Arman Financial Services Ltd

(vinay ambekar) #164

while they were not asked this specifically, they did stress that they have not indulged in evergreening their own loans i.e. give loans to their defaulters so that they can repay their earlier loans. my sense from the concal is that they are following prudent practices and their risk metrics would involve excluding defaulters if it reflects in their CIBIL record. however this is just a guess.

again, the method of fund raising was not asked specifically. my guess is that had the promoters themselves had the money, they might have purchased stock from the open market when it was down. i was wondering why the other promoter amit manakiwala and his family are selling in the open market and not to the patels. likely due to funds not being available with patels. low promoter holding is a concern, which will go lower with any QIP.


Thanks for the reply. I am taking the discussion forward. Feel free to pitch in.

I heard the concall that is available on Researchbytes now. Arman seems to have higher credit bureau rejection rates for its MF loan applicants than the larger players. The rejection rates for Arman are higher than 50%, while Ujjivan etc report much lower figures. Arman has lower repeat clients too (40-45% vs 80-90% for bigger players). The rejection rates may be high, since Arman has to find new customers all the time. That raises concerns about the people pool form which they are trying to pick customers. Can anyone remind me why does Arman have low customer retention rates?

It is difficult to understand why would promoters not go for a rights issue. If there is under-subscription, then they can mop up those shares and increase their shareholding in the company. It is possible that promoters do not have money to invest and dont want to pledge their shares for it. Another possibility is that the growth story is not as strong as the company claims and hence the promoters do not want to invest more of their money.

(Kunal Parikh) #166

Thanks Pranav for the questions. I do not know if retention rates of customers in mfi is a good thing or a bad thing in a situation where disbursements are going.

As far as the second question is concerned, the promotors have dvr and if that is counted their stake goes up by 40% but they obviously lack voting rights. You are right that they don’t have that much money and if you check they do not take very high salary(like csl finance). Also, in my interaction with Alok Patel in the agm, they were fine with dilution, as long as they get good valuation for their shares. He pointed out low promoter holding on other microfinance companies too. He was not happy with the present valuation and hence the issue.


Thanks Kunal! Once again feel free to pitch in guys.

It is likely that promoters do not have large pools of money with them and do not want to pledge their shares. So, they would rather not go for a rights issue. I would interpret this as aversion to take very high risks, which is welcome. However, I think that promoters should go for a rights issue this calendar year even if they need to take a personal loan to fund their subscription.

I agree with you about high retention rates being a double edged sword unless we know why are they high. For MFIs ever greening their loss accounts, high retention rates would make their job a lot easier. However, if an MFI has high retention rates and does not evergreen the accounts, then the profitability would be sustained at high levels.

Infact, Arman may not have higher rejection rates than others and they may be more honest about it. The rejection rates could be same for the entire industry, as the management said in the con call. If a large MFI has 15% rejection rate and 85% retention rates every year, then it is rejecting 15% in an effort to lend to 15% of applicants. So, rejection rate except their repeat customers is 50%. Similarly, if Arman has 50% rejection rate an 50% retention rate, then Arman is rejecting 1 applicant for each new applicant that they lend to. So, both lenders are looking at a similar pool of applicants. However, it also implies that the pool of applicants has been fished already by MFIs. So, the MFIs that would grow fast now will have to lend to the leftover applicants. This does not sound good for Arman, eventhough they have managed the credit quality well till now.

I have a related question. MFIs claim that they lend for income generation purposes. However, any business does not recover all it’s cost within a year. MFIs recover entire principal along with the interest in about a year from the customer. These are amortizing loans and different from the working capital loans to the corporates where they only pay interest and the loan limits are renewed each year. MFI clients would have to liquidate their assets (working capital, cows, buffaloes, etc.) to repay the MFI within a year. Or, they will have to take multiple loans during a year to meet the cash flow mismatch. As the loan keeps amortizing, at intervals of a few months the borrower will require another loan to meet the working capital requirement. Theoretically, borrowers would like to take multiple loans at intervals of a few months, all adding up to a little over their requirements, to manage their business. Maybe, this is why MSME loans have longer tenures of 2 years. A longer tenure slows the amortization of loans and makes working capital management easier. It appears to me that mfi customers who are involved in income generating activities would need multiple loans and would most likely renew these loans. However, those who are taking loans from single MFI or not renewing their loans are either taking it for one time need (sickness, marriage, etc.) or for consumption.

Arman has low retention rates and yet recovers the loan from borrowers. This may mean that about half of the borrowers use Arman as a source of meeting one-time need for resources. Please remind me why does Arman have low retention rates (their opinion and also yours) and feel free to comment.

(Mayank Narula) #168

To answer your second question, most of the times, MFIs clients are engaged in activities generating high ROE. A milk farmer can sell the milk with which they can recover the fixed cost of buying a milch animal within a year or a vegetable venders can sell almost all the produce at more than 50% profit.

Disclosure- not invested in Arman, but in Satin and Ujjivan


Hi Mayank, Thanks for contributing to the discussion!

In my opinion, the return of entire investment within a year may be possible in some cases but not in most of the cases. I don’t think that milk business on a small scale generates that much profit from what I saw of it. The profit margins of large dairy companies also suggest the same. I do not know about vegetable vendors. But let us assume that a vegetable vendor sells 150 kilos of vegetable every day amounting to ~10,000 rs. At 50% margin, he would earn 5,000 rs a day, or 150,000 rs a month. If vegetable vendors made this kind of money, then they would not need a loan of 20,000 rs at ~25% interest.

The mfi and shg outstanding would be about 1.5 lac crores rs. That is, about 10 cr loans of ~15,000 rs outstanding value on an average. 10 cr loans can not be invested in trades where entire capital is recoverd within a year.

(Mayank Narula) #170

Hi Pranav,

Dairy industry is quite peculiar with a lot of counter intuitive factors along the supply chain. Major dairy companies work on a low margin (at times in SMP) as they can’t pass on the lower prices to farmers. Milk is a sensitive commodity in India. Govt. protects the milk prices, so that consistent supply is protected. Hence, milk supply is quite a profitable side business for farmers seasonally. Pls bear in mind that more than 70% of milk supply is done during winter months. Recently, I was talking to CFO of a reputed unlisted dairy company of North India (I am a corp banker with 2 major dairy clients). He says that with a 500 crs investment in a dairy farm, we can take care of supplies from 5000+ farmers, but that money is better invested in value added products.

Similarly, vegetables also provide a seasonal opportunity. 5k rs profit doesn’t mean that opportunity is available for 12 months and cash is rotated on daily basis. In fact, most of the activities in rural areas are seasonal in nature and at best are available for 100 days in a year.
Besides, would like to add that MFI loans for commercial purposes are not used for capex but used for shorter duration activities. This is the reason why MFIs keep getting repeat businesses from same clients.


(Mayank Narula) #171

Also, I am not sure but MFI/shg o/s of Rs 1.5 lacs crs seems to be on higher side. I am not able to verify, but it should be well under 1 lac crs. Pls correct, if I am wrong.

(Susindar) #172

Promoters are selling in the open market over the last week (although not a big percent). Is anything cooking?

(Kunal Parikh) #173

The promoter selling is brother in law of Jayendra patel and now wants to retire. So he is selling his stake. He even resigned this year from board of director. This they have clarified on many occasions including agm

(Mayank Narula) #174

Param Capital bought entire stake of Reliance Mutual Fund in Arman Financial Services. Mukul Agrawal of Param Capital is an existing investor in the company.

Disclosure: Invested

(Rupesh Tatiya) #175

Finally some sign of turnaround in Arman with very good Q3FY18 results!

Few observations

  • Employee cost is up 4-5% YoY (16% to 20%) due to expansion phase. Hopefully, this will come down to normal over next few quarters.
  • Finance cost has grown faster than loan book growth. This probably implies that more & more growth is coming from borrowed funds as company grows in size i.e. equity as overall source of of funds is going down.
  • Namra made losses or did not make any profit in H1FY18. but finally, it has made decent profit of 1.6Cr for Q3FY18.
  • Standalone numbers have shown impressive growth for Q3FY18. Need to check is MSME business gets booked in Standalone entity.
  • If they can replicate this performance in Q4FY18, PAT for full year consolidated numbers will be more than that of last year.

Key Monitorables

  • With Small Finance Banks (SFB) coming around, need to keep an eye on liability side of book or cost of funds and margins.
  • Equity dilution or raising of funds

Disc - Invested 5% of portfolio. No transactions for 90 days. This is not a buy or sell recommendation. Please do your own due diligence.

(Mayank Narula) #176

Good numbers indeed. One observation: I was trying to ascertain the provisioning cost as details are yet to be shared on that. If we compare the proportion of other costs to revenue of Q3 FY18 to Q2 FY17( pre-demo), same has come down to 15.6% from 18.8%. Shows that due to aggressive provisioning in last 3 quarters, company is almost done with demonization woes. We will learn more in con-call.

(vaibhav) #177

Q3 presentation

conf. call on Monday 5pm

(Milind) #178


do you have earning call pdf or attended conf call? I am not able to open earning call in researchbytes

(Chandragupta) #179

Refer to this to see how to listen to conference call on Research Byes:

(Milind) #180

Thanks a lot. It worked for me. really helpful.
Generally i listen earning calls on android app of researchbytes on mobile.