Kreon Financial Services aka StuCred......The Rising Micro Cap

ravish · January 26, 2023, 6:59pm

Introduction
StuCred -Instant Credit App For College Students in India, is the tagline of the company. FinTech in true sense and a unique business model of lending and empowering students with basic knowledge of Personal Financials.
Parent company Kreon Financial Services is a 25+ year old NBFC decided to start StuCred an App based fully digital loan providing company.
2 UK Graduated Brother and Sister returned to India with an experience of Overdraft facility for students studying in UK universities. New blood has taken over from old, Jaijash Tatia and Henna Jain Tatia are now steering this Fintech startup which is profitable and is a rarity in Fintech world.

About Business
Kreon has a legacy NBFC biz which they are downsizing and focusing more on Digital lending App. I will not go to legacy lending biz as i did not dig deep in to it.
2-1-0 Lending
2- Min Authentication 1- Min Credit Transfer 0- Human Interference

Commercial Lending Division- Interest Income + Dividend Income + FD Interest
Digital Lending Division- Fees & Commission + Penalty Income
Digital lending is possible due to UPI & IMPS & E-Aadhar
About App

One also need to notice that the loan tenure are very short 60-90 days so they have to be on their toes for growth. Have to give loans multiple times to the same students in a single year apart from getting new students onboard. Which a weakness in my view.

Extracts from ARs and Company update

Change of management started in year 2018-19, young siblings took over KMP roles.
launch of StuCred App on Vijayadashmi. Banking partner YES Bank.
Loan during lockdown 20 million, 6000 students and 10000 number of loans
Partnered with PayTm as trusted merchant lender.
Approved 3.75 lac equity share at 20Rs to Jaijsh against loan.
Approved 4.25 CCS at 100Rs later changed it to 3.1 lac share against loan by Jinpad Dev related party.
5 Lac Digital transaction till SEP-21 and Tie up with ICICI Bank
Considered rights issue but dropped it and issued 95 Lac warrants to promoters at 21 Rs so total 19.95 Cr would come to company in next 18 months updated on 28/10/2021
Total share after all the preference, CC and Loan converstion- 2.0246 Cr **So current market is misleading it is double of what it is **
Company is investing in developing new app for wider segment that is the Hint of Footprint expansion.
Propose to change of name to Kreon Fintech Ltd
Launch of New products Cross sell and up-sell to existing good customer.
Started Alumni program.
Expansion so moved to new office in Chennai.
Timeline: Registered Students
6000 Year March 2020
60000 Year June 2021
100000Year Sept 2021
300000 Year June 2022 (Henna Jain Tatia on her Linkedin)
500000 As per my notice around Aug
1000000 As per current status on Play store

WhatsApp Image 2023-01-13 at 19.49.401600×720 50.4 KB
Credit Rating for Proposed Fund Raising BB/Stable
https://www.brickworkratings.com/Admin/PressRelease/Kreon-Finnancial-Services-15Sep2022.pdf

Financials

Hiccup in profit profile during latest Sep-22 Quarter is due to change in accounting for Intangible asset under development ( App development is a ongoing process), increase in salary and increase in Rent (new office space). All these expenses will have lower impact going forward on profit.
What i like in this biz is its profitability and return ratio. They may grow without borrowing which is phenomenal in itself. Also monthly revenue growth rate is in higher single digit which is very encouraging and not going down till now. As per my calculation they are about to cross 1 Cr + revenue/ month in Jan-23. Due to short term nature of this biz one should understand that Loans and Advance in balance sheet is not throwing full light on the disbursed loan during the year or quarter.
Lets see that March-22 balance sheet shows Loans as 13 Cr ( as per my observation StuCred is disbursing more than 16 Cr per month now) but as per credit report
The total income from operations for FY22 has increased to Rs 3.82 Crs from Rs. 1.71 Crs for FY21 due to consistent fresh disbursements made in FY22 of ~Rs.28.23 Crs and total disbursements of Rs. 39.77 Crs. ROA and ROE have improved to 3.43% (FY21:-1.20%) and 6.87% (FY21:-6.23%).
So if we go by credit rating’s analysis of net NPA is 4% so it is only 52 Lac on total disbursement of 40 Cr. More can be analysed after looking at below AR info.
Kreon.pdf (443.6 KB)

Management
While looking at a microcap it is most important thing. Jockey will only decides the success and failure of business. Again i did not study old guard but just googled and referred AR for their qualification.
Mr.JaijashTatia is a business graduate from Regents
University, London, specializing in Financial Economics
and Business Management consisting of various courses
including Asset Management and Risk Management. He
has undergone various additional modules such as,
Managerial and Financial Accounting and Statistics at City
University, London, United Kingdom. The Company is
benefited from the knowledge and expertise of Mr.Jaijash Tatia.

Ms. Henna Jain ,flourishing young entrepreneur, she has been one of the team members at the helm of StuCred since August 2017, and has been positively contributing to the areas of marketing and business operations. She holds an MA (Hons) International Relations and Economics from University of St Andrews, Scotland. In an effort to constantly expand her knowledge and expertise, she has completed 3 advanced level online courses in Marketing, specialising in Social Media Marketing from Northwestern University, USA

When there was tough times during covid this is what management did to cut cost

Salary + Intangible asset under development(App development charges):

FY19-20- 1.9 cr
FY20-21- 1.57 cr
FY21-22- 1.72 cr
HY22-23- 1.22 cr
Henna is not taking any salary till now and Jaijash salary was 24 lac, 12 Lac and 24 Lac for last three years. New remuneration for Jaijash is 60 Lac PA.
One can see that management at top is competent to run this biz.
Miscellaneous

I could not find any listed pure App based lender if anyone know please post here.
There are lot of App based loan company and it has to compete with them likes of mPokket,
Total addressable market is more than 3.3 Cr students in India (Higher Education).
Some old article on StuCred
https://yourstory.com/herstory/2020/04/woman-entrepreneur-fintech-college-students-loan
Kreon Finnancial Services launches mobile app - StuCred | Business Standard News
Creditor Queen
No more financial woes for students thanks to Chennai-based startup- The New Indian Express
I tried connecting company but haven’t got any reply yet if anyone can get in touch with the Management then it would be great help for understanding more about their vision.

Valuation
I would like to discuss and know more about the valuation it may command. I could not give it valuation so its open for discussion.
Current Mcap= 100 cr (after taking dilution)

Risk Analysis

High cost of funds.
Rising NonPerforming Assets (NPAs).
Competition from other NBFCs and banks
RBI is taking very proactive measures and laying rules and regulation for new age Lending biz. Complying those updated regulation is the key to success. Recently RBI have put ban to some App based lending companies citing non-compliances.
I am not a fan of Related party transactions and kreon has many related party transactions and high cost borrowings from its related party, i see it as a risk.
In Nov-22 App went offline due to some issues and management was not able to fix in fast it took some days so depending upon IT Tech and robust IT Infra is must for such type of companies. Though it was a first instance.
Any restriction by Govt on uses of Aadhaar based KYC or digital infra build by Govt will permanently damage the biz. So its also a risk.
In my limited understanding current growth is self sustainable through internal accruals and dont need external funds to the tune of 25 crore out of which 15 cr will come before july 23(share warrants) and proposed fund of 10 Cr. So unnecessary equity dilution is not good for a borrowing biz. Equity is the most important thing in lending biz selling it cheap will deter me from investing.

Disc: Holding

starpointer97 · January 30, 2023, 1:54pm

Hello Ravish,

Thanks for identifying this company.
Charging a flat 6% fee for the disbursed amount, deducting it from the loan amount itself and keeping the loan amounts small so that these 6% fees don’t pinch the students is a neat business plan. Plus, it helps the students to start having a credit score. So, parents may also be incentivized to allow the students to use this mechanism once in a while to create their credit profile.

However, there are 2 concerns for me

A few students taking a drastic life-taking step because of the loan recovery mechanism or any other factor may cause RBI to put an end to these type of practices. Such things have happened in the past.
I went through the company’s Annual Report and nowhere did I find any mention of the delinquency rate or GNPA/NNPA. If we go by the BWR credit rating report, the company has a GNPA of 4.36% and NNPA of 3.97%. This also means that the company has made provisions of just 10% of the Gross NPA which is a very small percentage.

What are your thoughts?

ravish · January 30, 2023, 5:25pm

My take on your points
1.I dont think for 10000 Rs any student will go for a extreme step and even company must not go to extreme level to recover money. Also complying to RBI is the only key to success in long term for any Digital lending biz. One may also argue that for a student to be eligible for a max 10000 Rs he has to borrow multiple times and he would have given back a lot of profit to company to take care of future leakages. Business models are made up after doing all these analysis of max NPA hits they can take to survive for next year and in its case they have a lot of room to survive. Just look at APR( An annual percentage rate* is expressed as an interest rate) its 72%.
2. As per AR FY20-21 100% provision is made for NPAs for FY19-20 of total amount 2.8 Lac only.
For FY20-21 max NPA is 28.30 Lac and provision done is 2.8 Lac.

For FY21-22 10% provision for NPA is 5 Lac so max NPA would be 50 Lac which very much acceptable in IMHO.
Delinquency information is very well mentioned in the AR please see below.

Have i answered your queries in a proper way?

Q: I need to know how this biz is valued?

ravish · February 5, 2023, 4:51pm

This step by Govt. is a boon for StuCred type of Indian App, as i wrote earlier the better the compliance regulation better will be the opportunity for StuCred.

Just read this news and think that these App based loan provider dont want to do lending biz but just want to create social fear among the lenders/borrowers. No App which is operating under the regulation of RBI would do this to their client.

ravish · February 12, 2023, 3:44am

Q3 FY-22-23 Result update
Results looks good and are in line with my revenue estimation (as per monthly update data). If we go by their past performance they have underperformed and that is not due to some slowdown but due the Downtime of their App in NOV month so they could not grew MoM during that month. Again in its 7-Feb update they have mentioned about UID downtime and it has affected its operation. This frequent glitch is not acceptable as it is a Digital only biz. Salary and Depreciation as a percentage of expenses has gone up and was expected due to new office, increased salary of Jaijash and new recruits. These expenses may stabilize sooner then later and profit matrix should improve from hereon. No update on Stu Cred Alumni biz segment, i think if Growth in AUM > revenue from traditional trends then i think they have started Alumni biz. Lets see what happens.
Disc: Holding

ChaitanyaC · February 12, 2023, 10:07am

I know nothing about the business, I did not check either. But as with a lot of micro caps the daily price movement has wild swings, so SHP has to checked to see the people who hold the shares as public, considering no institutional holding.

ravish · April 1, 2023, 3:13am

Conversion of warrants have been started by Management, Kreon just got 5+ crore rupees from Promoters and others. Remaining 14 crore form warrants should come before July-23. Lets see what happens. They have just launched StuCred Discord Chat room.
Does anyone have any idea about Discord Servers?

Company have stopped giving monthly update and i have sent mail regarding that but no reply from them as usual.
Disc: Holding and adding in very small quantity

sougataG · April 1, 2023, 6:18am

Discord is a Messenger app like Whatsapp, telegram, etc, with a lot more flexibility and capability. A discord server is somewhat like a WhatsApp group, but you have different channels within that group. Say one for group members to interact, another for product announcements, and so on. It started as a messenger app popular with gamers but has steadily grown its userbase from gamers to the WEB3 community and now to the AI community.

ravish · May 23, 2023, 5:58pm

Result is not good so i am not posting it in details just link

and as i mentioned earlier, company has stopped giving monthly update so in a way it was anticipated from me that there will some not so good update. I am disappointed because there is not any commentary or update even with yearly results. Microcap’s success is mostly dependent on the promoter and from my observation Kreon’s New Gen Promoters are also behaving like their olds. I am still invested and interested in this because promoters are also infusing money through conversion of loans in equity and preferential shares.
I adding some screenshots to track the installation and popularity of APP

Disc: Have not traded recently.

ravish · August 25, 2023, 3:06pm

Just for disclosure purpose i have sold my all position Of Kreon Financials because lately i came to the conclusion that it will definitely grow but the rate it will grow will also be awesome but the Base from which it has to scale, will take few more years to give a meaningful sense to its valuation. Also i think that the Cycle of recognising and seasoning of NPA is also need to be seen.

Disclosure: Sold my positions.

krishh · February 10, 2024, 8:13pm

Results don’t look too good. Company finally wrote off 4.78Cr as bad debt, the biggest part in their expenses leading to a loss making quarter.

Disc. Holding a tracking postion.