Inditrade Capital Ltd - another evolving NBFC


(vinay ambekar) #1

Current price 72, Mcap 169cr (as on 09.02.18)
Listed on BSE

Background

Inditrade Capital Ltd. (Inditrade) was set up in 1992 in Kochi as JRG Securities Ltd., and was engaged in broking and distribution of financial products.

Barings Pvt. Equity Partners India were the promoters of the company since 2009, and as of December 2015, held 49.4% of the shares through its affiliates/funds [Duckworth Ltd (subsidiary of Baring India Private Equity Fund II Ltd; 45.6% share) and Baring India Pvt. Equity Fund III Listed Investments Ltd. (3.8%)]. In February 2016, a group of investors that included Sudip Bandyopadhyay (SB) and 2 corporate entities Juno Moneta Technologies and AT Invofin India purchased the stake from Barings and made an open offer to the public to acquire additional 26% of shares. The price paid by the new investors was Rs. 42.5 per share as compared to book value per share of Rs 39.6 as at March 2016.

As at December 2016 (after completing the formalities for takeover of shares and open offer) the new promoters owned 71.77% of the company. SB directly owns only 0.21% of the company, and it is likely that he has indirect stake through the 2 corporate entities, as well as future stake through ESOPs. These entities also have a certain Alok Tandon as a key person.

Current Business

Inditrade in its current avatar is engaged in equity/commodity/insurance broking (constituting 40% of total revenue), client financing (21%) and distribution of financial products (23%). It has 29 branches and 350 franchisees with over 1.5 lakh registered customers across Kerala, Tamil Nadu, Karnataka, Andhra Pradesh, Telangana and Maharashtra.

Future Businesses – focus areas

Agri Commodity Funding

The company has also been involved in agri-commodity trading and financing, and this received further impetus by acquisition of the agri-commodity business of Edelweiss group in November 2016.

This is a highly unorganized market (about 75-80%) and presents a focused player like Inditrade ample opportunity to grow. Warehouse receipt management and certification is increasingly becoming more regulated, standardized and professionally managed, minimizing frauds that used to plague the sector in earlier times.

Inditrade offers funding against exchange traded non-essential commodities stored in exchange recognized warehouse, for short duration of 1-3 months, to commodity traders and processors. Commodity price risk (and to a large extent, default risk) is mitigated by simultaneously selling futures contracts of the commodity of similar duration on the exchange through their broking division. This enables them to offer high loan amounts of as much as 95% of the value of the commodity in a relatively quicker time at fairly attractive rates of 14-15% (much of the competition is from banks which charge lesser rate of 12-14% but take time and offer only 70-80% of the value).

Microfinance

Inditrade secured its microfinance lending license in March 2017 and commenced microfinance business in April 2017 by initially targeting the semi-urban industrial belt of South Maharashtra and Tamil Nadu. It has 9 branches in both states and plans to have 15 more branches by end of FY2018 with a loan book of Rs 100cr (half each in Maharashtra and TN).

They claim to be the first in the industry to have a completely digitized prospecting-approval-disbursement-collection process which involves eKYC and GPS tracking, online credit checks (through rating agencies Equifax and High Mark Ratings), and money transfer to bank accounts. Use of digital systems are likely to enable better risk management. The maximum credit provided to a single borrower is Rs 30,000 over a period of one year, with weekly collections. The microfinance business has currently 50 employees who have been incentivized by making them part owners, infusing 1/3rd of the equity capital.

As per recent press report of November 2017, Inditrade’s microfinance business had 17 branches and a loan book of Rs 40cr. It is in the process of acquiring 80% stake in another microfinance entity Varam Capital (25 branches spread over TN and Chhattisgarh, with loan outstanding Rs 100cr) at a cost of Rs 40cr. Whether this is paid in cash or shares is not known as of now.

Quick comment on Financial performance

The financials are audited by Haribhakti (including 4 out of 6 subsidiaries, the remaining 2 having insignificant contribution as on 31.03.17) which provides some comfort.

FY17 was the first full year of operations under the new management. Till recently the company has generated revenues only from its traditional business of broking, private funding and distribution. This is expected to continue to grow at a healthy pace in future given the sector tailwinds. The new businesses of agri-commodity funding and MFI are likely to start having an impact from early FY19.

The company has grown its revenues year on year by 39% in Q1-18 and 33% in Q2-18. However expenses, particularly employee, finance and administration costs, have grown at a faster pace over these periods as the company is focusing on growing its commodity financing and microfinance businesses. The company started borrowing funds in Q4-17 and would have deployed them during FY18. These expenses are in the nature of upfront investments, and should start generating returns in future periods.

Q3 income is up from 10.8cr to 17.8cr, up by 65% (but we have to remember we are comparing with a demon quarter). PAT is up from 0.13cr to 1.5cr. Momentum of Q2 also appears to be sustaining (revenues of 16.4cr and PAT of 1.6cr). Finance cost has doubled in Q3 over Q2 indicating that company has resorted for borrowings to fund its lending businesses (there is a big difference between the interest cost figures in P&L and Segment reporting, which needs clarification). Debt/equity ratio as of Sep 17 was less than 0.4.

Broking is a volatile business and is highly correlated to the vagaries of market activity. It can be seen from table below that broking is around 40% over last 3 quarters. And client financing is 21%. Financial distribution is decreasing is and others is increasing (what does others constitute is not known at present).

image

Summary

  • Although in a crowded space (NBFC), the company appears to have a differentiated business model – particularly (1) agri commodity funding with commodity price/credit risk hedging and (2) sector-focused semi-urban MFI lending to banked and/or tax paying customers (as against the uneducated poor that MFIs are known to target) and leveraging digital information and platforms for more efficient delivery and risk management.

  • Existing businesses like broking, client funding and distribution of financial products will continue as bread and butter business with sector tailwinds emanating from digitization and a structural shift towards financialisation of savings.

  • The company is contemplating a digital enabled foray into affordable housing finance, which would be a new area for growth.

  • The Jockey has relevant experience, financial backing and probably, skin in the game in terms of ESOPs (2 sets of ESOPS have been announced by the company for its employees with exercise price of Rs 37.75 earlier and Rs 83 more recently)

  • Current price is around 1.7x of what the new promoters paid to takeover the company

Risks/Concerns

  • This is an evolving story and needs close tracking on how the new businesses pan out. The last 3 quarter results have been directionally right. However, it is now 2 years post management takeover in November 2015, and the company needs to start delivering at the bottomline level soon. Broking is a volatile business and it can drag performance in bear markets.

  • There is key-man risk as a lot is riding on SB. While he has a slightly chequered past, he seems to have the necessary experience having been involved/started financial service businesses. One wonders why he is still actively appearing on TV (as a financial analyst) recommending other company stocks and why he is mainly based in Mumbai instead of the headquarters in Kochi. Of course, as they say- once an analyst, always an analyst; and maybe SB will continue to be one. Also the MFI business is based in Mumbai.

  • As is typical with small/start-up companies, there is the generic risk of over promising and under delivering. In their FY2017 Annual Report the company made a tall claim to achieve a loan book of Rs 5000cr in 3 years (which was later scaled down to 3000cr in a subsequent interview). Even then, this is extremely aggressive/ambitious and while the company may certainly have these as internal targets, it should refrain from public announcements of this nature, so as to manage investor expectations. Such steep targets may also force the company to take undue risks while chasing growth (for instance the price they intend to pay for their proposed acquisition of Varam Capital could be questionable).

  • Lending is easy, but key is credit risk management and recovery. The company is still to be tested on this. Their delinquencies/NPAs should be closely tracked, as ideally none (or very little) of it should appear within the 1st year atleast.

Some pointers on valuation

The share was available for below 42.5 for many months post announcement of takeover by the new promoters (till as late as May/June 2017), and would have been the ideal time to buy as we would be getting in at the same price as the new owners. The share witnessed a spurt sometime around Jul-Aug 17 when the target of Rs 5000cr in 3 years became public.

The book value per share as of Sep 2017 was 44 per share, and annualized 9-month EPS is 2.35. The current price of 72 translates into price-to-book of around 1.6x and price-to-earnings of 30x. While the price looks ok on PB basis, the PE looks optically high for an emerging company, and may correct, if the company delays on delivery. However, if the company is able to sustain 30-40% growth at PAT level, this would look attractive.

The company has several subsidiaries, which are not wholly owned, through which it carries on its activities. When applying valuation metrics, some element of holding company discount may come into play.

Disclosure

I hold shares in the company from earlier and also added recently after Q3 results. I am not a registered financial analyst and this is not a recommendation. Views welcome.


(A. King) #2

How have you gathered all the info made available here?
Is it all from public domain? Did you have management interview ?


(vinay ambekar) #3

All this is from public information. I am an overseas based part time investor with no access to managements. Mostly from bse announcements. And some from the company website and some from net. Attaching a few for reference.

http://www.inditrade.com/documents/media/pressrelease/4/18-September-2017/draft-release_mfi-launch-tn_v01_18082017pdf-10122017-41325-pm-Draft-release_MFI-launch-TN_v.01_18082017.pdf

http://www.inditrade.com/documents/media/pressrelease/3/13-April-2017/draft-release_micro-fin-launch-sholapurv02_13-042017-10122017-41250-pm-Draft-release_Micro-Fin-launch-Sholapur_v.02_13042017.pdf

http://www.inditrade.com/documents/media/presscoverage/35/22-January-2018/inditrade-microfinance-to-expand-loan-book-to-rs-500-crore-by-december-end-1232018-30908-pm-Inditrade-Microfinance-to-expand-loan-book-to-Rs-500-crore-by-December-end.pdf

http://www.inditrade.com/documents/media/presscoverage/14/09-December-2017/downward-filtration-12212017-31002-pm-Downward-Filtration_Financial-Chronicle_December-9,-2017.pdfhttp://www.inditrade.com/documents/media/presscoverage/14/09-December-2017/downward-filtration-12212017-31002-pm-Downward-Filtration_Financial-Chronicle_December-9,-2017.pdf

http://www.inditrade.com/documents/media/presscoverage/11/28-November-2017/inditrade-capital-to-pick-up-chennai-mfi-varam-12212017-30216-pm-Inditrade-Capital-to-Pick-up-_The-Economic-Times_November-28,-2017.pdf

http://www.inditrade.com/documents/media/presscoverage/21/25-July-2017/growth-through-acquisition-12212017-54808-pm-Growth-through-acquition_Business-India.pdf

something on the jockey:



ESOP announcement – 7.94 lakh shares at Rs 37.75 per share
http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/5312E9DB_AEC9_46E2_A1CC_9BC58A062D1C_155828.pdf


(James Sebastian) #4

Can you throw some light on management quality ? Key management personnel and their reputation etc ?


(vinay ambekar) #5

It seems that the main guy is Sudip who is driving things. The other 2 shareholders (corporate entities) have one Alok Tandon owning majority shares. They seem to be the muscle (financial strength). We need to dig deeper on these guys.

Some bits about these entities from the share purchase document are as below:

Juno Moneta Technologies Private Limited - The key shareholders are Mr. Alok Tandon (41.67%), Kiran Badrinarayan Goyal (41.67%), Lipika Bandyopadhyay (16.67% - what relation with Sudip?) and Jhuma Guha (Negligible percentage). The persons in control of this company are Alok Tandon, Kiran Badrinarayan Goyal and Lipika Bandyopadhyay. The directors of the company are Jhuma Guha and Giri Krishnaswamy.

A. T. Invofin India Private Limited – this company is a part of Shyam Group of Companies. The key shareholders of the company are Shyam Basic Infrastructure Projects Private Limited (97.64%), Rakesh Kanwer (2.16%), Alok Tandon (0.06%), Swapna Tandon (0.06%), Sonika Tandon (0.05%) and Vimal Kakkar (0.03%). The persons in control of the company are Shyam Basic Infrastructure Projects Private Limited, Alok Tandon and Swapna Tandon. The directors of the company are Alok Tandon and Swapna Tandon.

I dont have information about the operating management (2nd rung below Sudip).


(James Sebastian) #6

A quick looks at http://www.inditrade.com/about-inditrade/team under board of directors and management team, I do not see the name of Sudip. Now from that names, I am not able to figure out, who is CEO/MD.


(vinay ambekar) #7

image


(Chitresh Lunawat) #8

Inditrade microfinance to increase its loan book to 500 crores from the current 50 crore by end of december
Kerela MF to start in first fiscal 2018-2019. 50 crores by 1st year


(vaibhav) #9

Any audio/video interviews/concalls?


(Chitresh Lunawat) #10

In accordance with Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements)
Regulations 2015, we would like to inform you that the Company has acquired the entire shares of
the subsidiary, Inditrade Insurance Broking Private Limited (CIN: U67190KL2000PTC013701).
Consequent upon such acquisition, Inditrade Insurance Broking Private Limited (CIN:
U67190KL2000PTC013701) has become a directly held wholly owned subsidiary of the Company.
Additional details as required under Regulation 30 of SEBI (Listing Obligations and Disclosure
Requirements) Regulations 2015 are provided separately as Annexure A to this letter. This is for
your kind information and records.

Brief background about the entity acquired
in terms of products/line of business
acquired.

The Company is engaged in the Life Insurance
and General Insurance Business.
• Date of incorporation. 22/02/2000
• History of last 3 years turnover. 1. 2016-2017 – Rs 1,89,36,359/-
2. 2015-2016 – Rs 62,37,950
3. 2014-2015 – Rs 22,65,920/-


(Vikrant Yadav) #11

I’m invested in Inditrade for last 1 year or so. It forms ~10% of my pf. Below are my notes on the business:

Where does Money come from:

Equity Brokerage:

Rs. 8.59 cr revenue in FY2015
Rs 15.60 crores revenue in FY2016
Rs 21.66 crores revenue in FY2017

Loss of Rs. 0.99 cr in FY2016
Loss of Rs. 1.98 cr in FY2017

Commodity brokerage:

Rs.4.56 crore Revenues in FY2015
Rs 4.56 crores revenue in FY2016
Rs 6.28 crores revenue in FY2017

Loss of Rs. 0.89 cr in FY2016
PBT of Rs. 0.66 cr in FY2017

Client financing

Rs.5.3 crore Revenues in FY2016
Rs.11.7 crore Revenues in FY2017

PBT of Rs. 1.87 cr in FY2016
PBT of Rs. 6.98 cr in FY2017

*Inditrade Insurance Broking Private Limited is a Wholly Owned Subsidiary of Inditrade Derivatives and Commodities Limited
#Inditrade Commodities Trading Limited is a Wholly Owned Subsidiary of Inditrade Business Consultants Limited
$Acquired 64.1% in Tree microfinance & hanged the name to Inditrade Microfinance Limited.
^M/s. Athena India Opportunities has acquired 43% (forty-three percent) of the fully paid up equity share capital of JRG Fincorp Ltd from M/s. Duckworth Limited.

Commodity Financing

Inditrade through its subsidiary JRG Fincorp has entered into agri commodity financing business in Kerala, Andhra Pradesh and Telengana. Company hopes to rapidly scale up the loan book at around ₹300-400 crore https://www.vccircle.com/inditrade-hike-stake-jrg-international/

JRG Fincorp asks the borrower to store the commodity in exchange recognized warehouse. The quality and quantity of the commodity is confirmed by a third party / warehouse. JRG then asks the borrower to sell the commodity on Inditrade’s platform in future. JRG then finances the company for 95% of the value of sale in future. This structure reduces the credit risk. JRG effectively has payment risk on the exchange.

Global Constructors Sale Purchase:

A T Invofin India Private Limited (promoter gp) has 10% shareholding in Globus Constructors & Developers Limited. Inditrade has invested 2 cr in Globus Constructors. JRG FINCORP LIMITED (arm for commodity lending) purchased 11 lakhs @ 18.15 in June 2016 (market price was ~15)

While this purchase raises questions, important to note the following:

  • Management has cleaned up most of the balance sheet of Inditrade Capital & subsidiaries by selling all significant quoted investments.
  • At the consolidated level, the investment in Globus is the only Non-current listed investment.
    the amount invested is Rs 2 cr, and at 57% ownership, Inditrade’s risk exposure is about Rs 1 cr, which is about 1.2% of its net worth.

I would believe this is a one-time transaction or that they would always restrict such investments to small bets.
Seasonality of commodity financing:

Monsoon across India is not at the same time, eg: Kharif season in Kerala begins in May and in North India in July. Many commodities financed by Inditrade are seasonal in supply, but the demand is throughout the year. This requires someone to finance it from the time of production until it is consumed. Eg: turmeric is a Kharif crop, but is consumed throughout the year.

Maze of subsidiaries:

Company has multiple subsidiaries and it is important to read their accounts of statements to fully appreciate the businesses. The stamens are available on the website.

As per financial statements for 2016-17:

  • JRG holds 9% preferential shares worth Rs. 6 cr in Inditrade Business Consultants.
  • JRG has current o/s loans & advances of Rs. 126.5 cr of which Rs. 92 cr is to Inditrade Business Consultants, Rs. 2 cr to Inditrade Capital and Rs. 31.6 cr to customers. Inditrade business paid interest of Rs. 6 cr to JRG
  • Inditrade Capital gave loan of Rs 45 cr to Inditrade Business Consultants Limited - outstanding of Rs 7.7 cr as on March 2017
  • Inditrade Business has investments of Rs. 3 cr in Inditrade Commodity Trading (Edel Commodities)
  • Inditrade Business inventory totals to Rs. 70 cr.
  • Inditrade has outstanding advance of Rs 2 cr from Inditrade Commodities Trading Limited
  • Inditrade has paid advance of Rs 94 lakhs cr to Inditrade Derivatives and Commodities Limited

Seems it’s a group financing company more than a commodity financing company. Inditrade Business is effectively acting as borrower. May be company is trying to take calls on commodity trading till the time external client base builds up.

JRG may have started as commodity financing, but it seems they are using JRG to finance Inditrade’s businesses, without diluting the main company’s equity capital.

MFI Business:

MFI collections are weekly as compared to monthly / bi-monthly by other players. Weekly collections will increase the operational expenses; on the other hand it’ll help manage credit losses / delayed payments.
Inditrade wants to reach INR 100 cr loan by end of current fiscal. They have started with Sholapur and Coimbatore regions with completely digitised process.

Other factors to draw comfort:

Sudip took over the company and restructured the businesses for good:

  • Cleaned balance sheet and encashed assets
  • Established new businesses
  • Bought Edelweiss companies, and sold 2 companies out of those (which were outside India and hence, not wanted) within a short time of taking over

The biggest risk is the execution and key man risk. Another risk is fraud - commodity financing is marred by frauds in the past.


(Chitresh Lunawat) #12

Managment initial plan was 500 crore commodity finance this year and 1500 crores next year. They have tamed it down to 250 Crore this year and 1000 Crore next year.

Currently, the group, which forayed into microfinance through Inditrade Microfinance, operates with seven branches in Maharashtra and 18 in Tamil Nadu. It is expanding into Kerala by April starting with Palakkad and Thrissur districts as it is contiguous with its activities in Tamil Nadu. Palakkad is closer to Coimbatore, where Inditrade has a good presence .Currently the group, which forayed into micro finance through Inditrade Micrifinance, operates with seven branches in Maharashtra and 18 in Tamil Nadu. It is expanding into Kerala by April starting with Palakkad and Thrissur districts as it is contiguous with its activities in Tamil Nadu. Palakkad is closer to Coimbatore, where Inditrade has a good presence.
Kerala is a strong market and we hope to lend Rs 100 crore in the state alone. Inditrade Microfinance Ltd plans to enter Odisha by June-July before expanding to other states

https://economictimes.indiatimes.com/markets/stocks/news/inditrade-expanding-agri-finance-micro-finance-operations/articleshow/63469141.cms?utm_source=WAPusers&utm_medium=twittershare&utm_campaign=socialsharebutton&from=mdr


(Chitresh Lunawat) #13

Inditrade has created a new subsidiary Inditrade housing finance limited.


(vinay ambekar) #14

Q4 results declared. Looks like a solid set of numbers.

Q4 revenue increased by 66% and Pat doubled. Fy18 revenue and Pat increased by 50% and 55%

Huge jump in loans and advances to 233cr as of mar’18 (increase by 3.4x over last year). Indicates lending business is picking up.

Debt has increased. But d/e is only just above 1, indicating huge room to grow.

Equity broking business is sold for 32cr. So income will reduce (it constituted 35% of total revenue). But as per segment breakup it was loss making - loss before tax of 2cr out of total PBT of 10cr. And employed highest amount of capital in broking (31cr out of total 141cr), which will get freed and deployed in lending.


Company has already announced increasing its stake in its main subsidiary, through which lending and borrowing were done.

Share at 65 is Quoting at 17x ttm pe and 1.4x pb.


(Anks) #15

Sammy11 sir, i am new in this field (so may be wrong)and looks they posted very good set of numbers.Few days back i bought few shares. what i liked about this microcap is the promoter holding(maximum),the Agri commodity lending(niche business),experience management joining(sudip Bondopadhyayd ex reliance money) etc. Now after selling the loss making unit their cash balance would be more then half of their market cap.so no need of immediate fund to accelerate their mfi and housing finance business. I think in near future they are more interested in mfi and Agri com business. It would be a interesting play on jockey rather then the horse. I could be completely wrong, ur views appreciated.


(vinay ambekar) #16

Yes Anks. We need to see what is the break up of commodity loans, mfi, and other in the loan outstanding of 233cr.

Promoter had mentioned that they would achieve 250cr loan book in fy 18 and 1000cr in fy19. FY18 achievement is ok (they had reduced it from the initial tall claim of 500cr to 250cr). In my view Sudip Bandopadhyay should stop giving out projections and just focus on maintaining their 50% run rate. That itself should have been enough in the 1st place. However, now the damage has been done since he has given out these numbers in public and even scaled it down. A veteran market participant like himself should have been aware of this aspect. Another point is that after announcing possible acquisition of Varam Capital, they could not push through with it. They should just do their job and let it speak for itself. Hope sense prevails.

Equity broking has capital employed of 31cr. So the funds infusion of 32cr will set this off. Fresh capital will be employed in lending business, rather than this loss making business. Its a good move in my view as broking is hyper competitive and with brokerages rates the way they are trending down, unless one has large scale, it will be difficult to survive. Flip side is that broking contributes also to margin funding which generates income. So unless they have already classified it under broking income, there would be some loss from their Client Financing part of revenue. They will have to make up for this by ramping up lending in their other businesses.

This remains an evolving story needing close tracking. They have taken many steps in the right direction. There are some self induced speed bumps on the way. Hope they are able to tide over it and focus on business growth.


(vinay ambekar) #17

some relevant news articles:

new line of business being planned