It highlights the importance of experience and prudence in the MFI business.
@DEBASHISH Sir I wanted to get your views on Arman, especially considering the current industry headwinds. The company has been known for its prudent approach to lending, but this time it seems their loan disbursements are growing despite the downturn in the industry. Additionally, their PAR (31-90) has been rising sharply, which raises some concerns.
The valuation has also corrected significantly recently, which has caught my attention. Given these factors, I’d really appreciate your perspective on whether you see this as a potential buying opportunity, or if there are risks that we should be mindful of. If you see value in it, I’d certainly be interested in exploring it further on my end as well.
Looking forward to hearing your thoughts
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Book Value per Share: 824
Price/Book: 1.5 (lowest in last 10 years and similar to Covid bottom)
Debt/Equity: 1.5
GNPA: 3.74%
NNPA: 0.64%
Credit Cost: 99 Cr (4%, not annualized)
I am tracking this company from last 7 years. The company has frontloaded the provisions for NPA. I know the working style of Alok Patel (CEO). The biggest coushion is that D/E is very low. As and when cycle NPA cycle turns, a sharp recovery will be seen in lending because of low D/E.
Industry wide corrective measure have been started from last 2 quarters, which may start yielding results after next 2 quarters.
This is a heaven for contrarian crowd.
04/01/2025
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Hi, from 30 August 2013 till 29 May 2014, the Price to Book of Arman Financial is being shown ranging between 0.4 to 0.5 in Screener.
From 1 April 2005 till 11 October 2013 (Almost 9 Years), the price reached from Rs 6.50 to only Rs 16.5, as per Screener.
If a full fledged recession occurs (I hope not), then there might be a lot of downside possible in the entire unsecured microfinance sector.
Disclosure: Views are personal and only for educational purposes. As of today, no personal holding in Arman Financial.
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mfi industry was not popular during 2005, today the situation is different. once the cycle turns, you will see the difference. valuation is favourble, limited downside.
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MFI is a oligopoly in India with CAG having largest market share of 41%. We can look at certain advantages that the players may have:
- Patent: Management being important IP since NPAs and excessive growth can wipe out players.
- Economy of scale: Higher size and lower COF, with managed manpower leads to better margins.
- Switching cost: Marginal switching costs due to pre-payment penalties.
Thus the larger players with good management will have a sustainable advantage. No player will have pricing power, only power will be with managing input costs which is size dependent.
So why choose Arman in this highly cyclical industry?
We write down the risks and the mitigants to them like a credit analayst:
- Employee attrition: ESOPs of Arman help in retention (look at attrition rates vs industry)
- IP: Patel has vast experience across cycles. Fund raise at the right time in 2023 has decreased default risk. Aggressive provisioning is a plus.
The valuations are compressed and may compress further. But every round of selling will make Arman more attractive due to the high CRAR which will increase the future ability to lend. Hence accumulating the stock from current valuations on a very watchful basis may prove beneficial.
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I have pointed some reasons earlier… That will work in favour of arman in tough time.
They created pool of good customers, means if customers have willingness to pay then there is no problem at all… They will renew the loan simple.
Disc. Not invested
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I didnt see your message earlier and hence my apology for delayed response .
Your return on share depends on at what price you bought (or kept adding ) and your allocation % .I have been invested in Arman for 8 years now .Have most of the time added during fall hence inspite of Arman down from all time high by more than 50% + my CAGR return on Arman in 8 years is 31% pa+ .I even added during this fall.
Coming to MFI cycle no one can predict when the cycle will turn .This time the problem is man made wherein the leverage at customer end is very high .RBI is after MFI ,on top of it the players have started becoming cautious and hence the cycle will rectify in few quarters .Hence if we take a longer view of 5 or 10 years( in my view its a cyclical industry hence have to have longer time horizon so as to NOT to play or project the cycle accurately in shorter time frame )we will make lot of money as bcos :
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The PE & PBV is at its lowest in my investment horizon since I have been tracking & invested for last 8 years
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Given Promoter background ,they know how to underwrite credit better than any MFI and hence would come out one of strongest in this cycle
3)They have raised money and DONT need money for next 2/3 years
4)If we do REVERSE DCF assuming we want to make 20% return pa for 5 /10 years at EXIT PE OF ONLY 12 ,market is assuming PAT growth of 5 % & 8% pa for 5/10 years -where in this market we will get this type of valuation ??
- Hence I am taking a contrarian view and will further buy
Discl : My views on Arman is biased bcos of my holdings ,please DO YOUR OWN due diligence
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