housing Finance now has an AUM of Rs 116 Cr and it disbursed Rs 18 Cr in Q2.
   21. Satin Finserv has an AUM of Rs 62 Cr.

Investor Conference Call Highlights

1. The company was awarded the first place among MFIs in the Customer Service Index Evaluation conducted by MFIN.
2. The management believes that the company will be able to achieve 50% cashless collections by March 2020.
3. The company has developed a digital lending platform called LoanDost which uses inbuilt psychometric tests and can disburse loans within 25 minutes without any human intervention.
4. The company currently has provisioning of 1.7% which is approximately Rs 110 Cr.
5. The management has stated that most of the NPAs are in the older portfolio before April ’18 and the rest which counts for 92% of total loans have had a collection efficiency of 99.6%.
6. The residual maturity of the loan book is less than 12 months as mentioned in the detailed results above.
7. The management expects the funding situation to improve going forward as it has seen that some PSU lenders which were not lending to the MFI sector have started doing so.
8. The management would like to maintain the company’s DA+BC portfolio at 35% of the total book.
9. The management is currently satisfied with the cost to income ratio in the range of 54%-56% but it is trying out different methods like psychometric testing, etc to explore avenues to reduce this figure further.
10. The management has not changed their PAT guidance despite the fall in tax rates because the performance of H1 was not up to par due to large scale flooding in 5 states for the company and the company is also adding a lot into backend operations and reengineering which may take some time to bear fruit.
11. The management admitted that H1 saw muted disbursal due to the backend reengineering efforts and the timing of the floods added combined with it resulted in the company’s muted growth as compared to the rest of the industry. It also didn’t help that one of the company’s big states of MP was the worst affected by the floods which hurt operations in the state a lot.
12. The company is involved informal consultations as to how to proceed forward with conversion into a small finance bank and it is in the initial stages of exploring the idea.
13. The management acknowledges that the H1 profit of Rs 95 Cr and the unchanged profit guidance of Rs 260 Cr for FY20 puts a lot of pressure on the company to achieve Rs 165 Cr in profit for H2 but the management remains confident of accomplishing this feat.
14. The management expects 80-90% of the reengineering to be complete by the end of December.
15. The company has faced some challenges in growing its BC business mainly due to the Aadhaar verdict after which IndusInd Bank has stopped accepting Aadhaar cards for BC services and the company is working to carry out the BC operations with voter IDs instead. This has also impacted disbursements in the short term.
16. The negative yield incurred by the company due to excess liquidity was around 4-4.5%.
17. The management has reassured that there will not be any significant process implementations and consequent operating expenses rise in the next 2 years once the big structural change schedule is completed in FY20.
18. The management has maintained that ensuring credit quality is the number one priority for the company and the focus on growth comes in after that.

Analyst’s View

Satin Creditcare is one of the leading players in the MFI industry in India. The company boasts of the largest customer base for any MFI in India. It is also doing encouraging and innovative work in constantly reinventing and refining the operational process to harness greater efficiencies. This is evident in their ambitious efforts to integrate psychometric testing in all of the company’s products and the development of LoanDost which is a digital lending platform which aims to optimize and shorten the loan disbursal process and eliminate the need for human intervention thus looking to achieve greater cost optimization while maintaining high efficiency. The company’s results in the year so far have not been ideal with revenue declining slightly in Q2 despite robust growth by most of the industry players. This has seen the company’s share performance go down a lot. But despite such setbacks, the management remains committed to its current resolution of prioritizing credit quality above growth. It remains to be seen whether the company will be rewarded in due time for its efforts and whether it will return back to its previous growth track with the rest of the industry once the backend reengineering is complete. Nonetheless, just given the reach and size of the company’s customer base and the history of innovations associated with the company, Satin Creditcare is a good MFI stock to watch out for, particularly considering the high valuations of almost all the other players in the industry.

Q1 2020 Updates

Financial Results & Highlights

Detailed Results

1. 1. The company had an average quarter with consolidated revenues growing 8% YoY.
   2. The consolidated PAT was up 48% YoY mainly as expenses remained almost the same for both Q1FY19 and Q1FY20. This is because the company saw a decrease in impairment on financial instruments of around Rs 20 Cr which was almost compensated by the increases in employee costs and other expenses while finance costs remained almost the same in both periods.
   3. The current AUM of the company is at Rs 7139 Cr which is up 18.4% YoY.
   4. RoA for the company improved from 1.7% in Q1FY19 to 2.4% in Q1FY20. RoE improved to 13.4% from 11.7% in the same period. CRAR also rose to 30.52% from 23.41% in the same period.
   5. The company was awarded the 1^st place in customer service by MFIN. (Microfinance Institutions Network is an association for the microfinance sector in India containing all the leading players in the sector.)
   6. The company got equity infusions from its promoter of Rs 60 Cr and Rs 45 Cr from IndusInd Bank at Rs 335 per share.
   7. The company maintained a collection efficiency of 99.4% while gross NPAs fell to 2.8%.
   8. The company has also implemented 100% cashless disbursement and 12% of collections were through cashless mode.
   9. The company is the only lender to 57% of its clients showcasing a loyal customer base.
   10. The company has added 65 new branches in 10 districts in Q1FY20.
   11. The AUM share of non-microfinance division is around 6% currently.
   12. The company has made an investment of Rs 30 Cr into Satin Housing Finance which has an AUM of Rs 100 Cr with zero delinquency till date.
   13. The net interest income was up 15.6% YoY while the number of clients grew 20% YoY to 3.6 million.
   14. The company has become the first MFI in India to be certified with ISO 27001:2013 for its information security management system.
   15. The company has launched its digital lending platform called ‘LoanDost’ with instant loans of up to Rs 1,50,000 and underwriting decision making the capability of only 25 mins.
   16. The company has diversified their exposure well with 96.5% of districts having <1% exposure and only 0.3% of districts having >2% exposure. The company also has 19 states with more than 1% exposure thus highlighting their pan India reach.
   17. The top 5 states exposure to AUM is 51.8% currently from 64.2% a year ago.
   18. The breakup of purpose for loans is as follows:
       • Agriculture: 75%
       • Trading: 17%
       • Production: 3%
       • Others: 5%
   19. The company has also started its SME lending arm from March ’19 onwards where the average ticket size was Rs 6,23,000.
   20. The company boasts of a robust internal audit system which completed 790 audits in Q1FY20.
   21. The rejection rate for all products in Q1FY20 was around 18%.
   22. The company has reduced commercial paper exposure to 1% of funding in Q1FY20.
   23. The company continues a healthy positive ALM with an average maturity of assets in 9.7 months while the average maturity of liabilities is 22.8 months.
   24. The company has also maintained a robust liquidity position of Rs 1786 Cr.
   25. The operating expenses to AUM ratio is around 6.4% while the cost to income ratio is at 56.4% in Q1FY20.
   26. The company is targeting to achieve <20% exposure for the biggest state and >50% cashless collections by 2020. The company has also provided guidance of an FY20 PAT figure of Rs 260 Cr.

Investor Conference Call Highlights

1. The disbursements for the quarter grew 35.5% to Rs 1806 Cr in Q1.
2. The company raised Rs 1428 Cr of incremental funds and none of them were done using commercial paper. The company has reduced its reliance on NBFC funding to 10% from 25% last year.
3. The company’s business correspondent services under Taraashna Financial Services has reached an AUM of Rs 542 Cr with 3.76 lac active clients. The company plans to convert this entity into a separate NBFC to tap opportunities in the co-lending space.
4. The business correspondent arrangement with IndusInd Bank has grown rapidly to an AUM of Rs 647 Cr from Rs 47 Cr a year ago.
5. The company expects to achieve a balance between microfinance and non-microfinance divisions in 4-5 years. They expect the non-MFI loans to rise to 1/3^rd of the total AUM from its current level of 6%.
6. The promoter’s pledge has been reduced to 20.8% from 53% in Q1FY20.
7. The company has seen very encouraging results from their psychometric test pilots where none of their defaulting clients could pass the test.
8. The company expects to maintain credit cost at current levels for the year.
9. The margin on direct assignment is around 1%-1.5%.
10. The company is continuing to reengineer themselves and implementing new systems but they still standby their projected growth rate of more than 30% in FY20.
11. The company is looking forward to growth in Taraashna as they have just added IDFC Bank in July.
12. The management maintains the previous guidance of keeping book portfolio at 65% of the total portfolio while the rest would be made up from direct assignment and BC tie-up.
13. The company has not been expanding in UP mainly to reduce concentration risk as prescribed by rating agencies. The company is present in only 40 out of the 80 districts in the state which shows that there is significant room for the company to grow here.
14. The company was probably the last MFI to enter Tamil Nadu yet their portfolio there is around Rs 176 Cr with no delinquencies. They have also successfully entered Tripura and Meghalaya.
15. The management is confident of achieving their guidance targets for revenue growth and PAT despite the average performance in Q1 as they believe they can achieve high growth in the coming quarters on the back of their additional branch expansion.
16. The partnership with RBL Bank ended as they acquired an MFI called Swadhaar and it would make more sense for them to work with an MFI that they own.
17. The company is confident of their ability to attract more institutional clients based on the fact that they were able to bring IDFC bank for BC tie-up.
18. The management maintains that what sets the company apart from other MFIs is their reliance on psychometric evaluations to understand the intent of the borrower along with the standard evaluations done with the help of the credit bureau to identify the borrower’s indebtedness levels. This focus on identifying the intent behind the borrower should prove to be the key to identify potential defaulters early according to the management.
19. The company has done around Rs 6 Cr of bad debt recovery in Q1FY20.
20. The company has raised around Rs 800 Cr from banks and Rs 585 Cr through a direct assignment. The average cost of bank loans is around 11-11.5%.
21. The management does not have any reservations about any change in relationship with IndusInd and Bharat Financial as the tie up with IndusInd had happened after the merger announcement.

Analyst’s View

Satin Credit Care is one of the few MFIs with a pan India reach and the enviable record of zero net NPAs in India. They have done well to expand their reach across the country and maintain their robust operations. The company is still in the transitionary phase where they introducing and experimenting with a number of concepts and products. The company has a lot of ground to cover in order to be able to achieve its ambition of being the foremost pan India MFI provider. So far the company has not faced any big delinquency issues and have managed to stay untouched from the current liquidity tightening. It remains to be seen whether the company will be able to achieve its revenue growth target of more than 30% for FY20 given that its revenues have grown only 8% in Q1. Nonetheless, given their wide reach and under-penetration in most of their markets and their focus on maintaining their stellar level of operational efficiency, Satin Creditcare is a good stock to keep an eye out for anyone banking on the themes of increasing consumption and microlending.

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