SG Finserve Ltd - Does it has a scalable business?

About the Company Past - Management change

SG Finserve Limited (SG Finserve), originally established in 1994, has an NBFC license and is also registered as a SEBI broker. Earlier, SG Finserve provided a wide range of services associated with Broking, Distribution, Investment Research, Online Trading, Wealth management, Investment Banking and Insurance. However, the company had ceased to do any business in the recent past. The promoters, Mr. Rahul Gupta and Mr. Rohan Gupta acquired 56.25% stake in SG Finserve on August 20, 2021, post which an open offer was made which concluded on July 22, 2022.

Company Present

  • SG Finserve, an NBFC, was started to cater to the funding requirements of the dealers of APL Apollo Tubes and vendors of APL Apollo Tubes in its first phase of growth plans.

  • In the next phase of growth, SG Finserve intends to cater to the distributor network of the dealers.

  • In Q1 of fiscal 2024, the company has disbursed Rs 4207.6 crores and collected Rs 2964.9 crores in the same period. The AUM as on June 30, 2023 was Rs 1242.7 crores.

  • The APL group will extend support to SG Finserve in terms of details around the dealer network which would form a critical component of the underwriting process as well as enforce stop supply in the event of any delay from the network of APL Apollo.

Risk mitigation Techniques in lending
Typical lending companies take collateral to reduce risks.

Let us understand its risks

Screenshot 2023-11-05 at 3.48.50 PM

558 borrowers and 3807 Cr disbursements in a quarter. Definitely, it is huge concentration risk.

One way how they seem to be managing risk, is through reducing the duration of loan. As even after lending so much, there AUM is still near to 1000 Cr.
Screenshot 2023-11-05 at 3.53.38 PM

Other risk managing techniques taken by SG Finance →

Vendor financing - the NBFC will also provide bill discounting facilities to the creditors of APL Apollo Tubes Limited (AATL). The facilities offered will be for a tenor of upto maximum 90 days with an ROI of 11% to 15%. Here the risk mitigation resolves around the health of the AATL and no drastic increase in its payable days. Anyways, there is huge concentration risk on one company that is APL Apollo from vendor financing side but obviously they seem to be confident of their APL Apollo tubes business.

Dealer financing - AATL has a vintage of these dealers of over 3 decades and for the last decade the bad debts within AATL have remained within 0.2%(Source: Crisil credit report). Hence they seem confident of dealer financing.
Considering AATL(APL Apollo Tubes Limited) has the market dominance with 50 percent market share and is only manufacturer of certain tubes in the world(Source: Q4FY23 investor presentation). They have planned to use their dominance for recovery by stopping new supply of materials to the dealers.(Source: Crisil credit report)

Retailer financing(Not yet started it seems as per Q1FY24) - Here will be system integration and stop supply arrangements with the dealers wherein the dealers will also provide an FLDG of upto 20% for the loans given by SG Finserve. First Loss Default Guarantee(FLDG) means that initial upto 20 percent loss in loan needs to be taken by dealers who are giving the loans to the retailers.

Real Industry TAM And Growth
MSME lending is TAM is obviously huge but will they be able to manage risk same way as they are doing in case of dealers and vendors of the APL Apollo.

Total AUM potential in case of APL Apollo vendors and dealers -
Vendors -
Considering 40 payable days, payable turns = 365/40 ~ 9
Average Payable Amount = COGS/9 = 16000/9 ~ 1700
Annual AUM from the vendor invoice discounting = 1700 Cr

Considering the dealers and retailers also take the loans for similar period, hence total AUM potential = 1700*3 = 5400Cr.
Considering 1000 Cr current AUM through financing to dealers and vendors of APL Apollo, potential of 5400Cr AUM does not look big enough.

Though if it expands its business to vendors, dealers and retailers of other companies, its TAM might increase but will it be able to employ same risk mitigating techniques as it has now for its current customers?

Financial Metrics

ROA Tree from Q4FY23

Current ROA(Annualised) as per Q2FY24 = 4%
They seem to be have very low gearing ratio which is understandable considering they are still testing their business which has led to low ROE.
Its current Equity is 759 Cr.
Here though again, we need to think, will it be able to scale its AUM maintaining similar risk profile to increase its ROE.
They have a good ROE potential if the scalability of the business considering the risk mitigation metrics can be ascertained as to increase the ROE they need to increase the leverage ratio(also called gearing ratio).

Source of Funds
Equity and some from banks under group entities corporate guarantee.

One interesting thing to research.
In their investor presentation they seem to show below page.

Where does these non group companies comes in the lending value chain?
Am I missing something?

I have not done the management analysis(though can be seen from APL Apollo Tubes thread). I have assumed the management is good considering APL Apollo parentage.
MOAT, Competitive analysis and Valuation comes after we can ascertain if their business is scalable which is still doubtful.

Disclosure - Not invested and please verify from your end.
Have not analysed many financial companies and hence the fundamental errors can there. Please correct if it is there.
Based majorly on CRISIL ratings.

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Already there is thread for this stock. SG Finserve - is this birth of another Bajaj finance?

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I think, SG finserv is good proxy to Manufacturing capex.

Major issue with major companies is funding at Working capital shortage in Retail sellers. SG finserv is targeting only working capital loans which are backed by anchor companies. This itself is major Moat.

Disc : Invested

Can you explain this?
I am under assumption that they are currently targeting the supply chain members of apl apollo. Has they started targeting other companies creditors and dealers?

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In attached pic, all companies are anchor customers. Yes, currently they are 18-20 anchor customers.

Is there any concall or something where they have declared it?
As I can see from recent crisil credit report(Rating Rationale), they only talk about apl apollo value chains.

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As per Dec 2023 shareholding info, Ashish Kacholia has entered the stock holding 6,28,366 shares or 1.14%. I could not see his name in the previous quarter.

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