Arman Financial Services Ltd


Outcome of meeting

Shareholding pattern existing vs. post CCD -

sh

With one non-x board seat to SAIF. I believe there might be issues in future to grow, as limited scope to raise funds by diluting Promoters stake,

Disc: Invested.

With high RoE, there may not be a need to raise capital. After all, it has been growing for long without raising capital.

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The promoters also own Class A shares. Here is an extract from the agenda send by CS for EGM:

"Note : (1) Above does not include 12,04,474 (Twelve Lakh, Four Thousand, Four Hundred and Seventy-Four only) "Class A” Equity Shares carrying voting rights of 1 vote for every one lakh shares. These “Class A” shares are not listed as per terms of their issuance.

(2) The post preferential allotment shareholding of the Investor has been calculated on a fully diluted and converted basis assuming conversion of face value and if the Investor chooses, also
the aggregate accrued but unpaid coupon (net of withholding taxes in India and interest paid in cash) at the end of thefull tenure of the CCDs."

Discl: Invested

However, “Class A” shares carry voting rights of 1 vote for every one lakh shares which is only ~12 votes only.

Yes that’s what’s class a shares mean, to give away voting rights. There are two reasons why low promoter holding does not bother me:

  1. For financial organisatiOn, raising money is a need as it is their raw material. You can check other financial firms and see how their promoter holding has been diluted over the years.

  2. The management is professional and they have enough skin in the game with class a shares. With shareholding evenly disbursed, I don’t think it is a takeover target yet.

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I understand biz expansion and dilution relation. However, Arman is still tiny company. Post this CCD, promoter have only ~20% stake. Hence raised flag earlier for future growth.

Q4 FY18 CONF CALL NOTES

Press Release

Above press release contains the good summary. Some interesting points from conf call ->

NPA

  • Namra: We need to provide 1% of standard assets as provisions. This is sufficient to cover GNPA, no additional provisioning is done.
  • We have been aggressive with writing off non-performing loans.
  • We have a separate recovery team which many other MFIs do not have. We are still chasing for money in accounts defaulted during demonetization. Recovered average of 30-40L for last 3 months.
  • We are trying to instill following in the customers - “Paisa Liya Hain to Paisa Dena Padega”

GROWTH

  • Planning to have AUM of 650Cr by FY19 (MFI: 400-450Cr, MSME: 100Cr, 2-Wheeler: 90-100Cr)
  • Thinking of launching LAP products. If launched, that might contribute around 25-30Cr.
  • Target to open around 40 branches in FY19 (10-15 branches in eastern UP, 3-4 rest of UP, 4-5 branches in Rajasthan, rest in Madhya Pradesh & Maharashtra)
  • On being asked that, loan book target is not very ambitious - “In finance business, one can open many branches and grow. We would like to focus on recovering our money. We have a strong risk management framework and we do no like growing very fast”.

OPERATING COST
MFI

  • Yield: 24-24.5%, Opex: 8.5%, Loan Loss: 0.6-0.7%
  • For MFI business, looking to bring down the opex to 7.5-8% for FY19. We are still doing bi-weekly collection product compared to some other MFI players who are doing monthly products in urban areas. We expect loan loss to go upto 1% over 3-5 year time frame.

MSME

  • Yield: 30%, Opex: 11-12%, Loan Loss: 3%
  • Opex cost is higher due to door to door collection compared to branch collection in MFI. Expect loan loss around 2% over 3-5 year time frame.

2-Wheeler

  • Yield: 21%, Opex: 6-6.5%, Loan Loss: 1-1.2%
  • Expect loan loss around 2% over 3-5 year time frame.

UP BUSINESS

  • We are not finding UP to be as difficult place to business as others. We have a very good operational team on ground.
  • Average loan size is 18k in UP, we try to stay away from political risks as much as possible. 100% disbursements are cashless.
  • PAR90 is 27L for the UP loan book of 90Cr.

LAP

  • Thinking about starting LAP product. Looking at size of 2-5L.
  • Not looking at agricultural properties or municipal registered properties. Looking at Panchayat properties and clients who have established businesses in rural side.
  • Opex will be lower in this business but yield would also be low.

SFB

  • Management reiterated (as in the past) that MFI is not a very price sensitive market, funds delivery is more important.
  • There are some SFBs who are still charging same rate as Namra.

Disc - Forms > 5% of my portfolio. No transactions in CY18. Not a buy/sell recommendation.

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@kunal28parikh tracking your portfolio since jan17 added repro but missed arman fin.

Excellent research …

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Pre-demonetization, company had plans to dilute 25% of equity. The plan was delayed due to demo. Do members expect it to happen in FY19, or will the recent capital infusion by SAIF suffice for AUM growth this year?

recent capital infusion (which will be treated as Tier 1 capital) by SAIF will suffice

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outstanding result by Arman !Promoter shareholding also increased marginally in qtr1

Arman financials qtr1 1819.pdf (636.5 KB)

Arman result extract …“this transition initially impacted disbursement growth and there were teething issues with operations” …comments like this states what is going to come …inspite of teething issues they have grown at 100%+ result enclosed -very good is an understatement -lets track it closely

good development -independent director appointment -impressive pedigree Arman independent director appo-030818.pdf (1.5 MB)

Arman issued Non Convertible Debentures worth of 27.5 Cr at coupon rate of 12.6% payable semi annually and on maturity.

image

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Well this is good for several reasons:

  1. The interest rate is nominal for an NBFC, so it means they found buyers for the debt instruments which speaks of their growing reputation.
  2. This augurs well for AUM growth being on track, part of which was funded by SAIF capital injection
  3. The funds raised are 27.5 crore, which is around 5% (?) of current AUM

Disclaimer - Invested, views are biased

Arman also had a ratings upgrade from CARE

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I found Arman’s annual report for FY18 to be very good.

Without going into numbers or growth plans etc., following are some points/paragraphs which I found interesting -

  • Our rejections rate for MSME applications is around 70%, and we are essentially cherry-picking the best clients to build a strong foundation for our new MSME segment.

  • Our low reliance on using our existing rural microfinance customers to cross-sell MSME loans. While this may sound counterproductive, our goals for MSME is to target customers which are one-step above the bottom-of-pyramid segment. While many of our peers are using their existing microfinance book to sell large-ticket MSME products, we believe that many microfinance customers may not be able to absorb the larger ticket-size of MSME loans, which may create a quality issue in the future.

  • While we were considering adding an affordable housing loan segment in FY 19, we believe it is prudent to wait until we have a better idea of the loan quality experience in this newly evolving loan sector.

  • Our businesses are closely interlinked from a knowledge perspective. Our microfinance is our turf testing tool. We use this vertical to widen our geographic horizon for important reasons – it provides us grass root information at the absolute micro level, the risk of failure is low (owing to the low ticket size) and it establishes our brand.
    This is critical because the other high-ticket verticals (MSME and LAP) mandate in-depth on-ground information to establish a presence in any state. So even as our microfinance business covers 4 states (technically 5 if you include our 2 branches in Uttarakhand through our UP operations), our MSME business is only operational in Gujarat and marginally in Madhya Pradesh. We will extend this business further in Madhya Pradesh in the coming year and to other states beyond, wherever we enjoy an entrenched presence.

  • 89% of Arman’s customers are women of which, 84% are located in rural areas and are using our loans for income generating activities to increase household income.

The only long term question I have in my mind is ability to sustain competition from commercial banks & small finance banks due to lower cost of funding.

On this front, management has clarified that - delivery of funds is more important than the cost of funds in MFI business. Also they claim that they target under- or un-served rural areas where there is very little competition. How much difference this strategy makes is unclear to me. Fullerton India seems like a much larger player focused on rural areas & it would be good to look at their commentary.

Another observation I have is - most commercial banks use MFI loans as a tool to increase RoA & NIM and hence lower cost of funds never really gets passed to MFI customers (examples are - Axis Bank, RBL Bank). When banks lends to NBFC-MFI, they make a very good spread. One or two small finance banks that I track are trying to diversify their lending book into non-MFI and lower cost funds are used to lend to these new areas.

So unless one of the commercial banks or small finance banks really turn the heat on in MFI segment, I feel these cost of funds might not be such a big issue. It would still be interesting to ask management about this aspect in detail on conf calls or other meetings.

Disc - Arman forms > 5% of my portfolio, I hold it for more than 2 years now, no transactions in last 90 days. This is not a buy/sell recommendation.

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Yes, Arman should not be affected by the rising bond yields and thus cost of funds