Spandana Sphoorty IPO: From strategy to growth, a promising revival story

While evaluating the initial public offering (IPO) of microfinance player Spandana Sphoorty Finance, the question is whether there is appetite for businesses which have bounced back from a major crisis. Examples such as Suzlon haven’t demonstrated success in doing so post the corporate debt restructuring (CDR) exercise. 

But the differentiating factor is that unlike other businesses, microfinance has retained its sheen as a promising space in India. Post the 2010-11 crisis, regulations have been strengthened and more importantly, organised microfinance institutions (MFIs) have vacated the Andhra Pradesh/ Telengana region. 

To that extent, Spandana’s business is a new one, with almost no baggage of the past. The business strategy, growth, scalability and underwriting practices have been largely boosted in its new avatar.

High concentration in united Andhra Pradesh had created a huge financial crisis for Spandana, as was the case with most MFIs. In 2014, it exited the CDR and nearly three years later, Kedaara Capital pumped in equity into the company. Kedaara’s overall stake may reduce to 47 per cent from over 60 per cent now, though it will retain its position as the largest shareholder. The holding of promoter Padmaja Gangireddy, a first-generation entrepreneur, will get diluted to 16 per cent from 20 per cent post the IPO. Currently, Spandana has 929 branches, spread across 16 states. 

It plans to raise Rs 400 crore of fresh capital through the IPO to plough into the business — largely to scale up branches. Among others, its focus on lending to economically active women and dual-income houses ensure relatively high recoverability. 

Still in the early phase of new set up, FY17-19 has been the fast growth periods for the MFI. Yet, in a space not densely populated by listed players, Spandana ranks third, next to Satin Credtcare, with the leader being CreditAccess Grameen. Financials, too, have improved in this period.  Net interest margin at 16.8 per cent in FY19 is quite impressive, though asset quality may need monitoring. While there was no net non-performing asset (NPA) in FY19, gross NPA ratio was 7.9 per cent in FY19, largely owing to region-specific issues. 

The IPO demands 2.7 times FY19 estimated book value, which analysts at Sharekhan view positively. Considering peers trading at 1.2-1.5x FY20 estimated book, Spandana’s asking rate is a tad steep given there is a scope for improvement, particularly concerning branch utilisation. Its average branch-level disbursements at Rs 470 crore is lower than its peers’ Rs 910 crore per branch. 

MFIs also remain susceptible to socioeconomic issues that crop up in states, including farm loan waiver. Unsecured nature of the business also tends to impact asset quality in the near to medium term should there be any default.