I think management has explained this point in the concall- MFIN is becoming a high credit cost industry, but at the same time, ROAs and ROEs compensate them for the risk they are taking.
My sense is, in the past we have seen cycles like 2011-2016 with no credit events or 2003-08. If Macro remains strong, good credit cycle for lenders can continue. There is no high stress or systemic risk at the moment anywhere. Wholesale lenders are still seeing write backs
Thanks for the reply. Yes that I know higher credit cost is in fact compensated by higher yield, but was unsure of the part of credit cycle we are in. Thanks for sharing your view.
Arman concall is very insightful. One thing that I picked up from the concall was that Mfi lending is become a sort of buyers market now. Ie; Too many lenders approaching the same customer. This can lead to delinquencies and Mr. Patel also alluded to rise in credit cost.
This was confirmed in scuttlebut ( mfi division of a bank) . They were saying that they are facing repayment pressure , due to wrong selling , going down the quality curve due to higher supply.
Other wise Arman looks to be a good candidate to invest.
What would be the impact of change in RBI priority sector lending norms for MFI lenders like Arman?
What’s happening with this counter? Falling consistently for no reason I can think of. Is there any negative news in the market or just Mr Market having its fun?
I think it is due the the fact that all microfinance companies and small ticket unsecured parts of other lenders are facing troubles in Q1 results.
Disc- Invested
So just had a peak at this co, looks impressive considering other banks/nbfcs in MFI category majorly faced a lot of headwinds with declining profits YoY for Q1FY25. And the recent fall in the stock price does it make this co. undervalued and good to invest for long term has anyone researched it in-depth/is tracking. My apologies for asking straight away but I’m still trying to understand banking/nbfc sector
@sammy11 If you could share some insights and rationale for your investment it could help build a good starting point for discussion . Also how much of an impact the RBI priority sector lending changes do you think it could have on Arman and the sector ?
hi…i have been invested in arman since 2016-17. what kept building my confidence in the company, the promoters, the management and the team was the way they handled every crisis - demon, ilfs, gst, covid and various other intermittent issues such as floods, elections etc in between.
it seemed as if everytime the company was coming out stronger and better prepared for the next eventuality.
being a high beta play in lending, mfi has always been susceptible to more swings than a normal more diversified lender. but the cross cycle performance of arman has been quite remarkable. and there are not many players who have been able to consistently do this.
it was felt that it was easy to do mfi business and hence many lenders entered the sector. banks took over nbfc-mfi’s thinking it was easy business. moreso after recent rbi relaxations. but many took many missteps and ones like arman and creditaccess who just played it the right way came out stronger, even after getting affected by the same circumstances that afflicted other players.
jlg mfi is more an operations game than a risk game. so consistency, uniformity, simplicity, etc. is the key. ofcourse, it is also important to navigate the risk scenarios, which come in spikes. but how one manages the business during “normal” times is what sets it up to weather the next crisis.
i cannot suggest or recommend, but arman probably looks like it is very near the cheapest levels it has quoted.
sentiments are poor right now given rbi glare on unsecured lending, high growth, visible stress in certain pockets. but by and large, the mfi borrowers are of the resilient nature and typically losses are because of inability and not intention.
improvement in rural economy, some self corrective steps taken by the mfi’s (in terms of moderating growth, increasing provisions etc) under guidance of the self regulatory authorities like mfin and sadhan, may give some comfort to rbi.
mfi remains critical for financial inclusion and that is recognised by finance ministry as well as regulators.
someone interested in the company and the sector will just have to wait it out i guess.
@sammy11 - I have entered the stock probably at the wrong timing. 20% loss right now. However, I invested in this stock given its past resilience and being the fastest growing MFI. However, I see the following challenges -
The GNPA number is increasing from last 3 quarters → 2.5% (Q2), 2.8% (Q3), 2.9% (Q4). This is a bit concerning.
Management has said that the honeymoon period for MFIs has been over. So, the 40% AUM growth is at risk also.
The other MFIs are performing extremely poorly on valuations, with exception of Credit Access Gramin.
Fusion - 1.55 P/B (RoE - 17.9%)
Muthoot Microfin - 1.47 P/B (RoE - 20.4%)
Satin Creditcare - 1 P/B (RoE - 21%)
Credit Access Gramin - 3.21 P/B (RoE - 24.8%)
All these factors give lower the confidence. I am not sure when to average more. Arman is still at 2.3 P/B. Is this the bottom? Or are we looking for more correction?
I am awaiting results. Will invest post that I guess. Any counter opinions?
let me give some instances where arman was kind-of ahead of the curve in some aspects.
they were also the earliest to call out that the pre covid credit cost levels of around 1% are a thing of the past. at that time they had said they expected 2-2.5%. which did come about. and now they think it could be higher. whether it is temporary and whether it would settle back to 2-2.5% levels, only time will tell.
whether it can fall more, whether it can become cheaper? sure it can. i dont know.
how soon will dust settle down for mfi sentiments, if at all, is also tough to guess/gauge for now.
like i said it is a waiting game, and it is quite alright if anyone does not want to play it. its tough to suggest a buy in any mfi at the current juncture.
Thank you Vinay ji. The promotor holding have gone down substantially to me that is a bit of more of the problem. the promotors have voted with their money. It might have gone down a little bit but long term is much more important. The valuation are undemanding so I am guessing even a less of growth would be okay if promotors are still committed Any thoughts about that? Regards
I’ve heard similar stories from a friend working at a fintech startup. Companies are aware that borrowers already have multiple loans, yet they continue to issue new ones. Customers often use these new loans to pay off old ones.
Many private banks have also warned that farm loan defaults may increase in the future, as the rural economy is in distress.
Over the past five years, people have taken on a significant amount of personal loans, with financial liabilities growing at a 22% CAGR, while household savings are only growing at 11%.
This is why the Reserve Bank of India (RBI) wants to slow down personal credit growth. It is reflected in the latest figures, where personal credit growth has decreased from 20.4% to 17.7%.
fact is that the family running the company (Jayendrabhai patel and his son aalok patel) have not sold any shares. another faction (manakiwala family) which has historically been classfied under promoter category (but have long since ceased being involved in the business) has been selling their stake because they are no longer involved in running the company’s business. The son, who is based in usa, who inherited shares after his father’s death (senior Mr. Manakiwala) has been selling. The company could have declassifed them as promoters, but for some reason, didnt go through the process.
otherwise any reduction in promoter shares % is because of dilution due to fresh funds raising.
Fusion took a huge write-off today and showed negative profits. Stock went 20% down.
Seems like bad times might continue for microfinance sector
Lending is not a homogeneous market, geography wise 99% of time. Exceptions being COVID, DEMON. How can you extrapolate one company’s poor risk management, lending standards, lack of geographic diversification to the entire industry?
Look at the results others delivered, the difference is night and day. What Fusion reported as credit cost in Q1 is more than the annual projection of everyone else barring ESAF. And all the results are for the same period, so no new stress is being reported by Fusion. Almost every other operator has said stress is limited and reducing and H2 should be normal growth wise.
This was a blip caused by elections, Q1 was an excellent identifier of good vs bad lenders. Make use of that information.
I see huge impairment losses this quarter, 43 Crores ! Because of this, even though revenues grew, margins took a hit and the net profit is down considerably as well. Can someone shed some light on how to read this? Is this a one time thing and we should focus on revenue growth or is there a potential for asset quality to deteriorate further? Thanks.
Diff b/w GNPA and NNPA is almost same so how could provisions increased that much. In my opinion Company has taken a major write-off . Therefore GNPA is optically looking smaller so that investor wont panic seeing GNPA in the range of 3.xxx . So stay cautious, till we get further commentary from the managment.
DIsclaimer: Above written is my personal thought . I have recently invested in the stock to test the waters since it is available at cheap valuations.
Arman management has history of taking one time large impairment loss and given NPAs are stable/lower, it seems to be a repeat. Look forward to the concall
