SBFC Finance Limited IPO

SBFC Finance Limited has filed  its DRHP with market regulator SEBI on March 23, 2023 to raise capital through IPO. The IPO of the Company consists of Fresh Issue and Offer for Sale.  The size of Fresh Issue is [•] Equity Shares aggregating up to ₹750 crore and Offer for Sale of upto [•] Equity Shares aggregating up to ₹ 450 crore. As part of OFS, the major selling shareholders are Arpwood Partners Investment Advisors LLP, Arpwood Capital Private Limited, Eight45 Services LLP and SBFC Holdings Pte. Ltd.

Business Model of the Company

The Company is a systemically important, non-deposit taking non-banking finance company (“NBFC-ND-SI”) offering Secured MSME Loans and Loans against Gold, with a majority of the borrowers being entrepreneurs, small business owners, self-employed individuals, salaried and working class individuals. Among MSME-focused NBFCs in India, the Company has one of the highest assets under management (“AUM”) growth, at a CAGR of 40% in the period from Fiscal 2019 to Fiscal 2022. (Source: CRISIL Report) The Company has also witnessed robust disbursement ,growth, at a CAGR of 39% between Fiscal 2019 and Fiscal 2022. (Source: CRISIL Report)

As of February 28, 2023, approximately only 14.52 million MSMEs have registered on UDYAM, of the estimated 70 million MSMEs in India (Source: CRISIL Report), leaving a large number of MSMEs without access to organised finance owing to their unregistered status. As of March 2022, less than 15% of MSMEs have access to credit in any manner and traditional institutions have historically refrained from providing credit to underserved or unserved MSMEs and self-employed individuals, leaving them to resort to credit from informal sources. (Source: CRISIL Report)

The credit gap was estimated at around ₹ 85 trillion in Fiscal 2022, offering growth potential for financial institutions. (Source: CRISIL Report) Further, with increasing presence of MSME lenders in smaller cities and lenders increasingly focusing on underserved customers, the portfolio of secured MSME loans with ticket size between ₹ 0.50 million and ₹ 3.00 million is expected to grow at a CAGR of 13% – 15% between Fiscal 2022 and Fiscal 2025. (Source: CRISIL Report)

Management of the Company

(i) Neeraj Swaroop is an Independent Director and Chairperson of the Board. He holds a bachelor’s of technology degree in mechanical engineering from Indian Institute of Technology, Delhi and a post graduate diploma in management from Indian Institute of Management, Ahmedabad. He has been associated with the Company since November 21, 2017. Prior to joining the Company, he was associated with Pond’s (India) Limited, Bank of America, HDFC Bank Limited, Standard Chartered Bank and Singapore Exchange Limited and he is currently a visiting faculty at S.P. Jain Institute of Management & Research, Mumbai.

(ii) Aseem Dhru is the Managing Director and Chief Executive Officer of the Company. He holds a bachelor’s degree in commerce from Gujarat University. He is a member of the Institute of Chartered Accountants of India and has been certified by the Institute of Cost and Works Accountants of India. He has over 25 years of experience in the banking industry and has been associated with the Company since September 28, 2017. Prior to joining the Company, he was associated with HDFC Bank Limited as a group head – business banking working capital & retail agri business, HDFC Securities Limited as managing director and chief executive officer and was a director on the board of HDB Financial Services Limited.

Object of the Issue

Offer for Sale

The Company will not receive any proceeds from the Offer for Sale by the Promoter Selling Shareholder and the proceeds received from the Offer for Sale will not form part of the Net Proceeds. The Promoter Selling Shareholder will be entitled to the proceeds of the Offer for Sale after deducting his proportion of Issue expenses and relevant taxes thereon.

Fresh Issue

The Company proposes to utilize the Net Proceeds towards augmenting the Company’s capital base to meet the future capital requirements arising out of the growth of the business and assets.

Further, the Company expects to receive the benefits of listing the Equity Shares on the Stock Exchanges, which will result in enhancement of  visibility and  brand image among its existing and potential customers.

Risks in the IPO

The risk of non-payment or default by the borrowers

As of December 31, 2022, 81.58% of the total AUM of Secured MSME Loan customers are self-employed. During the period from April 1, 2020 to December 31, 2022, 79.31% of the loans disbursed (in terms of disbursal amount) by the Company were to self-employed customers and amounted to ₹ 28,338.64 million. The Company also has a concentration of loans to MSMEs. The risk of non-payment or default by the borrowers may adversely affect the business, results of operations and financial condition.

Subject to laws and regulations

The Company is subject to laws and regulations governing the financial services industry and the operations in India, including laws in relation to capital adequacy ratios. Changes in, and differing interpretations of, laws and regulations governing the Company could adversely affect the business, results of operations and prospects.

The Company depends on information provided by its customers and certain third party

The Company depends on the accuracy and completeness of information provided by its customers and certain third party service providers and our reliance on any erroneous or misleading information may affect the judgement of their creditworthiness, as well as the value of and title to the collateral.

The business of Company is vulnerable to interest rate risk

The business of the Company is particularly vulnerable to interest rate risk, and volatility in interest rates for both lending and treasury operations could have an adverse effect on the net interest income and net interest margin, thereby affecting the results of operations and cash flows.

Some of the loans are unsecured 

Some of the loans that the Company provides are unsecured and are susceptible to certain operational and credit risks which may result in increased levels of non-performing assets (“NPAs”), which may adversely affect the business, prospects, results of operations and financial condition.

Financial Performance

As per the financial statements of the Company, here are Financial Highlights for FY22 compared to FY21:

Revenue: The company experienced a 3% increase in revenue, reaching Rs. 530 crore in FY22 compared to Rs. 511 crore in FY21.

Total Expenses: Total expenses rose by 11% in FY22, reaching Rs. 444 crore compared to Rs. 397 crore in FY21.

Profit Before Tax: The profit before tax decreased by 24% in FY22, amounting to Rs. 86 crore compared to Rs. 114 crore in FY21.

Profit After Tax: The profit after tax also decreased by 24% in FY22, amounting to Rs. 64 crore compared to Rs. 85 crore in FY21.

Total Assets: The total assets of the company increased to Rs. 4515 crore in FY22 compared to Rs. 4231 crore in FY21.

Total Equity and Liabilities: The total equity and liabilities remained the same as the total assets at Rs. 4515 crore in FY22 compared to Rs. 4231 crore in FY21.

Net Cash from Operating Activities: The company used Rs. 821 crore in operating activities in FY22, a significant increase from the Rs. 275 crore used in FY21.

Net Cash from Investing Activities: The net cash generated from investing activities increased to Rs. 651 crore in FY22 compared to Rs. 375 crore in FY21.

Net Cash from Financial Activities: The net cash generated from financial activities in FY22 was Rs. 183 crore, in contrast to the Rs. 186 crore used in FY21.

Net Cash and Cash Equivalents: The net cash and cash equivalents at the end of FY22 were Rs. 151 crore, slightly higher than the Rs. 138 crore in FY21.

These highlights provide an overview of the company’s financial performance in FY22 compared to FY21.