ICICI Securities Recommends 'Buy' This Small-Cap Finance Stock For Strong 33% Gains

ICICI Securities in its report on Spandana Sphoorty Financial Ltd has given a 'buy' rating for a target price of Rs 550 per share. The brokerage is bullish on the stock as it sees a potential gain of 33% in 12 months. The company has taken corrective measures in FY22, which include: Appointing new and experienced core management, settling all the disputes with the erstwhile MD by paying a one-time settlement amount of ~Rs400mn, streamlining the business process as per the revised RBI guidelines and rolling out Vision 2025 with RoA / RoE target of >4.5% / >20%, respectively.

Stock Outlook

Spandana Sphoorty Financial is a small-cap stock with a market capitalization of Rs 2,863.97 crore. Wednesday, July 13, the shares of the company on NSE opened at Rs 428.10 per share, after falling 2.78% from the previous close it closed at Rs 414.50 per share, while the previous close was 427.90/share. The 52-week low is Rs 286.65 per share recorded on June 20, 2022, and the 52-week high is 727.40 per share recorded on July 12, 2021.

ROE of the stock is 2.24%. PE ratio is 42.34. PR ratio is 1. TTM EPS is Rs 9.79. It has a face value of Rs 10.

The company was listed on the exchange in 2019. The stocks of the company have gained 0.53% in the past 1 week, and 23.69% in the past 1 month, respectively. In the past 1 year, its share price has slid nearly 41.59%. Since its listing on the stock exchange, it has given 51.11% negative returns.

Considering the estimated target price of Rs 550 per share and the CMP of the stock, it has the potential to gain nearly 33% in 12 months.

Vision 2025

Vision 2025 aims at sharp improvement in profitability - targets RoA / RoE of >4.5% / >20% by FY25. After a turbulent FY22, which saw AUM decline of 19% YoY, 4% YoY decline in borrower base and GNPL increasing to 15% by March'22 on the back of operation and management instability triggered by the resignation of the erstwhile MD & CEO, Spandana has initiated various measures to get back on feet. As a part of course-correction, it appointed Mr. Shalabh Saxena (former MD & CEO of BFIL) as its new MD & CEO, who took charge in March'22. In a span of

 

Credit cost to remain elevated in FY23E, but NIMs could surprise positively

While the management envisages to bring down credit cost to 2% in FY23E, we believe elevated stress pool (NNPL at 6% + PAR 31-90 at 6.6%) would keep credit cost higher. We are modeling credit cost at 4.6% in FY23E. However, we also estimate >100bps margin expansion driven by lower interest reversal and likely price hike (in line with industry trend) during FY23E.

Management and operational stability to help improve earning trajectory going forwar

Monthly disbursements of Rs8.6bn in March'22 suggest fast approaching business normalcy and also reflect operation realignment. Further, settlement with the erstwhile MD & CEO would ensure operation stability going forward. Spandana has taken the opportunity to beef up top and mid management teams, post the resignation of its erstwhile MD in Nov'21. It has hired CEO, CFO and CTO in the past six months. Management stability along with realigned business process would help it execute Vision 2025 in an effective manner.

Buy for a target price of Rs 550/share

FY22 had been an eventful year for Spandana Sphoorty (Spandana), starting with the resignation of its erstwhile MD & CEO which triggered operational instability followed by course correction. Therefore, in Q4FY22, it was focussing more on setting up its strategies, aligning and refining processes to pave the way for achieving Vision 2025 goals. Consequently, it reported a PAT of Rs286mn in Q4FY22, a decline of 37% QoQ due to 14% QoQ decline in NII and one-time settlement fees of Rs400mn. Further, accelerated recognition of stress resulted in GNPL ratio doubling to 15% in Q4FY22 vs 5.7% in Q3FY22. While total stress with NNPL ratio at 6% and PAR 31-90 at 6.6% remained elevated, collection efficiency at 100% in non-restructured book and 74% (March'22) in restructured book gives some hope of credit cost in FY23E to remain lower than FY22 (7%).

ICICI Securities said, "Considering the management and the operational stability, improving visibility on earnings recovery led by credit cost normalisation and favourable risk-reward (trading at 0.7x FY24e P/BV), we upgrade the stock to BUY from ADD earlier with a revised Target Price of Rs550 (earlier: Rs450). We roll overestimates to Sep-23 and assign P/BV multiple of 1x."

According to the brokerage, stress unfolding higher than anticipation, and operational instability caused by outside interference are two key risks to their buy call.

About - Spandana Sphoorty Financial Ltd.

Founded by Mrs Padmaja Reddy in 1998, Spandana Sphoorty Financial Limited is a public limited company registered with the Reserve Bank of India (RBI) as an NBFC-MFI. Spandana's journey began in 1998 and within five years, the company grew to become the largest Microfinance Institution (MFI) in India and the 6th largest MFI across the globe by 2003. At its peak, Spandana had 1,856 branches with a presence across 10 states and a workforce of over 13,500 employees.

Disclaimer

The stock has been picked from the ICICI Securities brokerage report. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.