At present, I am finding it challenging to identify companies that meet both my comfort level for investment and my valuation criteria. Most appear overvalued. Among the options I have reviewed, Arman Financial Services stands out as being within a reasonable value zone and aligns with my long-term investment approach.
After a detailed review of the company’s latest disclosures and strategic updates, I am comfortable holding Arman for the long term. Key highlights influencing this view include:
1. Asset Quality Over Aggressive Growth
Arman prioritizes asset quality over rapid expansion. The management remains agile to seize opportunities when appropriate but is equally willing to slow growth to preserve portfolio integrity.
2. Adapting to Market Realities
Acknowledging the decline of traditional rural joint-liability group (JLG) borrowing norms, Arman has evolved its systems to assess customers individually, ensuring a nuanced understanding of borrower circumstances.
3. Strategic De-risking of the MFI Segment
- Reduced Microfinance Exposure: Disbursements declined from ₹1,895 crore in FY24 to ₹1,232 crore in FY25, with AUM down 23% year-on-year.
- Robust Provisioning: Provisions of ₹90.22 crore cover 5.35% of consolidated AUM and 7.30% of on-book AUM. While this reduced FY25 net profit for subsidiary Namra Finance to ₹7.8 crore (from ₹138.8 crore in FY24), it demonstrates prudent risk management.
- Strong Capital Adequacy: As of March 31, 2025, capital adequacy ratios stand at 37.34% for the standalone (non-MFI) business and 48.37% for Namra Finance.
4. Operational Realignment
- Separation of credit and recovery functions at the branch level is fostering an independent credit culture.
- Overdue collections have been established as a dedicated vertical, supporting improved repayment efficiency.
- A new governance structure introduces Branch Credit Managers who conduct rigorous, customer-level assessments, including house visits and detailed income evaluations.
5. Encouraging Early Results
- In Q4 FY25, over 75% of MFI disbursements were to customers with credit scores above 700; rejection rates remain high at 80% but are expected to decline.
- Collection efficiency improved to 98.8% in March 2025, up from 97.3% in November 2024.
6. Forward Outlook
Management acknowledges that predicting the future of unsecured rural finance is inherently uncertain. They emphasize agility, data-driven decision making, and a shift toward more rigorous individual credit assessments. The company also remains alert to opportunities in MSME funding, a sector with a significant financing gap and long-term growth potential.