Spandana Spoorthy Limited - IPO Note

Private Client Research




Finance - NBFC


Spandana Spoorthy Limited

Finance - NBFC

August 06, 2019

Rating: Subscribe

Sensex: 36828.78

CNX Nifty: 10914.35



Price range
Issue Period
5 Aug19- 7 Aug 19


August 06, 2019



CNX Nifty







Issue details

Face value (Rs.)
Market lot
Issue size
1200 crores
Public Issue
1.4 crore shares
Market cap post IPO
5504 crores
Equity Pre - IPO
5.96 crore
Equity Post - IPO
6.43 crore
Issue type
Book built

Shareholding (Pre IPO)


Shareholding (Post IPO)


+91 22 6639 3000

Investment Rationale:
Seasoned business model with resilient performance through business cycles: Spandana has been able to leverage the inherent strength of their client centric business model, focus on internal controls, the expertise of their Individual Promoter and core management team to maintain their status as a leading NBFC-MFI. Company's response to the 2010 AP crisis demonstrated the strength of their decision making, planning and execution. In the aftermath of the 2010 AP crisis, even while they were under CDR, Spandana continued operations outside Andhra Pradesh in various states. In this period, they focused on rebuilding profitable operations through portfolio diversification, cost rationalization, customer retention, and recovery from their Andhra Pradesh portfolio. These measures helped Spandana to raise new debt from existing lenders and gain capital infusion from Kangchenjunga, their Corporate Promoter and Kedaara AIF - 1, which allowed them to exit from CDR in March 2017. According to ICRA Research, Spandana is one of the only 2 major MFIs to successfully exit from CDR post AP crisis.

Further, in November 2016, the aftermath of demonetization, inadequate currency supply, political interference in some states and disruption in borrower cash flows led to a sharp dip in the collection efficiencies of MFIs (from over 98% prior to demonetization to approximately 75-80% in November and December 2016). During the months following the demonetization notification, Spandana adopted practices that allowed borrowers to repay a portion of their installments and also supported them with interim loans. Their Collection Efficiency for Fiscals 2018 and 2019 were 99.25% and 99.74% on a consolidated basis, respectively. ICRA Research notes that company's performance (in terms of reductions in 30 dpd delinquencies and 90 dpd delinquencies) and asset quality was superior to the industry after demonetization, as a result of their rural focus, lower share of portfolio in the most affected districts and their geographically diversified portfolio. Further, according to ICRA Research, company's credit costs post demonetization was superior than the industry average.

High degree of client engagement and robust risk management, leading to superior asset quality and collections:
Spandana focuses on a high degree of client engagement through their large employee base and operating procedures. Their client engagement practices include village/block level centre meetings and client training. Prior to lending to a client, they impart training over 3 days on loan terms, utilization and repayment, insurance and client support services. They also conduct center meetings where clients interact with their staff at regular intervals (typically based on their installment payments frequency).

Further, their risk management norms are designed keeping in mind the various kinds of risks to their business. Spandana make changes to these norms from time to time in response to business environment to ensure a responsive risk management strategy. Many risk control measures are embedded in the business process. They follow a set of eligibility criteria for clients, which are aimed at minimizing credit risk. Every prospective client prior to disbursement is also assessed for their credit history with other lenders reporting into the credit bureau. ICRA Research notes that the vintage of their portfolio is better than the industry, with over 25% of the portfolio in the 4th cycle compared to 11% for the industry as of December 2018.

The table shows the key portfolio indicators:

Particulars FY19
Collection Efficiency 99.74% 99.25% 97.13%
Stage III PAR 90+ (excl. the old AP Portfolio) Ratio (%) 0.10% 2.27%


Stage III PAR 90+ Net (excl. the old AP Portfolio) 0.61 11.75 8.72
Stage III PAR 90+ Net (excl. the old AP Portfolio) Ratio (%) 0.01% 0.38% 0.71%
Stage I, II and III PAR 0+(excl. the old AP Portfolio and std Portfolio) 38.28 74.37 139.08

Streamlined systems and processes and high employee productivity:
Company's business processes are designed for scale and efficiency and they constantly review and endeavor to strengthen them as the scale of their operations increase. Their operational efficiency is also driven by streamlined systems and procedures and scalable workforce deployment. At the branch level, they have implemented standardized systems and a front-end interface that gives them real time information on demand and collections. The systems follow an accounting module with budget controls built and approval authorities clearly earmarked. As a result, according to ICRA Research, Spandana had the lowest operating expenses/ AMA ratio amongst major NBFC-MFIs and SFBs for Fiscal 2019.

Focus on the high potential and under-served rural segment:
According to ICRA Research, while rural India accounts for approximately 68% of India's population as of March 2018, it accounted for only 34% of total deposit accounts and 23% of the loan accounts in scheduled commercial banks. ICRA Research notes that the significant under penetration of credit in Rural Areas offers strong potential for improvement and that given the relatively deeper reach, existing client relationships and employee base, micro-finance institutions are well placed to address this demand, which is currently being met by informal sources such as local money lenders. Accordingly, with Spandana's focus on the rural segment as of December 31, 2018, 88% of their portfolio was located in Rural Areas, as compared with 61% for 33 NBFC- MFIs as a whole. As a consequence, the proportion of their portfolio in agriculture and allied activities is higher for them as compared with the industry. (Source: ICRA Research). Further, loans given to their clients for agriculture and allied activities can be classified as "Direct Agri" by banks pursuant to the RBI's priority sector lending guidelines, which provides Spandana with the opportunity to assign this portfolio to banks that need to meet their target on Direct Agri loans. As of March 31, 2019, 94.6% of their portfolio was located in Rural Areas.

Geographically diversified operations leading to risk containment and business resilience:
As of June 30, 2019, Spandana cover more than 74,749 villages in 269 districts in 16 states and 1 union territory across India through 929 branches. Their operations are well-diversified at the branch, district and state levels. To address geographic concentration risk, Spandana has specified exposure caps at the state, district and branch levels. With the adopted norm, their operations are geographically well-diversified with no single state contributing more than 20.01% to the AUM, no district contributing more than 1.82% to the AUM and no branch more than 0.3% to the AUM as of March 31, 2019. Further, according to ICRA Research, Spandana had the 2nd lowest GLP per branch amongst peer comparison of certain NBFC-MFIs and SFBs, as of March 31, 2018 and lowest GLP per branch amongst peer comparison of certain NBFC-MFIs and SFBs in March 31, 2019. Further, as per their risk containment norms, disbursements for any single state must be less than 22.5% of their total disbursements.

Significant industry experience of the Promoter and management team:
The long-standing industry experience of the Individual Promoter and the management team provides Spandana with an understanding of the needs and behavior of the clients particularly in Rural Areas, the nuances of lending to these clients and issues specific to the microfinance industry in India. This expertise gives them a competitive advantage in this industry and has helped them in maintaining their resilience through industry cycles.

Padmaja Gangireddy, the Individual Promoter and Managing Director, has over 24 years' experience in social development and microfinance sector. She also founded Spandana Rural and Urban development Organisation ("SRUDO") in 1998 and promoted this company ("Spandana") in 2003. Further, at the field level, Spandana has a high retention rate of employees at the middle to senior management level. The average experience of their assistant vice-presidents, division managers and cluster managers was 7.6 years, 5.6 years and 6.4 years, respectively, as of March 31, 2019.


Peer comparision:
Market share based on AUM

Spandana Spoorthy

Historical trend of Micro finance Industry:
For several decades, microfinance sector, in its various forms, has been in existence in India. The industry has grown manifold, driven by an inherent demand for credit at the bottom of the pyramid, which remained largely underserved. Number of negative events in the past have influenced growth as well as asset quality of the microfinance sector including – the AP crisis of October 2010, farm loan waivers by several states, as well as demonetisation in November 2016. Despite some setbacks, the industry has evolved over the cycles and demonstrated resilience by adapting to changing dynamics. The microfinance sector in India has grown at a CAGR of 23.1% over the past 10 years to reach ~| 263300 crore as of March 2019.

Overview of Indian Micro finance industry:
The share of portfolio in urban (and semi-urban) areas was at 39% (for MFIS+SFBs) as of December 31, 2018. Initially, MFIs exposure to urban areas was on the rise till March 2016 as lending in urban areas enables disbursement of higher ticket loans. However, post conversion of SFB licensees and their exclusion from NBFC-MFI category, share of rural clients has increased for NBFC-MFIs as they are more focused on serving rural clients. Over the years, average ticket size in the MFI business has been on the rise. While ~10% of borrowers had loans less than | 10,000 in March 2014, the share came down to slightly above 2% in September 2016 and remained broadly comparable as of December 2018. In contrast, loans with ticket size greater than | 25,000 have increased from 12% as on March 2014 to 47% of the portfolio as on September 30, 2016 and further to 83% as on December 2018.


Geographical concentration acts as risk:
As of March 31, 2019, the company has ~67.6% branch and ~72.94% of gross AUM originated in Karnataka, Madhya Pradesh, Odisha, Maharashtra and Chhattisgarh. While it has endeavoured to manage and monitor concentration risk at the district level, the company is susceptible to risks relating to concentration in these states. In the event of a regional slowdown in economic activity in one or more of these states, or any other developments including political unrest, disruption or sustained economic downturn, the company may experience an adverse impact on business, financial condition, results of operations and cash flows.

Potential conflicts of interest with one promoter and/ or directors:
Promoters may become involved in ventures that may potentially compete with the company, which may adversely impact business, financial condition and results of operations. For instance, individual promoter, Padmaja Gangireddy, owns 68.31% shareholding in Abhiram Marketing, one of the groups engaged in the business of consumer goods, whose retail products are sold at company’s branches. Further, Padmaja Gangireddy owns 69.18% shareholding in another group company - Criss Financial Holdings Ltd, which operates in the same line of business. The letter of intent to acquire Criss Financial Holdings has been submitted to RBI and approval is awaited. Also, some directors are associated with entities in similar business.

Regulatory, local disruption affect financial condition:
In October 2010, the AP government passed the AP Microfinance Ordinance to put in place extremely stringent operating guidelines in response to the allegedly coercive collection practices adopted by MFIs in the formerly unified Andhra Pradesh. Post this ordinance, loan collections and asset quality in the formerly unified AP was severely affected across the industry. As the company had large exposure in the formerly unified AP, the company had materially adverse effect on business. Thus, business operations may get affected by regulatory actions or any laws passed by state governments in which the company operates its business.

Company Description

Incorporated on March 10, 2003, Spandana Sphoorty Financial Limited ("Spandana") is a leading, Rural Focused NBFC-MFI with a geographically diversified presence in India offering income generation loans under the joint liability group model, predominantly to women from low-income households in Rural Areas. As of March 31, 2019, they were the 4th largest NBFC-MFI and the 6th largest amongst NBFC-MFIs and Small Finance Banks ("SFBs") in India, in terms of AUM.

Through their extensive corporate history, Spandana has developed an in-depth understanding of the borrowing requirements of the low-income client segment. Their business model involves regular client meeting processes through their employees, who maintain contact with the clients across the districts that they cover. As of June 30, 2019, Spandana had 7,062 employees (including 5,051 credit assistants) operating out of 929 branches in 269 districts across 16 states and 1 union territory in India. Through their loan products and client- centric approach, Spandana endeavor to strengthen the socio- economic well-being of low-income households by providing financing on a sustainable basis in order to improve livelihoods, establish identity and enhance self-esteem.

In October 2010, the MFI industry (including Spandana) was severely impacted due to external regulatory action, as the government of the formerly unified Andhra Pradesh promulgated the AP Microfinance Ordinance 2010, which enforced several restrictions on the operations of MFIs. This severely impacted Spandana's collections and the consequent cash-flow shortage impacted their ability to service their debt, which in turn impaired their growth and profitability. Their lenders referred Spandana to the Corporate Debt Restructuring ("CDR") mechanism of the RBI to develop a plan to restructure the borrowings and revive the business. Spandana agreed on a CDR plan with their lenders, which allowed them to get cash-flow relaxations to enable them to continue their efforts towards portfolio diversification, process improvement and cost rationalization. These measures helped them turn their operations profitable from the year ended March 31, 2014.

Further during the time that Spandana were under CDR, they deployed efforts to recover dues in AP, such as continuing to keep their branches open and continuing to engage with borrowers. Their operations turned profitable in the year ended March 31, 2014 and they went on to make profits for 4 consecutive years while operating under the CDR mechanism. The restated consolidated profit for the period (under Ind AS) for Fiscals 2018 and 2019 was Rs.187.95 crore and Rs.311.90 crore. As a result of their collections from the old AP portfolio and the profits generated from the operations in other states, Spandana was able to restructure their outstanding debt as well as raise refinancing debt from the existing CDR lenders. Spandana also received capital infusion from Kangchenjunga, their Corporate Promoter, and Kedaara AIF - 1, which enabled them to exit from CDR mechanism successfully in March 2017 with approvals from the RBI and their lenders. ICRA Research notes that they were one of only 2 major companies that were able to successfully exit from CDR.

Post their exit from CDR in March 2017, Spandana has increased their lender base, diversified their borrowings to new banks and NBFCs and also issued NCDs in the capital markets (leading to a reduction in Average Effective Cost of Borrowing to 16.31% for Fiscal 2017 from 14.74% for Fiscal 2018 and further to 12.84% for Fiscal 2019). As a result, during Fiscal 2018, with increasing flow of capital, Spandana expanded their operations and were able to effectively utilize the existing branch network and employees.

Prior to their exit from CDR in 2017, Spandana had limited access to capital, due to which they were able to offer loans in lower ticket sizes than the demand from the clients. According to ICRA Research, Spandana had the lowest portfolio per branch amongst peer comparison of major NBFC-MFIs and SFBs, as of March 31, 2017. Post exit from CDR, they were able to optimize the ticket sizes and also acquire new clients at existing and new branches. This helped them grow their AUM in Fiscal 2018 at one of the highest rates (143.8%) among large NBFC-MFIs in India (Source: ICRA Research). Over Fiscals 2018 and 2019, their Disbursements increased by 87.34% and 28.82% (from Rs.2,059.17 crore as of March 31, 2017 to Rs.3,857.65 crore as of March 31, 2018 and to Rs.4,969.28 crore as of March 31, 2019) and the Consolidated Gross AUM grew from Rs.3,166.79 crore as of March 31, 2018 and to Rs.4,437.28 crore as of March 31, 2019.

Profit & Loss Statement:- (Consolidated)

(Rs. Crores)

Particulars (INR mn) FY17 FY18 FY19
Gross AUM (including the old AP Portfolio) 20991.00 39601.00 47958.00
Gross AUM (excl. the old AP Portfolio) 13015.00 31668.00 44373.00
Gross AUM Growth (%) 7.00% 143.00% 40.00%
Annual Average Gross AUM 12602.00 22342.00 38020.00
Disbursements 20592.00 38577.00 49693.00
Disbursement Growth (%) 15.00% 87.00% 29.00%
Total Active Loan Accounts ( No. in mn) 1.10 1.90 3.00
Revenue from Operations 3771.00 5873.00 10431.00
Other Income 16.00 2.00 54.00
Borrowers (No. in mn) 1.10 1.60 2.50
Total Income 3787.00 5875.00 10485.00
Finance Costs 1494.00 2318.00 3579.00
Net Interest Income 2211.00 3357.00 6233.00
NIMs 17.50% 15.00% 16.40%
Total Expenses 3435.70 3048.30 5750.60
Operating Expenses 957.90 1084.50 1718.90
Opex / AUM (%) 7.60% 4.90% 4.50%
Cost to Income Ratio 41.80% 30.50% 24.90%
Profit before tax 455.90 2827.00 4734.70
Profit for the period 4434.10 1879.50 3119.00
Stage I, II & III PAR 0+ (excl. the old AP Portfolio and standard Portfolio) 1390.80 743.70 382.80
Stage I, II & III PAR 0+ Net (excl. the old AP Portfolio & standard Portfolio) 394.80 140.30 272.10
Stage III PAR 90+ (excluding the old AP Portfolio) 892.60 719.40 43.10
Stage III PAR 90+ (excluding the old AP Portfolio) Ratio (%) 6.90% 2.30% 0.10%
Stage III PAR 90+ Net (excluding the old AP Portfolio) 8.70 11.80 0.60
Stage III PAR 90+ Net (excluding the old AP Portfolio) Ratio (%) 0.70% 0.40% 0.00%
Collection Efficiency 97.10% 99.30% 99.70%
Return on Annual Average Gross AUM Portfolio 35.20% 8.40% 8.20%
Return on Annual Average Net Worth 79.80% 16.20% 19.00%
Net Worth 9276.00 13906.00 18894.00
Net Asset value per equity share 316.80 467.30 326.00
Yield and Cost of funds
Particulars FY17 FY18 FY19
Annual Average Yield on Gross AUM (%) 29.40% 25.40% 26.00%
Quarterly Average Yield on Disbursement (%) 25.80% 25.10% 24.30%
Annual Average Cost of Borrowings (%) 16.10% 14.20% 13.50%
Productivity Ratio
Particulars FY17 FY18 FY19
Number of branches 526.00 694.00 925.00
Number of employees 3044.00 4045.00 6656.00
Number of loan officers 1984.00 2746.00 4674.00
Number of active loan accounts 1143414.00 1934180.00 2969500.00
Gross AUM per branch 2.47 4.56 4.80
Gross AUM per employee 0.45 0.91 1.26
Gross AUM per active loan account 11417.00 16408.00 14943.00
Disbursement per branch 3.90 5.60 5.40
Disbursement per employee 0.70 1.10 0.90
Disbursement per loan officer 1.10 1.80 1.40
Average ticket size 21025.00 22826.00 26279.00
Source: Stockaxis Research, Company Data


Spandana Sphoorty is a rural focused MFI with a diversified geographical presence in India. As on FY19, it makes an ROA of ~13% largely due to lower leverage of ~2.3x, reversal of tax (benefit to be received till FY20) and comparatively lower cost structure as compared to the peers (C/I ratio ~21% as against ~35% industry average). We believe higher yields are not sustainable as RBI does not permit lending rate to exceed more than 10% above the cost of funds on the balance sheet. However, we believe strong AUM growth of ~35% (~52% CAGR for last 3 years) and increasing leverage to keep ROA /ROEs ~6.5% / 24% in the medium term. At the upper price band of INR 856, the stock is valued at 2.4x P/BV as on FY19 and 11.6x FY19 P/E post dilution basis. We believe the risk/reward ratio is encouraging and recommend SUBSCRIBE to the issue with a long-term perspective.

Key Information:

Use of Proceeds:
Offer For Sale (OFS) (INR Mn) 8,009
Fresh Issue (INR Mn) 4,000

The Net Proceeds of the Fresh Issue are proposed to be utilised for augmenting theircapital base and general corporate purposes.

Book running lead managers:
The promoter & management team have long standing experience of MFI lending, which gives it a competitive edge over its competitors & aids to perform better through various business cycle keeping growth healthy.