Intec Capital: SME Asset Financing

Stock Opportunities
1

First, what I didn't like about this small NBFC - eyesores right from the first look

a) High Promoter shareholding pledging

b) Very frequent dilutions - every year from 2007, except 2010 - couple of times have been big

But since that casual read of the 2012 AR (please start with that rather than for 2013) why can't I shake of the feeling that this is one NBFC with a difference - certainly difficult for others to replicate the expertise and relationships that Intec has built for itself in its niche.


Let's start examining why?

THE INTEC DIFFERENCE

Intec Capital is among few companies to haveset its sights exclusively on Indiaâs SME space.Currently, there are over 26 million MSMEs inIndia, but only 5%-7% were serviced by banks /FIs / NBFCs on account of limitations in reach.

At Intec, our focus is to service the remaining93% by addressing their financial needs and actas partners in their growth.Within what is largely an untapped market,Intec emphasizes the financing of machines forhigh-growth industries like Auto & Engineering,Printing & Packaging, Plastic & InjectionMolding, Medical, Healthcare & Pharmaceuticalsand Food Processing.

SMALL ANDMEDIUM-SIZED BUSINESSESARE THE LEAST PROVIDED FORWHEN IT COMES TO THEFINANCING OF THEIR MACHINERY& EQUIPMENT REQUIRED TO GETTHEM INTO BUSINESS ANDSUBSEQUENT EXPANSION.

INTEC CREATED AN ENTIREBUSINESS MODEL AROUND THISOPPORTUNITY. THE COMPANYEMERGED AS A FOCUSEDMACHINERY & EQUIPMENTFINANCE PLAYER IN INDIA,CARVING OUT A NICHE IN THECOUNTRYâS GROWING SMESECTOR.

Intec, headquartered in New Delhi (India) has a presencespread across 15 locations in Northern, Western and SouthernIndia, covering more than 137 SME clusters across a broadindustry spectrum.

Intec Capital FY2010 FY2013 CAGR
Disbursements 175.91 615.45 52%
Assets under Management 146.97 871.02 81%
Revenues 15.07 115.46 97%
PAT 2.03 13.14 86%

Net interest Margin (NIM) - 5.14% Mar 2012.Capital Adequacy Ratio - 19.45% Mar 2012.Net Non-Performing Assets (NPA) - 0.30% Mar 2012

While admittedly this record is on a very small base, but what is noteworthy for me is that the company has continued to keep growing its disbursements (at a great pace) in an environment where SME businesses were probably the worst hit. The growth pace in FY 2014 seemingly remains intact. Currently valued at 1.14x BV

Unlike vehicle financing or other financing, machinery financing I would assume needs a certain level of expertise and being clued in to their main industry domains (and their prospects), linkages with manufacturers, and the like. It's not something that someone with adequate financing can just decide and get into action straightaway!

Interested to examine, more? Let's focus if there's something special about Intec Capital and if it looks to be sustainable??

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Hi Donald,

Looks like a good company to dig more. Please find below the link to ICRA’s rationale (recent one)

http://www.icra.in/Files/Reports/Rationale/Intec%20Capital_r_17102013.pdf

The Annual Reports look pretty colourful andIndia Business Excellence Fund (as per ICRA’s rationale) has invested in the company recently. We need to dig more into the company.

Regards,

Ankit

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Donald,

I think the equity dilution is primarily to fund company’s growth. What’s more interesting is the capital adequacy ratio (CAR) of 23.33% as on March 31, 2013 as per ICRA’s rational. As per their FY13 AR, the CAR has increased to 23.33% as on March 31, 2013 from 19.45% as on March 31, 2012 primarily on account of PE investment.

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Thanks Ankit. Most of the “issues” are brought out in the ICRA appraisal. reproducing it here for the record.

Intec is in the business of extending loans to the SME customers for financing of machinery. The company relies on in-house expertise for assessing the debt repayment capacity of the borrowers using both formal income proofs as well as ascertaining cash flows from the business. Though Intec has been able to maintain good asset quality indicators (Gross NPA% of 0.50% as on June 30, 2013), and there has been some rise in the proportion of portfolio restructured during the year from 1.6% of the portfolio outstanding in FY2011 to 2.20% in FY2012 and further to 2.70% in FY2013. Nevertheless,ICRA acknowledges Intecâs good credit appraisal and monitoring processes and also unique lending structure wherein borrowersâ margin money remains with the company and results in accelerated loan repayment and faster build-up of borrowersâ equity. Nevertheless, as Intec provides loans without collateral security, its recovery potential could be low, in case of severe default by borrowers. Although, Intecâs portfolio is well diversified across various industries (Engineering, Auto ancillaries, Printing & packaging, Plastics and others), some of these sectors are facing credit challenges due to adverse operating environment.Further, the company is expanding into newer geographies, its ability to maintain asset quality indicators while scaling up the portfolio in newer geographies in a challenging operating environment would be a key rating sensitivity.

Though at portfolio level, Intec reported a 50% growth in managed portfolio to Rs. 560 crore in 2012-13, with the tough operating environment and higher base effect, the pace of growth of Intecâs disbursements slowed down to 10% in 2012-13 (vis-a-vis 38% in 2011-12) and was supported by geographical expansion of branches (in southern and western states of India). However, the proportion of portfolio concentrated in National Capital Region (NCR) remains high at 65% as on March 31, 2013 (reduced from 76% as on March 31, 2012) Further, though Intecâs lending rates are higher vis-a-vis banks/large NBFCs active in the segment ,Intecâs faster turnaround time, established presence in the segment and financing without collateral security,(unlike banks) are expected to provide adequate growth opportunities for the company.

Though Intec has been able to raise funds from a large number of banks as well as reduce its cost of funds by around 50 bps in FY13 and Q1,2013-14 and has also diversified its resource profile by borrowing in the form of instruments like commercial paper Intecâs financial flexibility is moderate as it is largely dependent on banks/large NBFCs for meeting funding requirements. Liquidity profile of Intec is comfortable given the matched tenure of assets and liabilities. With the infusion of capital Intecâs capitalisation level was adequate with gearing of 3.82 times as on March 31, 2013 (4.72 times as on March 31, 2012). However, going forward as well,Intec would continue to need regular external capital infusions to support its growth plans.

5

Hi Ankit,

“India Business Excellence Fund” is an investment vehicle of Motilal Oswal Private Equity - so its not an unknown/ less known PE fund but one of the better performing ones.

Regards

Hari

http://www.icra.in/Files/Reports/Rationale/Intec%20Capital_r_17102013.pdf Link: http://www.icra.in/Files/Reports/Rationale/Intec%20Capital_r_17102013.pdf

andIndia

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Download minmap on Intec capital which I have prepared. Hope it helps

https://drive.google.com/file/d/0B8Mr8IuAEwz7Ykh2SWFRTTBUZDQ/edit?usp=sharing

What can kill the idea

  1. Reliance of single source of financing. Intec capital is entirely dependent on bank financing. 2008-09 crisis shows that NBFCs which were entirely dependent on Bank financing, suffered near death experience when bank switched off credit life line.

  2. According to people I have spoken to there is high probability that Intec capital may go for delisting. [real public float only 4%] If it happens, delisting price WILL BE UNFAROURABLE because of the shareholding structure. To me its more like a partnership firm which is listed. Look at share holding structure. There is also possibility that the top public shareholders are promoter entities disguised as public, though probability is low. Though personally I do not think Intec capital will opt delisting route, as listing provides additional options for PE exit and fund raising…

Fast forward 10 years

If one study success pattern of companies like Shriram Transport, Shriram City Union, Mahindra & Mahindra and Bajaj Finance, these companies are run by honest management, operate in a business where its difficult for banks to compete and business are highly scalable because of the size of opportunity. Moreover other than Bajaj Finance, these companies are competing against money lenders and informal sources of finance and not banks.

If Intec capital gets it act right, then sky is the limit for company. Because machine financing is different from lending for 2W or 4W. Moreover, as per AR company selects particular industry, then builds tie up with manufactures & then funds the business which intends to buy those machines. So even if machines are repossessed they should be able to sell it to prospective buyers with the help of tie up with manufacturers.

Just read the annual report of FY13, I know AR are smartly prepared by PR, but even then if Intec is really adopting the credit approach then its very unlikely that they will suffer losses. Best part is they stick to standardised machineries.

But their business model isrisky too. In a way they are operating as a venture capital, by funding people in theirbusinesswithout any additional collateral or personal guarantee. If business fails, they will suffer. But what I Understand from AR, is that they don’t fund startups in their core business.

Regarding management, from my reading of last many years annual report I have not came across any act which I find against minority shareholders interest.

Some more risks

Lastly please do remember that liquidity is very very low, so its easy for operator to control the stock. Very difficult to buy or sell the stock in open market. With presence of PE, aggressive [or stupid expansion] ignoring sound credit principles cannot be ruled out. Just read what happened to Fullerton India, run by Temasek holding which suffered credit loss of upto 12%

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Company background : http://www.inteccapital.com/corporate-av.php

~The pioneer in the SME equipment financing . The company emerging as focused machinery and equipment finance player in India , carving out niche in country’s growing SME sector.

~Financing under two groups A . Strategic business group > 50 lakhs B . Emerging entrepreneur group : caters to lower ticket loan sizes from 5-50 lakhs ( < 10 lakhs comes under priority sector lending)

~ Knowledge driven , relation ship a based business model . Requires deep understanding of industry , customers per se . Its biggest USP.

~Wide India network with 18 branches as on june 13 and plans to add five branches per year now covering more than 137 SME clusters.

~Well defined , scalable organisation structure based on product , territory and process knowledge.

~Experienced management team ,their past track record is good.

~Strong financial track record driven by fast growth in AUM with least non performing assets.

~Strong relationships with nineteen various banks and finance institutions.

~Company is associated with 108 leading machinery manufacturers to address the finance need of Sme 's and on average receiving 135 applications for month.

Source : Annual reports , credit ratings reports and their corporate presentation .

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Opportunities

~ As per analysis of frost & Sullivan - July 11 , MSME market for Nbfc’s will grow from 41 billion in 2012 to 267 billion in 2020 .

~ As on 2012 , Percent of institutional fiance to total Msme reached just 8 percent and remaining 98 percent finance sourced by themselves .

~Even if Gdp growth touch 4-5 percent from 6-7 percent of previous years , Msme segment will grow by minimum of 20 percent .

~ Offers huge opportunities if Gdp bottom out and again touches 6 percent .

~ With wage arbitrage narrowed down to China and depreciation of Rupee of Approx 40 percent presents very good opportunities in export markets for Msme segment in coming days .

Role of NBFCs in the MSME finance sector

~The growth drivers for NBFCs engaged in MSME finance can be summarized as follows:

~Finances niche segment such as second hand or used machinery which are generally not funded by banks;

~Swift Loan Processing due to minimal documentation and flexibility of disbursement process;

~Significant Untapped Market and the lack of adequate penetration by banks;

~Repeat financing business on account of strong and friendly relationships developed with clients over thelending period;

~Strict evaluation procedures coupled with industry experience and conservative lending practises, that helpensure minimal NPAs;

~Customized and Flexible Repayment Schedules, based on customer requirement at a lower interest rate thaninformal sources; and

~Extensive Network of branches and leads to better customer service.

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Analysis :

~First mover and leader in Equipment finance for Msme sector . Huge scalable model and now financing to second handmachinestoo .

~ Highly unorganised industry with lot of privatefinancierswill offers ample scope to grow .

~Threat of new entrants low . As its business model based on relationships , deep knowledge its very difficult to new players .

~Customers bargaining power low : Unique customer base traditionally perceived them as risky by banks , organised financiers .Unorganised players charge higher rates .

~As on date below ten lakhs loans for Msme categorised under priority sector lending and present priority sector eligible loans constitute 15 percent of loan book . So borrowing cost is on higher side ( Now Intec enjoys BBB + rating by both Icra , Care )

~To maintain CAR above 15 company frequently dilutes equity automatically reduces borrowing cost . In 2011 they diluted at 5* book value and in 2013 they diluted at 2* book, collected 56 crores .

~ Company sources borrowings at floating rates and lends at fixed rates . In uptrending interest rate scenario this strategy will pose threat for NIMS . Now company plans to diversify borrowings from present banks only to commercial papers , Ncds etc and plans to lends some part at fixed interest too .

~ Non performing assets management is key for companies like Intec working in risky sector . As on Fy 2013 their collection management is excellent with 98 percent , Gross npa’s at 0.33 ( Last six years average Npas are less than 0.4 ) . I feel its best metric in entire nbfc’s ( NPA’S ).

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FY08

FY09

FY10

FY11

FY12

FY13

LOANBOOK

56.04

87.74

146.97

393.61

591.1

833.65

COLLATERAL

29.97

44.91

52.02

147.03

244.08

308.3

NET LOANS

25.07

42.83

94.95

246.18

347.03

525.3

PERCENTAGE OF COLLATERALS TO TOAL LOANS

55

50

36

37.5

41

37

RECEIVABLES






NON CURRENT




185

313

535

COLLATERAL




117.5

196

260

NET LOANS




78

140

296

CURRENT




197

254

264

COLLATERAL




30

48

48

NET LOANS




167

206

216.5

DISBURSEMENTS

62.5

98.18

163.26

404

556.62

615.45

DEBT

11.66

25.59

80.3

217.21

327.06

439.53

T I

6.46

10.83

15.07

37.07

80.99

115.46
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Weaknesses

~The Companyâs business and its growth are directly linked to the GDP growth of the country.

~ Care , Icra assigns ratings at BBB+ . Hence borrowing costs are high .

~Borrowing at floating costs and lending at fixed interest may pose difficulties in uptrending interest rates scenario.

~Majority of their lending book don’t comes under priority sector lending Which will cause higher interest rates and tough to source under severe liquidity conditions.

~Due to present small scale cost composition of total assets is high Which will reduce along with growth in Aum.

~last as applicable to all other nbfcs regulatory risks.

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Hi Donald ,

All Nbfc’s growing at higher rates need to raise capital to maintain CAR at 15 percent . But it is equally important to examine at which valuations they raised capital and diluted equity . Of all previous dilutions they diluted equity at very high valuations and interesting factor is that they subscribed themselves at that valuations .

In Fy 11 they have merged group entity named Unitel credit ltd operating in similar business , for better synergies and boosted their networth . This amalgamation of group entity done at good valuations and promoter stake reduced from 43 percent to 32 percent .

IN Fy 11 they issued shares to promoters and other non promoter entities at 3* BV .

They have diluted equity at 2* BV in FY 13 , issued shares to Motilal private equity funds named A . India excellence fund 2 B . India excellence fund 2A .Along with motilal funds they also issued shares to themselves at similar valuations and that is the reason of open offer .

Due to open offer they have pledged shares .

** certainly expertise **

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Nice to see great participation in the thread, already.

Thanks Anil for your concise summary and the mind-map. Guys, everyone is advised to use Anil’s mindmap to come to terms quick on the company

Thanks Omprakash for your data points and the analysis.I am impressed that Intec managed dilution at 5xBV in 2011 (in what must have been a difficult period too) when it had just some ~30 cr in Revenues. Which were the external entities? How much did Promoters subscribe to?

How about the dilutions in the period 2007-2009? Were they at any premium? Where they only by way of warrants? What entities?

I am worried about this aspect that Intec Capital will continue to need external capital infusions to support its growth plans.

Can you/someone examine the dilution track record of other NBFCs at similar sizes? How often do NBFCs need to dilute? And what is their ability to dilute at a premium??

That may throw some more light?

14

Oh Yes, I forgot to mention. There is an open offer from the company

http://economictimes.indiatimes.com/cmpnewsdisp.cms?companyid=8133&newsid=794359

This Open Offer is being made under Regulations 3(2) of the SEBI (SAST) Regulations, 2011. This Open Offer is being made by the Acquirers to Shareholders pursuant to which the Acquirers have agreed to acquire up to 4,775,225 Equity Shares (aOffer Sizea), representing 26% of the Voting Share Capital. This Open Offer is being made at a price of Rs. 109.45 (Rupees One Hundred Nine and Paise Forty Five) per Equity Share (aOffer Pricea).

Tentative Schedule of Activity:
Identified Date - September 23, 2013.Commencement of tendering period - October 08, 2013.
Closure of tendering period - October 22, 2013

However the open offer has run into some issues (in common with other pending) and is yet to be closed.

Om - do you have any updates on the same?

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Right now SEBI website is showing it is "under process " . Entire schedule is delayed due to pending approval from RBI and again they have to issue revised schedule .

PL check background and offer details in this document posted in sebi website

http://www.sebi.gov.in/sebiweb/home/list/3/20/15/0/Letter-of-Offer

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Am finding it hard to understand the below sentence from a very common sense point of view.

1). What is the meaning of borrower’s margin money remains with the company ?

In general, when X lends to Y, to buy a thing costing Rs.100 in market and X lends only Rs 80 (loan amount) and Y puts Rs. 20 is called Margin Money. So, what is the meaning of keeping margin money with lender ? Do they sanction 100, lend 80 and keep the rest 20 with themselves and borrowers keeps repaying based on Rs. 100 loan ?

2). It’s also mentioned that “**Intec emphasizes the financing of machines for****high-growth industries” and then said, **“Nevertheless, as Intec provides loans without collateral security, its recovery potential could be low”

How can both of these points be correct ? Why are the machines not taken as collateral ?

borrowersâ borrowersâ equity.

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Was talking with a friend, who knows dozens of customer of our esteemed lender “Intec Capital” who gives loans to SME sector at a** mouthwatering interest rate of 8%**.

The scheme is as follows. They will give you a loan of 100, you need to pay a margin of 35 in advance (which they will return you after loan period 3-4yrs with 8% interest rate). You need to pay them at **8% flat rate **in 3-4 years in the form of emi.

So the question is please calculate the actual rate of interest to the poor SME, who get fooled by this nice 8% trick.

[Pretty much the ethicality, sustainability, strength, weakness of the Intec capital lies with this simple calculation, as these people use a very simple fact that, people usually are not so rigorous in maths, and takes 8% for granted]

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[quote="Donald, post:13, topic:225616375"] > How about the dilutions in the period 2007-2009? Were they at any premium? Where they only by way of warrants? What entities? > > am worried about this aspect that Intec Capital will continue to need external capital infusions to support its growth > > Can you/someone examine the dilution track record of other NBFCs at similar sizes? How often do NBFCs need to dilute? And what is their ability to dilute at a premium?? > > That may throw some more light? [/quote]

All the nbfc's should dilute equity to maintain minimum Capital adequacy ratio of stipulated 15 percent and to grow at higher rates either in form of warrants or rights . Intec capital diluted equity in 2006-07 period . They have issued 25 lakh warrants to themselves and other non promoter group companies at price of 40 and 3* BV . All the warrants converted .

"Intec Securities Ltd has informed BSE that the Board of Directors of the Company at its meeting held on October 13, 2006 has allotted 25,00,000 Warrants convertible into equity shares on a preferential basis as follows:

Promoter Group:
1. Pantec Consultants Pvt Ltd : 345000 No of Warrants allotted.
2. Pantec Devices Pvt Ltd : 345000 No of Warrants allotted.

Non-Promoter Group:
1. Walias Multimedia Pvt Ltd : 450000 No of Warrants allotted
2. Edini Steels Pvt Ltd : 450000 No of Warrants allotted
3. Landmark Buildmart Pvt Ltd: 450000 No of Warrants allotted
4. Host Builwell Pvt Ltd :450000 No of Warrants allotted. "

I believe they have aggressive plans with huge opportunity before them . So to continue growth they have to dilute equity every two years once at least and as long as growth compensates dilutions its ok for investors .

Here i am presenting example of Shriram transport finance dilution history ( Although STFC is much bigger ) and i am not comparing both .


 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 cagr
NII 145 168 260 346 850 1415 2494 3731 4500 5430 5890 6558 41
NP 20 24 36 49 121 190 390 612 873 1230 1257 1360 47
EQUITY 35.6 41.9 41.9 65.4 150.5 184 203 203 225 226 226 226 18
EPS 5.31 5.13 8.16 9.06 8.96 11 19.7 29 40 54 55 60 25
PRICE AS ON MARCH 9 14 25 55 130 119 335 183 525 796 590 695 48.5


Here i think if opportunity size is big then dilution is good is its at fair valuations .

# I have never met management and have lot of queries on their products , their structure , sustainability and sent mail to them . I did't get any reply and they did't respond by phone too ( May be due to open offer period ) .Holding small quantity ( Just for tracking ).

I plans.

19

Hi Subash,

I did not get the trick part unless you are stating that they would not return the Rs 35 with interest of 8% after the loan period.

If the loan is 100 and the company gets Rs 35, effective cash outflow for the company is Rs 65. The EMI is calculated based on Rs 100. Lets assume 10 yrs and annual installment payment for simplicity. Effective interest rate for 8% calculation will come to 18.8% if we assume loan is only 65 but EMI is for 100.

But the company returns Rs 35 with interest of 8%. Hence the effective interest comes to 8.2%. This is slightly higher than 8% as company pays the interest only by end of 10 yrs instead of monthly payment.

If this is true how will they make money?

a 8%. **8% flat rate **in actual rate of interest

20

Hi Om and Anil,

How are they accounting for the margin money? Is loan book on net loan after subtracting margin inflow? The machines are not mortgaged?

Yes, its a niche business and similar story to Gruh and Repco - underserved potentially riskier segment is targeted giving higher NIM. The biggest issue is that unlike a house the security is very weak here. But the very impressive gross NPA figure states that lending is done prudently or that write-offs are done aggersively and hence bad loans bypass the NPA route.

Warm Regards

Vinod