Buy Spandana Sphoorty Financial, target price Rs 800: Yes Securities

Yes Securities has given a buy rating to Spandana Sphoorty Financial Ltd with a 12-month target price of Rs 800.

The brokerage says Spandana reported robust AUM growth of 16 per cent quarter on quarter and 56 per cent year on year in Q4 FY20. Disbursements grew by 67 per cent year on year notwithstanding Covid induced distortion in March. The borrower base grew 5 per cent quarter on quarter, after being static in preceding three quarters.

AUM/Borrower jumped 11 per cent quarter on quarter and 50 per cent year on year to Rs 26,600, still materially lower than industry average. Branch addition remained calibrated with a steady ramp-up in the number of loan officers per branch. Opex/Avg. AUM ratio came-off further and stood at 3.9 per cent. The company has made additional provisions of Rs 1.29 billion (2.75 per cent of on-BS loans) for potential Covid impact. Even adjusted for it, the credit cost was sequentially higher due to write-off of the impacted portfolio in coastal Karnataka (adverse external influence) and Maharashtra (hit by floods).



Investment Rationale


The brokerage built-in a near worst case scenario of 10 per cent AUM growth and 9 per cent credit cost (on opening on-book portfolio) in FY21. FY22 should be a normal year, but it has factored a higher than usual credit cost.

The brokerage is positive about profitability/growth normalization in FY22, robust CAR (supportive of liquidity position) and attractive valuation.

Spandana trades at 1 time /5.6 times FY22 ABV/EPS. Valuation will be most sensitive to the collection experience in the coming months

Risk to the call is prolonged Covid episode and a large scale moral hazard issue.

Promoter/FII Holdings

Promoters held 62.57 per cent stake in the company as of March 31, 2020, while FIIs held 11.62 per cent, DIIs 4.67 per cent and public and others 21.09 per cent.