Arman Financial Services Ltd (Arman) is an Ahmedabad based non-banking financial company (NBFC) promoted by Mr. Jayendra Patel. The companyâs operations are spread across Gujarat. It has recently entered Madhya Pradesh. The company has two lines of businesses:
1 Two-wheeler and three-wheeler Financing: The company commenced its operations with this activity and has since become one of the top-five players in two-wheeler and three-wheeler financing in Ahmedabad region. The average loan size is around Rs.20,000 to Rs.50,000 and tenure is around 12 â 36 months. The company claims that âa customer can literally walk into a dealer early afternoon and walk out with a new motor cycle in the eveningâ. In the mean time, the company does the background checks and investigations.
2. Joint liability group (JLG) microfinance: The company entered the business in 2009 and has become one of the few microfinance companies to have a presence in the Gujarat state. The company follows the JLG model of lending for microfinance business where the borrowers are organized in group of eight to ten women living in an area of around 500 â 600 meters, each jointly liable for other members. So in case one member defaults, other members can press her to repay (social pressure). The loan ticket size are small of around Rs.12,000 â 15,000 and is given for income generating activity of the borrower (for eg buying a cow/buffalo/goat, sewing machines etc). The tenure of the loans is for less than one year. Arman usually lends to members who own their house and collects residential proofs from them. Arman also takes life insurance for the borrower and male members (although the women borrow the money, around 50% of the time the money is used by the male member of the family for income generating activity) to the extent of loan amount. The company doesnât follow agent based model and has its own disbursal and collection agents. During FY14, the microfinance segment has overtaken vehicle financing in terms of asset under management. As per Reserve Bank of Indiaâs requirement, during FY13, Arman incorporated Namra Finance Limited (Namra) as its wholly owned subsidiary to carry on micro finance business which has got MFI license from RBI (first company in India to be awarded the license). During FY14, the microfinance business of Arman was fully transferred to Namra. Around 45 companies in India have MFI license.
The company has 35 branches spread all over Gujarat as on June 30, 2014. During FY12, Arman raised Rs.15 crore of equity (equity raised at Rs.56.95/share) by raising funds from private equity company, Incofin Investment Management, which specialises in lending to micro finance institutions all over the world. Incofin has portfolio of investments in more than 100 MFIs in over 100 countries. Incofinâs experience is expected to benefit the company in the medium term.
Key Financials (on consolidated level)
Growth in loan portfolio
(Rs. Crore)
AUM
As on March 31,
2010
2011
2012
2013
2014
2 Wheeler & 3 Wheeler Loan
13.62
21.15
27.96
36.88
42.79
Growth (%)
55
32
32
16
Microfinance
8.82
20.99
21.25
32.23
45.56
Growth (%)
138
1
52
41
Others
0.23
2.41
2.83
3.17
2.72
Total
22.67
44.55
52.04
72.28
91.07
Growth (%)
97
17
39
26
Disbursements
2 Wheeler & 3 Wheeler Loan
24.63
30.30
32.76
44.96
53.39
Growth (%)
23
8
37
18
Microfinance
9.38
38.86
43.27
59.96
85.00
Growth (%)
314
11
39
41
Total
34.01
69.16
76.03
104.92
138.08
Growth (%)
103
10
38
32
Over the years, the management seems to have focussed more on microfinance business and in FY14 microfinance business has overtaken vehicle finance business in terms of AUM.
Growth in AUM leading to healthy growth in interest income along with high NIMs
(Rs. Crore)
For year ended Mar 31,
2010
2011
2012
2013
2014
Net Interest Income
3.57
6.75
9.50
10.67
14.46
Growth (%)
89
41
12
36
NIMs
17.91
17.28
16.48
14.46
14.91
On account of presence in high margin vehicle finance and microfinance business, company has high NIMs.
Low Delinquencies
As on Mar 31,
2010
2011
2012
2013
2014
GNPA (%)
1.98
0.68
0.55
0.56
0.72
NNPA (%)
0.59
0.50
0.51
0.64
Companyâs delinquencies have remained under control and with shifting focus towards microfinance has led to GNPA coming down to less than 1% over the past four years from around 3.30% in FY09. However, the companyâs microfinance business is less seasoned.
High Return on Assets
For the year ended Mar 31,
2010
2011
2012
2013
2014
ROA (%)
4.63
5.31
4.53
4.64
*High NIMs and low NPAs have led to high and improving Return on Assets for the company
Adequate capitalisation
* Post Incofinâs investment in the company, companyâs capital adequacy ratio has remained high at 41.12% as on March 31, 2014 on standalone basis and 25.92% at Namra level. Company is adequately capitalised for at least two years and hence can grow at high rate.
Key Triggers for growth
Prior to FY10, although Arman was doing well it was still a small company and had high delinquencies (GNPAs in FY08: 2.9%, FY09: 3.30% and FY10:1.98%) and low RoAs. Also, the management didnât seem that much interested in the business (investments in equity shares as on March 31, 2009 and March 31, 2010). However, following events changed the approach of management as well as triggered growth for the company:
*Induction of Mr. Aalok Patel (son of MD) in the management team of the company: During FY10, Mr. Aalok Patel joined the company as executive director. Mr Patelâs educational background and experience in pretty interesting. He is MS in Accounting & Finance and is also a licensed CPA (equivalent to CA in India). He has worked with KPMG as sell. Induction of Mr. Patel bought about lot of positive changes in the company. He seems to have streamlined processes (no auditor qualification in FY13 and FY14 AR), focussed management (selling of equity shares in FY11) on microfinance business (leading to lower NPAs) and has also bought in private equity in the company. Since his induction there has been steady rise in companyâs AUM and disbursements.
*Entry into microfinance business: Company entered microfinance business in FY09 and has steadily grown it and is now concentrating more on this segment compared to vehicle finance. Prior to Andhra Pradesh crisis, microfinance was considered to be a high growth and low risk business. Post the Andhra Pradesh crisis lot of positive steps have been taken by RBI in terms of regulating the microfinance industry like cap on interest rates to be charged by the company, giving licenses to microfinance companies, provisioning, etc which has led to improvement in liquidity for the industry as well as equity funding. Granting banking license to Bandhan Microfinance by RBI was a big positive step for the microfinance industry.
Infusion of PE funding by Incofin: Incofin invested Rs.15 crore of equity in the company in FY12. Incofin is a specialized fund management company with more than 12 years of experience in microfinance. It has portfolio of over 100 MFIs. The shares were allotted to Incofin at Rs.56.25/share. Incofinâs experience and expertise hasbenefitedthe company.
Strengths
* Highly underpenetrated MFI sector: MFI is a highly underpenetrated sector and if the sector is regulated properly, it can have above average rate of growth. In my opinion, because of high underpenetration, most of the companies will have high rates of growth. The sector has high NIMs and decent ROAs (comparable to even few of the HFCs). There are very few listed companies in the sector and those listed can have high scarcity premium.
* High NIMs and healthy growth in NIIs
* Adequate capitalisation
* On account of social pressure delinquencies are low
Weakness
* High Competition and regulatory issues:MFI is a highly competitive sector and Arman is among the lowest quartile in terms of size. It becomes very important for the company to grow conservatively and learn from the lessons of Andhra Pradesh (unprecedented growth, charging high interest rates, ghost loans, employees siphoning off money etc). However, post the regulations by RBI (Malegaon committee report) and regular circulars (available on RBI website), the regulatory issues seems to have been sorted out.
* Presence only in Gujarat: The company has presence only in Gujarat any political issue in the region can adversely affect the company. Although, the company is trying to enter Madhya Pradesh, it will take time for them to establish.
*Low promoter holding: The promoters have low holding in the company (29.95%). Further, fund raising can happen at Namra level since its 100% subsidiary of Arman. Its a highly illiquid stock and valuations dont seem cheap as they were earlier.
Views invited
(Disc: I am positively biased towards the stock and hold it from much lower levels)