No impact. Prudent exercise by management to create confidence in Foreign investors on repayment assurance.
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I agree with this analysis, I am getting veey similar figures. I assumed a networth of 25k but it all depends on dividend payout. Anyways, PAT is expected to be min 4000cr.
Given all this, I am very surprised at why DIIs are not showing interest. What is the anti thesis here?
I do not see any capital risk, maybe lower ROA but with Aset light model, ROE is more apt. Eitherway, I do not understand the downside risk that market seems to be assigning here.
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The company has Rs 37,380 Cr of legacy loans (housing + developer finance) on their balance sheet as of June 2024 as per their Q1 earnings update. The market seems to be saying that all of this book will likely go bad (maybe thatâs why they havenât been able to unload it yet in the first place) and given their track record of 70% recovery from bad loans, the hit will be to the tune of Rs 11,000 Cr. Hence, discounting the same from their current net worth of Rs 20,000 Cr gives you Rs 9000 odd Cr of market cap.
However,
a) the company already has imputed provisions of Rs 6000 odd Cr from the written off pool which the market is not accounting for, and
b) not all or even a majority of the legacy book is likely to go bad (my opinion)
Nevertheless,
The management seems to be indicating that a substantial portion of the legacy book is likely to be unwound after requiring some provisioning and thatâs why there is no talk of write-back of provisions from the expected recoveries (and all the jargon around âtacticalâ actions to reduce the legacy book which is nothing but another way of saying that we will require to provide for some part of the outstanding legacy loan book before either offloading it or running it down over the normal course of loan repayment)
Lastly,
All of this ultra cautious approach could also be a ploy by the management to keep the share price depressed till 30-Sep-2024 when the optional put option will be exercised by the FCCB holders. If the share price were to rise before that, the FCCB holders could simply exercise the conversion option and add 5 Cr shares to the already large number of diluted shares after the Rights Issue. The FCCB conversion price is somewhere in the handle of 200 Rs per share but am not sure.
The management is also working on another ESOP plan which was approved by the board in Feb 2024 but implementation was deferred till after all the name change and KRAs for performance evaluation (the eight metrics they started reporting on since Q1)
were implemented. Lower the stock price, lower the strike price for their ESOPs since ESOPs are awarded at the market price of the day to avoid P&L hit.
My take on business performance going forward -
The increase in profitability will be gradual but steady over the course of next 8 quarters. The management will ensure that there are no surprises on the positive or negative side going forward. Not sure about the figure of 4000 Cr p.a. as I still donât understand how the ROE of 18% will be achieved without substantial leverage. If the 18% ROE is after accounting for provision write-back sometime after 2027, then it is not sustainable.
At some point well within the next two years, the market will get enthused by the steadily rising asset light AUM and earnings as well as reducing legacy book and assign a higher book multiple to the share.
Disc: Invested with a large holding
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Thanks for the detailed response. IMHO as well, legacy book issue must have been known by now for most part of it. There is no incentive for management to hide a big negative surprise until later.
As for FCCB, I think it was like 240rs. In one of previous con calls, MD mentioned that he is confident about foreign lenders converting them to equities. He put it as positive and they are confident in the business, etc etc. It was when the share was above 200rs. Lets see what happens. We will know soon.
I have not thought about leverage due to asset-light model. Donât really know how much % percent co. will keep in its balance sheet for each of partner banks. But 1 lakh crore is indeed a decent growth number with 18% ROE.
Management ESOPs is a great motivator for sure. For all these troubles, none of senior management left the company. There must be some good incentives in play.
p.s: Invested.
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Hi,
Here is a rough calculation of how the FY2027 numbers will look like taking managementâs word. In my view, without accounting for write-back of provisions, the company canât have anywhere close to Rs 4000 Cr PAT. Further, without considering substantial leverage (much higher than the 2x gearing the company is guiding for), 18% ROE from ongoing business cannot be generated.
Comments and critique invited
Excel Attached
Sammaan FY2027.xlsx (12.2 KB)
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Thanks for insight by learned contributors.
Can someone also project Book Value for FY26 or 27 with all foreseen Equity Dilution ?
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Thank you Mihir for your views and the crisp analysis in the thread. A couple of things standout for me from the excel sheet that you shared. Shouldnât a sub 2x gearing on an equity of >20k Cr be easily more than >30k Cr? That should hopefully help with a better RoE than projected by you.
The estimate of 1800Cr PAT in FY27 just gives a PAT CAGR of 15-16%. The current PAT is already in excess of 1200Cr. So, essentially you are saying that someone should be investing more for the market to re-rate the stock and not so much on the earnings potential?
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FCCB holders holding USD 134.3 mil of the outstanding USD 135 Mil have sent in their Put notices ahead of the Optional Put Date of 29th Sep 2024 as per the latest communication by the company. So a major overhang on issuance of additional shares have been removed.
[https://www.bseindia.com/stockinfo/AnnPdfOpen.aspx?Pname=2c570ed2-0c66-4147-8e1a-a4e607b29fe6.pdf]
Increasing the debt can happen in one of the two ways
A) AUM remains at Rs 105,000 Cr which means managementâs claim of asset light is breached. Management has guided that only 35,000 - 40,000 Cr will be on its books as of FY27. Eventually only 20% of AUM remains on the companyâs books as part of the asset light model
B) AUM rises substantially above 105,000 Cr (in the range of 130,000 - 150,000 Cr) by end of FY2027 while on book assets are in the handle of 60,000 Cr. I am not too sure about this.
As to your other point about rerating, my view is as follows:-
Market re-rating will happen on account of a) improvement in earnings from 1200 Cr to 1800 Cr, and more importantly, b) improvement in the quality of earnings. Todayâs 1200 Cr earnings quality is of a much inferior value considering the provisions not yet taken on the legacy book. Assuming even a 10% incremental haircut on the legacy book of 36,000 odd cr, it amounts to additional provisions for FY25-27 of Rs 3600 Cr (which incidentally is also the amount of rights issue fundraise by the company). Dividing this over 3 years will equate to Rs 1200 Cr provisions per annum to write down the legacy book. Hence, the market is probably not valuing current earnings adequately (or at all) expecting this hit at some point in the next couple of years unless management can show its ability to wind down the legacy book without any incremental provisioning
On the other hand, the quality of Rs 1800 Cr earnings of FY27 would be much superior as all of that will be coming from the asset light business where the underwriting is vetted by the company and the partner bank. The testament of that quality will be in the 30-40% dividend payout to the tune of Rs 8 - 10 per share.
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Thank you for the explanation and sharing your views Mihir. It just feels like if the guided RoE of 18% isnât met then the market wonât hesitate in punishing the stock again.
There is a further nuance here. The company has not guided for an 18% ROE on its net worth. The company mentions âincremental ROEâ of 18%. I would read it as 18% ROE on that part of net worth which is deployed in the asset light business.
Starting with FY27 asset light AUM of Rs 100,000 Cr. Of this, Rs 40,000 Cr will be on the companyâs balance sheet. Further assuming a gearing of 3x (upper end of companyâs guidance), the net worth deployed in this line of business will work out to Rs 10,000 Cr. 18% ROE on this would mean PAT of Rs 1800 Cr which will translate to incremental retail ROA of 4.5% (well above the 3.2% for FY27 guided by the company in its latest presentation).
Even their Q1 numbers on ROA and ROE donât add up without assuming substantial leverage. Company presented Q1FY25 incremental ROA as 2.9% and incremental ROE as 15.3% (slide 5, Q1FY25 deck). This means that the asset light business is operating at a gearing of 4x (even as the gearing for the company as a whole remains at 1.9x).
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Thanks a lot Mihir for all the data and explaining the numbers in detail. It would be good to actually get a view from the management on how much of the net worth would be deployed in the ALM line of business. That would just easily help in understanding what PAT should we be looking forward to.
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Thanks Mihir, for such detailed analysis. My sense is management has lot to prove in future ahead (including incremental business and expected return).
Unless further clarity emerges from legacy book, re rating looks distant probability.
Disc. Invested with large allocation
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Still how they will reach the PAT of INR 4000 by FYâ27 is not clear. The Path is a bit unclear.
Even if we take NIMs of 4 percent on book assets of 40k cr - INR 1,600
plus 1 percent on total AUM of 1 lacs cr - INR 1000
plus 0.5 percent processing fee on incremental disbursal - say 150-200 crs. (On disbursement of 30k crs)
Revenue sum barely reaches 3000 crs and on top of that you have Opex and credit costs.
In all scenarios it ends up in range of 1800-2200 crs.
Is there any other fee or income that comes in case of colending?
Do they get some additional revenue share if they are originating, maintaining and collecting from the customers? Logically, they should be getting some additional share for ops purpose.
Also, in my knowledge, when you give FLDG to the colender then you tend to get higher share in the arrangement (at tandem your credit risks shoots up).
Can someone help to solve this piece of puzzle.
@Ballaji_Vijayan @Mihir_iitr @Vineet_Bhatia and others.
Disc: tracking position taken
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Not sure why we are fixated on the figure of Rs 4000 Cr. Simply put, On Book Assets of Rs 40,000 Cr (for co-lending AUM of Rs 100,000 Cr) will require an ROA of 10% to generate a profit of Rs 4000 Cr which is absurd.
Letâs look at this from another lens - that of the total pie available to divide. Assuming total loans outstanding of Rs 100,000 Cr in FY27 given out at 8.5% rate of interest (remember, this is the most prime customer out there). Further assuming cost of funds for the partner bank at 6.5% and for Sammaan Capital at 8.5%, the total pie of gross profit available for distribution between the bank and Sammaan is as follows: -
Interest Income - Rs 8500 Cr
Fee Income @ 0.5% (origination of Rs 35,000 Cr) - Rs 175 Cr
Total Income - Rs 8675 Cr
Interest Expense (Bank) - Rs 5200 Cr (6.5% on 80% of AUM)
Interest Expense (NBFC) - Rs 1700 Cr (8.5% on 20% of AUM)
Total Interest Expense - Rs 6900 Cr
Total Gross Profit available for distribution - Rs 1775 Cr. Whichever way you slice it, the total gross profit cannot be more than what the customer pays minus the cost of funds.
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Expecting gearing to be 1.5-1.6, ROE to be below 12% for next 3 years, future 3 profits and any sell down of legacy loans to counter the writeoffs of legacy loans. ( this will be off PNL) like they have been doing.
M not focussed on what revenue it will make, i am more focussed on how book will be cleaned. Because thats where profitability metrics will change⌠It needs 3 years to do all of this.
I doubt investors today in this market has that much patience.
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I see a doubler in 3 years and legacy book reflection in presentation is a combination of good and bad loans(mostly provided).
Smart accumulation already in progress as Plutus has increased holding along with PAC.
Gagan is maintaining silence in media and I feel he will make numbers talk.
I am optimistic and invested for long term as market cap of 0.54 book value has more than proviosioned ofr any doubts and things can only improve from here
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Can the op or @Administrator change / add Sammaan capital to the thread name please?
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I hope so⌠When do you see we will get clarity on Legacy book ? Kind of valuation this company has it also seems it is an easy target for acqusition by big player. Only two points which are concerning me a) Quality of legacy book & b) No skin in the game (This matters most for small to mid size company)
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How integral is Gagan Banga to Sammaan? He seems to have stuck with the company through its downturn. I am hoping he will continue to stay with the company.
How is Sammaanâs ESOP diluting the existing shareholders? Which companies in India have sensible ESOPs where the strike price makes sure that the management takes up skin in the game without diluting the share holders too much?
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