No matter how well a company is runned, it just cannot escape the crisis. We are probable at the start of a painful downcycle (as per concalls of 10+ NBFCs & Industry experts). Arman has done all the right things - they have been spectical of the high growrth and RoE over the last few concall, this higher provisioning was more than expected. But there will be pain for the next 1-2 years. Only good think is the borrower level leverage is lowest in their core geography (Gujarat).
Disclaimer: Have been invested for last 6 years, just exited last month. Will look to enter in 1-2 years.
Looks like 15 August holiday and investor presentation saved the ticker from a circuit down. The presentation shows some positives. 2W PAR seems to have recovered and Microfinance PAR is steady, lending some credence to this being a book cleaning exercise with one time recognition of impairment expense, similar to what they took post demonetization. They have also given a tabular breakdown of amount due and collected per lending segment. The dues haven’t climbed between may and june 2024
Higher credit cost and low volumes, due to issues in the Microfinance industry.
Previously Lending for MFI customers were capped at 1.25 lakhs which is changed to 50% FOIR (Fixed Obligation to Income Ratio). This was done to better align with the borrower’s actual repayment capacity.
Challenges for the new rule:
Assessment of household income is a big challenge and a WIP for the industry due to non determinism of the income, and over leveraging (If one company quotes 2 lakh as the household income, some other might peg it at 3 lakhs)
MFI operations are highly linked with the credit so getting high repayment for it is highly important. In rural areas, the income is not easily predictable due to dependency on agriculture and other factors. There may be cases of overreporting the household income by branch staff to facilitate loan approval.
Arman has a centralized credit assessment, introduced pilot project with credit managers for loan sanction and assessment in 100 branches (by next quarter). There might be higher operating costs but will help in quality disbursal.
Non-MFI loans have become more accessible to rural customers, with banks and NBFCs offering a variety of loans (fintech, MSME, personal, gold, vehicle loans)
Heat waves, elections, high employee turnover lead to higher slippage. Also, a primary reason for the write-offs were overleveraging due to regulatory changes.
A positive development is that Namra Finance received a credit rating upgrade from A- stable to A stable. The standalone credit rating for Arman is expected to be released shortly. This will help in reduction of cost of funds. Confident of maintaining the NIMs.
AUM increased by 21% while disbursement degrew by 13% yoy. Consolidated collection efficiencies stood at 95.8%
Cumulative provisions amounted to INR 101 crores, Arman’s stand-alone contributed INR 20 crores, while Namra was for INR 81 crores. The decline in PAT is due to higher impairment costs and slightly lower yields in the MFI book.
The rural Micro LAP product launched in Q4 of last year has an AUM of 6 crores, management is optimistic of it’s long term potential.
Namra Finance has reduced rates slightly, leading to a minor decline in yields. Any further decline in yields is projected to be around 25-30 bps in the coming quarters.
Guidance was not given but management mentioned visible improvement post Diwali.
The aggressive write-offs are a strategic decision to stay ahead of potential issues and to be extra conservative. Another reason for aggressive write-offs mentioned was tax benefits.
They do not expect a significant decline in total impairment in the next couple of quarters. However, by Q3 or Q4, there might be a reduction in write-offs.
The credit cost guidance, which was previously set at 2.5% to 3%, might be revised slightly upwards by about 50 basis points.
Management is hopeful for improvement from Q4.
The Micro LAP product has seen limited volume growth so far, currently piloted in Gujarat. Southern states like Telangana are being explored and launch is anticipated soon.
There is a growing emphasis on work-life balance, especially among field staff who face challenging working condition, came #1 issue in their internal survey for job satisfaction. Attrition has been mostly for ground level staff.
Evaluation for CGFMU and credit insurance is going on, but there are concerns related to cost and claim rate.
Geographical based interest rates were considered but not pursued yet. If the credit issue becomes worse in local regions, then it might be implemented as a last resort.
The deterioration in loan performance is broadly observed across all states. There has been dilution of JLG culture post COVID due to easier credit availability as more players are entering and change in customer’s expectations.
Aadhaar-based authentication has been strengthened with biometric verification, but still fraud can happen for other documents like Voter ID, electricity bill, etc.
Some strategies which the company uses for stringent quality checks:
Separation of Credit and Sales
Advanced ML based analytics
Collection strategy adjustments (previously collection happened from 1st-12th of the month, but now it’s throughout the month)
Specialized Recovery Teams
Cashless Payment Initiatives (Namra app launched on play store)
Technology Enhancements like Biometric eKYC, geo tagging
Feel free to add any missing points and any feedback!
Are people bullish on the stock still buying this?
The stock is at lowest price to book ratio in history (Except Covid). Arman Financial is rarely available at <2 PB.
However, given its peers Satin and Fusion coming to 0.8 PB, I am not getting courage to buy the dip. Because I cannot size the dip. Any other thoughts??
Look at my last post. Arman (no matter how got it is runned) will and is getting impacted by the MFI cycle. I have tracked the company since last last 4 cycle (8 years+), it has become very predictable now. Only thing different about this cycle is that, despite knowing that the market is over-heated, the management didn’t slowed down the growth to an extent. But it still remains a very very well governed and managed company. Don’t look at the P/E or P/B now, it will compress further, optipically it looks better.
Disclaimer: I exited my 6 years old holding about two quarters back, but will look for opportunity to re-enter once the dust settles.
CRAR is 35%+ for both Namra and AFSL.
Collections are 95%+ which will decrease moving forward.
Leverage at 1.8x which is lowest in industry due to recent equity round.
Rating upgrade from June’24 to Aug’24.
Business cycle downturn led to reduced NIM, disbursement, collections.
Finance cost to reduce which will be beneficial to AFSL due to low leverage.
P/B ratio at low regions vs past.
I agree with you but I don’t think it’s the right time for entry! I believe the down cycle has just begun and you should wait till the cycle turns and credit costs lower down!
Also I believe and I could be wrong here it’s not going to be the biggest down cycle because rain has also been good so rural sector incomes should grow.
No I have factored in the stock price not moving for next 4-6 qaurters while entering. Also I am making staggered buying and have started at 2.0x book and will try and average around 1.8x book.
My thought is that I am buying a player which is least levered on net debt basis compared to peers and should last for the next 6 quarters. Also lowering of cost of funds in the future will allow Arman to increase leverage at lower rates, while the peers are levered and will have to raise equity which may be difficult to come by.
When the dust settles I expect Arman to be there and this is anyways 10% of portfolio where I can take a 50% hit and still manage the loss.
To note that over 10 years Arman stock price has given the same CAGR as the increase in the book value per share (BVPS). Also the book has never degrown and Arman has never reported negative PAT. This allows the BVPS to increase at bare minimum 10% and assuming same P/B the stock should give a bare minimum of 10% p.a. if held for 3-5 years.
I think you are right there and since Arman is growing at 25-30% per annum then that also helps it become a much more attractive so expected returns would be higher than 10%
What a massive derating this stock has undergone. While it’s a good time to evaluate the stock. Need to understand how bad the pain is in MFI sector. There is a slowdown going on in the economy represented by large cap stocks earning.
I was waiting for this stock to derate when it was trading at extreme valuation. Now that it has derated hugely. It’s a good time to evaluate things. Can you please provide your valuable guidance based on your experience what to do in such cases? I’m not looking for a buy n sell reccomandation
MFI is a cyclical business. I think it is prudent to accumulate when the cycle is negative. This specially applies to a ultra-conservative lender like Arman.
[Unless we are a very intuitive investor and can enter right when the cycle is turning. Even in that case I don’t believe I’ll be able to go lumpsum. So it might be better to build positions over this nagative cycle]
Disc : Invested and added positions in the last month.
Sir why you think so? Why not credit access grameen which is market leader in mfi sector. I am betting on market leader which has significant promoter holding with very less retail holding which is exactly opposite in Arman case.
I will love to hear your counter arguments.
