Shalibhadra Finance - microcap NBFC, growing steadily


(ManavBansal) #1

I am posting this idea under the Untested Category but the business per se in my opinion is quite tried and tested.

Shalibhadra is a 2 Wheeler Financing NBFC operating in Gujarat and Maharashtra

Growth Rates - Last 5 Years

Topline - 22%
Profit Before Tax - 26%
ROE - 22%

Sales from 2008 to 2015 - 2.88 -> 3.78 -> 4.66 -> 6.18 -> 8.23 -> 10.05 -> 10.59 -> 12.51
PBT from 2008 to 2015 - .89 -> 1.29 -> 1.84 -> 2.61 -> 3.41 -> 4.48 -> 4.79 -> 5.87
Div Per Share from 2008 to 2015 - .7 -> .8 -> .8 -> .8 -> .9 -> .9 -> 1 -> 1

I think this is very steady, high and consistent Business Performance and Growth, they have a 10 Year uninterrupted track record of dividends and have increased dividend from time to time and never reduced it

Business Description - Shalibhadra Finance Limited (SFL), registered with the RBI as “Asset Financing NBFC”, was incorporated in the year 1992 and started its operations in 1995. The company was listed on Bombay Stock Exchange (BSE) in 1995. The head office of the company is based at Mumbai. SFL was promoted by Mr. Minesh Doshi, who is presently the Managing Director (MD) of the company. At present, SFL is engaged in Two-Wheeler financing in rural and under-banked areas with about 80% portfolio towards new two-wheeler financing and balance 20% towards used two-wheeler financing. The company operates from 18 branches and with a customer base of 34,000 across the states of Gujarat and Maharashtra with total portfolio of Rs. 48 crore as on March 2015. Of the total portfolio, about 82% is in the state of Gujarat and balance 18% in the state of Maharashtra.

Management Quality - Along with Sound Local knowledge that the promoters possess about operating the business the management also has prudent risk policies. For example they rolled out a pilot Shares Stocks program 5 years back but rolled it back on their own when they did not get the desired response, they are internally very return focused (From one of their bankers), they reward minority shareholders with a handsome dividend.

Annual Reports - We can get a sense of Management Aspirations and How the business is run from the Management Perspective easily. They have defined their “IDEAL CUSTOMER” very narrowly and they target this niche very consistently, they have actually mentioned that they will not target customers who normally go to Micro Finance Institutions because these customers do not have much payback capacity. this is what management says specifically - "People having extremely low income are served by Microfinance institutions Ihc company does not target them as they usually do not have means/ income to buy any vehicles. The company wants to finance people who are in slight!v higher income bracket. "

Report from ICRA which captures 75% of the Business and Management Dynamics

Let me get to the point about Inflection Point from AR 2014-
During the year company could not increase the number of branches due to two mam reasons of non-availability of rating & absence of comprehensive software which can handle large number of branches & large amount of portfolio. But now the company is in the process of implementing new comprehensive software from outside agency. Company has started operating this software. This will increase the efficiency of the company to handle large number of branches with very large portfolio.
Company is in the process of getting rated from a credit rating agency. Good rating will open new avenues of funding & will take company to new growth trajectory. (Happened in second half 2014)

Valuation - Considering the Size of Opportunity and Management Quality, not to mention past performance, a PE Ratio of 6.7 at CMP along with a 26 crore Market Cap is very Mispriced. Management has a 20% Business Growth Target over the next 5 Years which they are confident of Achieving (Again, from the same Banker), they have been paying dividends for 10 years straight and have never reduced the dividend. Apart from future growth I am of the view that such a combination of numbers, company policies and management deserves to trade at a higher multiple, the right multiple might be 10X PBT or 12X PBT but it is definitely not 5X PBT

Mispricing - I think this is too small to come on the radar of most people along with no website, their ARs are quite informative though

Negatives -
a) No Website ! I do not think this is a big negative but this has to be rectified by Management
b) The Business is purely an execution and shoe leather business, no great competitive advantage apart from Management Risk Management and Execution abilities
c) The business has had great operating metrics in the past but if something internally changes I will not come to know since management is quiet (I have not contacted them btw)
d) As can be seen shares are tightly held with large public shareholders and corporate bodies holding more than 90% of the outstanding shares along with the promoters, this can be negative or a reason why the stock seems mispriced depending on personal perspective
e) The company is only listed on BSE, this can be negative or a reason why the stock seems mispriced depending on personal perspective

Views are Welsome if I have missed out on anything, I cannot upload ARs but below is the link to the ARs on BSE

AR of Shalibhadra Finance on BSE Site

Disc - Invested since last 2 Years with opportunistic purchasing since


(ManavBansal) #2

The Reasons I think this Management is Great are -
a) They have narrowly defined their Ideal Customer and have been able to maintain Growth at 22%, this requires very strong execution abilities. Part definition of Ideal Customer from 2014 AR - “Shalibhadra Finance Limited plant to concentrate further on smaller but upcoming towns to avoid margin competition. Shalibhadra Finance Limited customers are generally salaried class, agriculturist and self employed. This industry in growing in double figure rates and competition from other NBFC’s and banks is practically non-existent due to relatively small market and high service oriented business”. EVERY customer has to OWN HIS HOUSE, this is a big differentiation.
b) When they make a mistake, they talk about it and solve the problem in a hurry, the misstep in the shares vertical was the only one I could find, they stopped it in 2 years flat
c) They share important details in their ARs with their shareholders and are fairly transparent
d) The balance sheet is over capitalized, they can double their business size just based on this one insight
e) They have a clear idea about what they have to do to grow, they keep costs super low and focus relentlessly on this factor
f) They have mentioned in one of the AR that we have taken time to understand the Rural and Semi Rural Customer, now we are pressing down on the Accelerator for Business Growth, I think this is a mature perspective, nobody starts running from Day One, but if we can do the small incremental stuff for a long time, it sets us up for big jumps, I think this is the case here


(ManavBansal) #3

Sales from 2008 to 2015 - 2.88 -> 3.78 -> 4.66 -> 6.18 -> 8.23 -> 10.05 -> 10.59 -> 12.51
PBT from 2008 to 2015 - .89 -> 1.29 -> 1.84 -> 2.61 -> 3.41 -> 4.48 -> 4.79 -> 5.87

I think this is very steady and consistent Business Performance and Growth, they have increased dividend from time to time and never reduced it


(Pratik) #4

Hi @ManavBansal, indeed it looks interesting. They don’t seem to have their own website, is it?


(ManavBansal) #5

Nope, I had mentioned it at the bottom of the first post itself under one of the reasons why it is mispriced apparently these guys are of the mindset that whatever we have to share we will share in the AR

The logic given by my Banker Friend was this - they do not generate business on the Net so they do not see the need, plus with 10 years of an uninterrupted dividend stream which keeps increasing, they think their shareholders should be happy

Hope this makes it clearer

I would request you to read a few ARs, they even share interesting tid bits like each branch operates within a 50 KM radius etc, very eye opening


(Gurjot) #6

@ManavBansal

Thanks for bringing this to our notice and the detailed viewpoint. Would like your comments and potential impact to P&L on the qualified opinion of the auditors in the 2013-14 AR.


(ManavBansal) #7

This would be a very small amount, considering the sales employee profile of the company, employees are locals having knowledge of local customs and relationships and cheap (the company actually mentions this, saying we hire local guys so as to keep costs down plus the relationship factor), this is a shoe leather business, lots of running around and relationship building

I had come across this point, but when considering the magnitude of the amount involved, did not pursue it further, looking at context, since their operating areas are rural and semi rural markets, some payments in cash cannot be ruled out completely


(bibhu ashish panda) #8

There is a income tax dispute of 9.76 lakhs mentioned in 2014 AR. Did you find any red flag for this?
Also my main question is how scalable the business is and how big they can become? The moat they are mentioning in the AR is local relationships and they bring human face to their transactions. This is pretty good and ideal but can this be extended to other regions and areas of the country and how fast they can do it? The point I am struggling with is can this be a growth story?


(Jigar Punamiya) #9

Nice find Manav. I did have a look at it a few months ago. However, it somehow went out of my mind. Thanks for bringing this up. The numbers indeed look good.
On a personal level, I have started a practice to analyse finance (lending) company with HDFC Bank (ratios specifically).
This practice throws out many areas to look into. Hope to study Shalibhadra the same way soon.

Regards


(ManavBansal) #10

The 2 red flags I saw were all very small amounts, which is something very common in business per se, I do not know how much weight we should attach to them

Well, Gujarat and Maharashtra are very big markets, they have 18 branches operating within a 50 km radius, so total area covered is 5652 Kms :smiley:

The area is Gujarat and Maharashtra is more than 5 Lac Sq Kms (I know this is cheeky, but consider this, they have only covered 1.2% of these two states, if 70% is uninhabited and 10% is Urban, then 20% is rural and semi rural, that is 1 lac square kms, I think there is plenty of headroom for growth, when management says we want to double our Loan Portfolio, my sense is they would not need to go out of these 2 states at all)

MOATS in financial companies - NBFCs and Banks typically have no structural Moats but there is a very wide gap in performance between the best Bank and the worst bank and between the best NBFC and the worst NBFC, the difference is Management Quality and Risk Management, I think if we are investing in such financial companies, these two factors carry a lot of weight, I paid attention to them for this opportunity


(ManavBansal) #11

Many Thanks :grinning:


(Jigar Punamiya) #12

Completely agree with you on this.


(ManavBansal) #13

One Extra point which I forgot to mention was the shareholding pattern -

As of June 2015 Promoters hold 51.39% of the shares
As of June 2015 Public Corporate Bodies hold 24.36% of the shares
As of June 2015 Public Shareholders with more than 1 Lac Amount hold 15.54% of the shares
As of June 2015 Public Shareholders with less than 1 Lac Amount hold 8.71% of the shares

As can be seen shares are tightly held with large public shareholders and corporate bodies holding more than 90% of the outstanding shares along with the promoters

This can be a Positive or a Negative depending on personal choice


(Santosh Sinha) #14

What the NPA and provisioning levels ?
How it is capitalised ? CAR etc


(ManavBansal) #15

For financial Metrics -

From ICRA report whose link I have provided in the first post -

Comfortable capitalization levels (38.59% as on Mar-14, as against 15% prescribed by the RBI)

The company has maintained robust interest margins (Net Interest Margin of 16.53% for FY2014), supported by high yields and controlled operating costs despite operating in rural and under-banked areas, that has translated into strong Return on Equity (20.30% for FY2014)

The company follows prudent credit policies are with tenures for new and used two-wheeler loans capped at 24 months and 12 months respectively, and maximum allowable LTVs of 75%. As a policy, the company insists on house ownership in case of all loans

SFL’s asset quality had come under stress during FY2014 (gross NPA increasing to 1.98% as on March 2014 from 1.10% as on March 2013) owing to adverse monsoon last year, given that most of the borrowers of the company are dependent on agriculture and allied activities. Nevertheless, given the sound credit policies, the company was able to keep asset quality indicators under control. SFL has noted some moderation in delinquency numbers in FY2015, with marginal decline in Gross NPA to 1.77% as on June 2014. Going ahead, the delinquencies are expected to moderate further, given that SFL has experienced recoveries from harder delinquency buckets as well.

The reported capital adequacy of the company remains comfortable at 38.59% as on March 2014, with low gearing of 1.3 times

Hope this helps


(ManavBansal) #16

This is basic Business summary from the 2014 AR of the company, they have shared details like assets financed, live contracts and branches etc YoY, by March 2015, assets financed increased from 39.7 crores to almost 48 crores


(Jigar Punamiya) #17

Also, when FMCG’s rural demand is subdued currently and 2 wheeler sales which is considered as a barometer of rural spending is down, I guess, I would not take time for companies like Shalibhadra to get the pinch as the repayments for their loans greatly depends on rural growth n income.
Everyone knows how banks/NBFCs try to ‘manage’ NPAs.


(ManavBansal) #18

This is not the first time that FMCG’s rural demand is subdued or 2 wheeler sales which is considered as a barometer of rural spending is down, has happened before, will happen again

I would draw your attention to this - The company follows prudent credit policies are with tenures for new and used two-wheeler loans capped at 24 months and 12 months respectively, and maximum allowable LTVs of 75%. As a policy, the company insists on house ownership in case of all loans

This I found to be very rare, at a time when competing NBFCs and Banks are struggling and getting out of problem areas, Shalibhadra is uniquely positioned to grow faster

Demand is down by a certain percent, but two three factors support Shalibhadra -
a) Other competitors are either slowing down or vacating Shalibhadra’s markets
b) The company has worked at getting rated and implemented softwares so that seamless business growth is possible, they could grow faster but the fact that they waited for the softwares to get implemented so that they could maintain discipline and took the painful step of hiring an agency to digitize their records gives me a lot of comfort
c) Unless we are hit by droughts and famines, rural demand will be strong, may not grow, but will definitely not decline dramatically
d) A 2 Wheeler is not a want, it is a Need
e) The company operates in Gujarat and Maharashtra, rural demand has reduced in states like Uttar Pradesh (UP), Punjab, Haryana, Rajasthan, Madhya Pradesh
f) My investment is not for the next year, I am thinking 5 years, I think this is a tiny plant which can grow for a long time

YOUR Reasoning
The reason you gave is a product of first order thinking, but that seldom works in business, an idea is not worth more just because it is easily available to us, I have learnt the hard way to always dig much deeper and then balance out perspectives

I would not pay much attention to Newspaper Headline Risk if I am thinking in Years and not months, and mind you rural demand slowing down is in ALL the headlines, the media and analysts are acting as if this is the first time it has happened

When you talk about Banks and NBFCs managing NPAs, I would be happy to tell you almost every manufacturing and software company manages it’s “receivables” and “liabilities”

Our beacon of corporate governance, Infosys is notorious for smoothening out earnings

Banks get into trouble with Large loans not with smaller ones, making smaller loans to a set of less informed and less organized customers with enough interest charged and prudent and consistent collateral and risk policies has always been a winning business in India


(Jigar Punamiya) #19
  1. Rightly pointed out by you that the current slowdown will pass, eventually. And agree that it is more in other states than in MS & Guj. Had missed this.
  2. Also, I observed right now that, it is trading at PE of around 6x and PB of 1.3x, which according to me does give a cushion to the down side, if any. Would like to know your views on valuation.
  3. Apologies in advance for any observations/analysis, if any, as I am still in work in progress mode on this co.

(ManavBansal) #20

I am getting a After Tax Yield of 16% + Good Management + Very strong 20-25% growth track record + 10 Year uninterrupted dividend track record + Great Under capitalized Balance Sheet + Inflection point that management acknowledges + Enough headroom for growth

Valuation - Considering the Size of Opportunity and Management Quality, not to mention past performance, a PE Ratio of 6.7 at CMP along with a 26 crore Market Cap is very Mispriced. Management has a 20% Business Growth Target over the next 5 Years which they are confident of Achieving (Again, from the same Banker), they have been paying dividends for 10 years straight and have never reduced the dividend. Apart from future growth I am of the view that such a combination of numbers, company policies and management deserves to trade at a higher multiple, the right multiple might be 10X PBT or 12X PBT but it is definitely not 5X PBT

I think I am ok with that :grinning: