Hi Ramesh, great to know you have some working knowledge of a lending institution, makes for an interesting discussion 
I will try to answer your questions, but be prepared for long answers 
- I went through data to indicate is there is correlation between a NBFCâs loan portfolio size and the number of banking relationships it has, well, there is negligible correlation, there is a stronger correlation between the areas in which it operates (Metro, Urban, Semi-Rural, Rural)
To get this answered, I talked to one of the larger 2 wheeler financing companies in Delhi, the feedback I received was as follows -
a) They have 11 banking relationships, banks approached them in almost all cases, something about how monitoring loans and keeping a check on numbers and discussions is much easier for the banks as this particular company is operating locally in Delhi
b) I asked him that if your main office was in Delhi and you had 20 branches in rural areas of Haryana, would the attitude of the banks be the same, the owner told me this would make due diligence for the banks tougher, they would not be interested, infact the company would have to approach the banks for loans
Like you rightly mentioned, the company can show breakout performance once they start getting term loans, I think management is cognizant of the need for this, hence the effort to get a rating done for the first time in itâs history, there are not many NBFCs with 50 crore loan portfolios which would approach rating agencies and get themselves evaluated unless they thought -
a) The rating is going to help them to grow much more
b) Their aspirations were much higher than current performance depicts
c) They are not happy with their current financing arrangements
If you read past ARs, you will see management talking about how Banks are not happy lending to NBFCs and how they are trying to tackle this problem by getting a ratings done, this shows a longer term orientation since they are not hiding their weakness but telling us as shareholders that we are facing this problem and this is how we are trying to tackle this
You will see a pattern in the ARs, they repeatedly talk about deep business problems which other companies would not share and then share about how they are trying to solve them, and then they go ahead and do those things
I think that since the loan book has grown by 20% in 2015, we can wait for the 2015 AR to decipher what means of financing were used to grow this fast since now they base was much higher than in the past
Well Capitalized Balance Sheet - We can call a balance sheet well capitalised if the company had been leveraged 2-3 times and then the promoter pumps in equity to bring down the D/E, thereby enabling growth - Your point becomes valid once the stream of term loans start
The linking up of branches with Databases, Digitizing Records, Ratings are all leading indicators to this company preparing itself for the future, and the future includes getting better capitalized with the right financing structure, the current structure is very conservative or maybe too conservative, but hey, I am not complaining, the fact that the promoters have pumped in their own funds to support business growth makes me very happy and relaxed, if their business policies were shady or their operations were not upto the mark, I do not think the promoters would do what they have done
I come back to the same point I made earlier, with so many handicaps the growth rate has been above 20-25%, I mean, if you told me all these handicaps and then asked me how much do you think an NBFC would grow, you can be rest assured the answer would be much lower than these guys historical growth rate
The rating being BBB- has a lot to do with scale, otherwise if you reread the rating report, ICRA talks about their strengths and actually does not come out with anything negative, I have not read such a small company getting so many compliments from a ratings agency
Let us the number of positive things said -
a) long track record of operations
b) sound local knowledge of the management
c) a strong dealer network built in over past 15 years of operations
d) ability to maintain robust profitability indicators
e) consistent dividend history
f) comfortable capitsalition levels
g) high yields and controlled operating costs
h) strong Return on Equity
i) company has developed strong tie-ups with local dealers/sub-dealers for business sourcing
j) tie-ups with the scheduled district cooperative banks for collections at all locations where they operate, which improves the operating efficiency as well as reduces the risk of cash handling at the branch.
k) follows prudent credit policies
l) company insists on house ownership in case of all loans
m) given the sound credit policies, the company was able to keep asset quality indicators under control
n) experienced recoveries from harder delinquency buckets as well.
o) supported by higher yields earned while operating in relatively riskier, middle and low income segment and controlled operating expenses owing to centralised management and sourcing at dealer locations, and reasonable credit costs
p) derives comfort from a high capital support extended by the promoters in the form of debt as well as equity
Not to make this too one sided, let us note the negative things -
a) modest scale of operations
b) geographically concentrated operations
c) stress noted in the asset quality indicators during FY2014, albeit with some moderation
Now to discuss each point one by one -
a) They are growing, with the effort and changes made, they should not have a modest scale in sometime, it is not as if the company has an aversion to growth
b) Geographical Concentration is a necessity if they want to be sensible, this business requires Focus and deep territory knowledge, if they were spread over 5 states with the same business size, I would be worried, I consider this a big positive, they have enough headroom for growth in these 2 states, they have a long successful history of operating here and to add further perspective, Gujarat grows cotton and Maharashtra grows sugarcane, these two commodities have been in the dumps for a very long time now, but this company has grown by making these - 12-24 Month loans, with house ownership, with Low LTV% - the only reason they can do this is because - deep focus + territorial knowledge
When I read the ratings report I thought ICRA was saying I Love you to Shalibhadra, but I think ICRA wants to marry after Shalibhadra maybe grows a little more mature, and Shalibhadra is on the way already !!! Yay, happy union awaited !
