Intec Capital: SME Asset Financing

Stock Opportunities
21

Hi Vinod,

You missed few fine print, and made the usual mistake, that the company wants in customer to do. They are not lending 100, but actuallylending 65. But when calculating interest they are calculating on 100. Now the interest is of flat 8%, not reducing 8% one. So in 4 yrs the customer has to give interest of 8*4=32

So net payment will be 65+32=97 in 4yr for 65, in equally weighted emi of 2.02. Almost an emi of 3.1 for rs 100 loan. It turns out to be 22% interest rate effectively.

One can use http://emicalculator.net/ to check the fact himself.

This is smart use of customer’s poor use of mathematics to arrive at conclusion. Such type of company which has build upon its profit base on exploitation of ignorance of customer is bound to fail in long run. If they can fool customer, than there is no reason why they cant cheat minority shareholder.

There is no moat in its business either. Competitor can always copy its business model and starts fooling people till the trick is well known in the industry and bang, the profitability and reputation as a lender is gone!!!

I wish best of luck for those who are going to invest in this company. I feel, luck is highly required in investing here.

Regards,

-Subash

trick

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22

Subash, I have calculated EMI on Rs 100, so your fine point is well taken care of. Its not about flat or diminishing balance…you are just ignoring the return of Rs 35 with interest. Recalculate using how much the company will return at the end of the period…because that is what you stated in your first post.

“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 at8% flat ratein 3-4 years in the form of emi”

Try to calculate the XIRR considering the cash inflows and outflows for the company.

23

Subash,

I think we need to dig more into the company and then draw any conclusions. One of my colleagues’ friend (I dont know him personally) who used to work with a rating agency is working with Intec currently. Will try to speak to him to understand the company’s business model after going through its AR’s.

Working in the financial services, I have heard various rumours of NBFC’s financing without any margins from customers (especially in tractor financing where you inflate the cost of tractors) etc. If one looks at NIMs of Shriram Transport Finance (STF), one would be surprised that its almost double compared to banks and HFCs. Their average cost of lending should be more than 18 - 20%. Charging 20 - 22% interest rate isn’t sin considering the kind of risk the STF is taking. In CV financing (new as well as used0, their are huge NPA risk. But STF has built an expertise in it. Their collection and operational efficiency, knowledge of the CV sector is unmatched by any bank or other NBFC. I am not trying to say Intec is STF, but if it can build proper systems and checks, Intec can be a huge opportunity considering its small market cap. If one looks at their past track record, they have done pretty well.

Regards,

Ankit

24

Hi Subash,

Find attached the Effective Rate Calculation. It comes to be 9% only as per what you said.

IF company pays Rs 35/- at the end of 4 yrs (& not 35/- + 8% rate) , then Rate shoots to 21%.

Request you to please talk to your friend & find out the exact lending terms.

It shouldn’t be as low as 9% nor as high as 21%.

XIRR-Calculation.xlsx (10.3 KB)

25

1).

@Raj,

This actually does happen in private lending “Vyaj” business for ex. if you lend 100 Rs. for 10 months at 1% monthly interest or 12% annually which seems to be very attractive to the borrower… so what you do is you deduct the interest before hand and then just lend the remaining principal which is actually paid back equally in 10 months installment…

eg: Rs 100 principal

(-) Rs 10 interest for 10 months (deducted at start of lending date and then restamount is given as loan)

Rs 90 (Actual amount given to the borrower as loan)

Then the borrower pays 10 rs installment for 10 months ie: principal Rs. 100 is back…

The beauty is that the lender can actually earn double the amount as interest because first he has deducted interest and then every Rs. 10 given back each month is reinvested against in some other loan and the actual interest in 10 months he earns is some where close to 2% monthly or 24% annually…

The borrower is happy as he thinks he is paying less interest…

But any ways Intec capital doing business without any collateral is very risky thing in any financial business which i dont know why they are doing…

Second if they are charging 8% interest and even if you do above compounding then again it is not good sign as there has to be some understanding in finance business that you will loose some money every year and that money has to be compensated from your rest interest income which has to be from higher rate of interest to offset those bad debts…

Hope this helps…

26

Thanks Ravjit,

It’s interesting. I had a faint idea about this happening in private un-organized lending business.

First time, am hearing this in institutional level lending, that to sme sector.

27

As I said JAtin, it is flat rate loan. I have modified the spreadsheet to reflect the same. The IRR is coming to be whooping 29%.

Copy-of-XIRR-Calculation.xlsx (13.1 KB)

28

Some insights into the lending process and source of funds. Link:http://www.smetimes.in/smetimes/face-to-face/2012/Oct/16/intec-capital-helps-smes-get-loans-fast-sanjeev-goel891069.html

Relevant sections:

_What kind of benefits do you provide to the Small and Medium Enterprises (SMEs) in raising finance?
**Sanjeev Goel:**Back in 1990s, I realized that fund raising is the biggest challenge faced by the SMEs in India apart from other challenges. That prompted me to do something about the situation and contribute to the SME sector by setting up Intec, a company exclusively engaged in machinery loans to the sector. My first priority was to devise ways in which small and medium entrepreneurs could get fast loans for purchasing machineries. Second was to ensure that the SME gets the financial credit within a short period as in business world, timing is crucial, and if you fail to get the required money to get the job done on time, someone else will.

SMEs are typically characterized by a lack of collateral. In case of debt financing, lenders typically request collateral to mitigate the associated risks. The lack of collateral is probably the most widely cited obstacle encountered by SMEs in accessing finance. In our endeavor to serve the SMEs, we, hence strategized loans without taking real estate as collateral. We only hypothecate the machineries against which the loans are disbursed.

Intec also finances the needs of first generation maverick entrepreneurs and helps them fulfill their dreams by financing as low as Rs 5 Lacs.

We have been primarily focusing on sectors such as Auto and Engineering, Printing and Packaging, Plastic and Injection molding. We are also looking fulfilling machinery finance requirements of Healthcare, Medical and Pharmaceutical sector along with the food processing sector this year.

We are associated with the leading machine manufacturers of all these sectors and we fund the machinery purchased by SME clients. The market for refurbished machineries is also substantial in India and to tap the potential of this segment, we also finance the pre-owned machineries for the SME clients.

Since we understand the DNA of SME Customers, we do not go for the evaluation of the balance sheet in a traditional way. We look beyond the other things which are not reflected in the balance sheet. We basically see his experience in a particular business, education, residence stability, past and present cash flows, repayment track records & investment in business. On that basis, we are able to fund all his machinery requirements._

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We normally take 25 percent as the margin money and the machineries are the only collateral in that case.For instance, suppose the machine is costing to be Rs. 100, so he (the customer) is supposed to pay Rs 25 as margin money and rest Rs 75 will be the loan given to him.

**
**

Also, we have a credit delivery arrangement with SIDBI. This channel partnership with SIDBI provides economical financial assistance and subsidy to SME customers of Intec Capital Limited. Under CDA scheme, the company sources the proposal in compliance with all due diligence and SIDBI disburses the loan directly to the client. With this association, the MSME customers are entitled for a subsidy of 15% of the machine purchase cost under a Credit Linked Capital Subsidy Scheme (CLCSS).

**
**

How do you get funds to provide finance to your clients?
**Sanjeev Goel:**In the business of financing small and medium enterprises, success is derived from an ability to mobilize funds at the lowest cost. Intec is focused on procuring low-cost funds through short term and long term financial instruments comprising cash credit, term loans, letters of credit, credit delivery arrangements and direct assignment. We are working very closely with various nationalized banks and renowned financial institutions for procurement of funds. We are also looking at reducing the cost of funds by adding more banks to our consortium and raising funds from international sources.

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29

Hi Vinod

loans are shown net of margin money. Machines are part of collateral, but no other guarantee is being obtained. Currently I GUESS approval is closely monitored from HQ, most probably under direct supervision of Sanjeev Goel and few other trusted people. We need to see whether the same quality can be maintained once approval is delegated to branch level. To growth their AUM by more than 2-3x they have to delegate.

Secondly yes NPA are very low, but the fact is that their loans book has more than doubled in last 2-3 yrs and I think stress is showing under restructured loans. Even Shriram city union has credit cost [write off plus provisions] of 2-3% over 2005-13 [excluding gold loan, as NPA were negligible on gold loans]. So I would not be surprised if their NPA increased to 2%. What’s more imp. for Intec is to build scale and reduce expenses as % of AUM [which currently are 5-6% of AUM] and increase leverage which averaged around 4.5x and also to reduce cost of funds. These will come gradually over 3-4 years once they build scale…

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30

Nice link Rudra,

Did help to clear some doubts in mind. 2 things still remain to be clarified though 1. interest rate 2. margin thing

31

The other question that needs to be asked - posting on Ayush’s behalf as he is on holiday!

Why is Intec attractive enough to investigate when we are not interested in something like Muthoot Capital - similar size company with double the RoE of Intec and available at half Intec’s valuation - 4.6x PE, less than BV, with 4.7% Div Yield??

32

Donald,

I think what might differentiate Intec from Muthoot Capital is the management’s thrust on growth as well as their focus on the business. Muthoot Papachin group is mostly into gold loans and their focus is primairly on growing their gold finance business. This is also reflected in their growth numbers.

33

Hi Donald,

The reason why intec is more attractive is because of their presence in a niche area of SME equipment finance and the fact that they seem to be doing well while muthoot capital is present in 2 and 4 wheeler finance where there is intense competition.

Regards

34

**

Please read as 2 and 3 wheeler finance.

Regards

Hi Donald,

The competition.

Regards

The other question that needs to be asked - posting on Ayush’s behalf as he is on holiday!

Why is Intec attractive enough to investigate when we are not interested in something like Muthoot Capital - similar size company with double the RoE of Intec and available at half Intec’s valuation - 4.6x PE, less than BV, with 4.7% Div Yield??

**

35

The gold loan companies are attractive from a valuation point of view…but don’t meet the cut on governance and sustainability. Typically RBI has frowned on lending businesses which grow too fast outside the regulatory purview (eg: micro finance). Eventually investing is about risk adjusted return and conservative investor might prefer nbfcs for whom gold finance is one of the verticals but not the only vertical. Gold loans would provide the higher RoA and maybe growth(??), but there are other traditional businesses (SME finance…a bit like SCUF) to fall back on in case of regulatory challenges. My personal view is that you cannot wish gold finance businesses away but regulate them and eventually bring down the lending rates from 24 - 30% to maybe 14 - 16% or rates at which banks offer them.

In the smaller cos (micro cap / small cap) the promoter holdings might not be as low as some of the filings indicate as many of the other corporate bodies are also typically held / controlled by people / entities which have close association with the promoters.

36

Muthoot Capital is not a gold loan co! :slight_smile:

They are into 2 & 3 wheeler financing. Interestingly the co has been growing at a CAGR of 55% for last 5 years and yet available at 4.5 PE, 0.9 time BV and div yield of 4.5%.

Ayush

37

Ya agree with you Ayush it is not a gold loan company. Was referring to its group company, Muthoot Fincorp Limited which is into gold finance and is much larger in size compared to Muthoot Capital. Growth has been pretty decent for the company for the past five years, however, its NIM seems to be shrinking over the past 3 - 4 quarters. But looking at the valuations, it does merit a serious look. :slight_smile:

:))

38

Most of the key concerns of Muthoot capital are highlighted by T.Anil Kumar in muthoot’s thread. I think we shouldn’t compare it with muthoot capital since key to bet on Intec would be it’s different business model of machine financing rather than just another NBFC. There’s history of new business creating historical shareholder returns if moat is proved.

Coming to 2/3 Wheeler financing business - I think IndusInd bank does it with good risk management and I would prefer it anyday over muthoot.

39

Hi Guys,

Management Q&A with Intec is confirmed for 3rd week Jan.

Those interested/tracking please post your queries and help us extract the most out of this opportunity.

@Ankit - Like an intro with your friend who works in Intec Capital?

@Subash - Like an intro with your friend who has friends who have been/are Intec customers

Kindly link me up in email or provide me the contact numbers by email.

40

Loan book [unless otherwise stated strategic division]

  1. Need to understand a) Average loan size b) Typical loan tenure period C) How much collateral is generally taken D) rate of interest paid on collateral & when e) Interest charged on loan amount [Flat or on reducing balance, fixed or floating rate] f) Can customers pre-pay loans, if yes whatâs the pre-payment penalty, if any.
  2. Do customers understand the real interest rate which they are paying? [Some people have raised concern in the blog that based on their interactions with customers, many customers donât understand the real interest rate which is being charged to them]
  3. Who are the target customers of Intec and why they should be willing to pay higher interest rates. [I guess mostly customers will be those who are not able to get loan from banks & other NBFCs. But it would be better to understand the exact target group. Interest rate on loan against property is in the region of 13-14% and interest rate charged by Intec capital is much higher than that. So it also means these customers do not have any tangible property to offer as security?]
  4. What are the industries and categories of customers to which company do NOT lend?
  5. To what extent deal originator [loan officer] is responsible for the maintaining portfolio quality or is the deal origination and monitoring portfolio quality monitored by different department. Is compensation of deal originator linked with overall portfolio quality?
  6. Does company charge different rates of interest for different categories of borrowers or same rate of interest is charged for all borrowers.
  7. I read in an article that you buy printing machines and lend them on monthly rental. How this is different from directly lending to customers and what is the risk company bears? [Not able to trace the article]
  8. Industry wide breakup of AuM?
  9. A) Am I right to assume that majority of fee based income relates to new loans processing charges b) How much processing fee is charged and to what extent company incur additional expenses in processing each loan
  10. For retail segment [loans < 50lakhs], does the company takes personal guarantee and other collateral from MSME or like its equipment financing no guarantee & collateral is taken?

Future plans [next 3- 5 years]

  1. Loan disbursement growth in FY13 has fallen to 11% compared to around 38% in FY12. YTD growth in disbursement seems to be tepid? Is it planned slowdown or its result of economic slowdown in general and its impact on SMEs in particular?
  2. Does Company has plans to offer working capital and term loan finance on security of inventories and receivables etc. or would like to continue to concentrate on its niche of Machine based funding. [ In 2012 annual report â the Company mentioned that it intends to offer a bouquet of new financial products (including leasing) in 2012-13 }
  3. Target for future expansion of branches?
  4. What is the target AuM in next 3-5 yrs?

Funding

  1. Majority of loans funds of company seems to carry tenure of less than a year. This has led to huge mismatch of Asset-Liability over 1-3 year bucket. In this bucket loans funds are around 100crs but AUM is of more than 300crs. What are the plans of the company to correct this mis-match? Is it because banks are not willing to lend for period more than 1 year or because cost of obtaining loan for more than 1 year is high?
  2. To what extent recent changes in priority sector lending by RBI will impact companiesâ ability to secure funds from banks?
  3. Assigned or Securitised loans as at FY13 were at INR 38 crs. This is very low compared to other NBFCs, where its in the range of 10-15% or more. We understand that securitisation of assets under PSL norms offer attractive rate compared to normal bank borrowing. Then whatâs the reason that company is not able to securitise more amounts? [Probably its due to the fact that recent RBI amendment on PSL guidelines put a cap of 8% over Bank base rate for any assets to qualify under PSL norms, as company lend at much higher rate, it might not be eligible. But better to still confirm with company?]
  4. What is the off Balance AuM ? Whatâs the target for off balance sheet AuM?
  5. Fixed vs floating funding mix and whatâs the company target mix?
  6. Currently company is predominantly dependent on bank funding? Any plans to diversify source of funding [During 2008-09 crisis, NBFCs mostly dependent on single source of funding were hit hard most]
  7. Whatâs your target debt-equity ratio and RoA target in next 3-5 years?__

Expenses

  1. Legal & professional fee of 3.5crs in FY13 [FY12 only 1.4 crs]. Can you please explain the major expenses in this head.
  2. In 2012 annual report itâs mentioned that company source Business directly from customers and not channel partners. Then can you please explain about line item âBrokerage and collection chargesâ appearing in P&L. What and to whom brokerage is being paid? [Brokerage on deal origination or collection. Is collection outsourced?]

Accounting treatment/NPAs

  1. When is the interest on collateral paid/accounted for. [Quarterly or after repayment of loan?] And how the same is accounted in books [accrual or cash basis.] Is there any change in the accounting policy for accounting for interest on collateral expenses in the last 3-4 years?
  2. How the interest paid/accrued on collateral has historically been disclosed in P&L. Is it shown as deduction from interest income or shown under interest expenses.
  3. What are the plans to migrate to RBI tentative NPA rule of 90 days. Is the company still following 180 days rule ?
  4. What is the company policy on making provision for NPAs? [Most of the companies provide provision for NPAs much faster than RBI mandate. Need to find out if Intec also follows conservative policy and if yes, if its judgemental or there are clear quantitative rules laid down. This is very very important to know, else company can easily play with reported earnings by providing over/under provision?]
  5. What is the policy of company on restructuring of loan, where there is stress in account? After restructuring of loan, whatâs the accounting policy followed in recognising interest. Does company make any provision on conservative basis?__

Low liquidity in markets

  1. In 2012 annual report company spoken about listing on NSE. Whatâs the progress?
  2. Liquidity is very low, because major chunk is being held by strategic investors. Can you give some information on these strategic investors [Other than Motilal Oswal]. Are they family and friends or unrelated parties. 2) Individual shareholders hold less than 4%. Any plan to tap equity market to broaden the shareholders base.

All the best for meeting with management…

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