Fedbank Financial Services IPO Analysis

Fedbank Financial Services IPO Analysis

**SME and self employed focussed retail loans NBFC.**
86% of AUM secured

**Promoted by Federal Bank**

**PAT became 3 times in 2 years.**
**Loanbook growth at CAGR of 33% in last 3 years**

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Last day to apply today.

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**Business**

operate through 584 branches spread across 17 states, based out of Mumbai.

**Total Asset under management ( AUM) 9430cr**, 71% of which is from rural/ semi-urban towns.
**86% of AUM are secured against gold or property.**
Average ticket size 1.3 lakhs. Average Loan-to-Value is 51%.
Though they focus on the underserved category of retail loan , 87% of customers have an established credit history, 78% of them have CIBIL>650

**Total branches 584**

**Branches ( major states)**
Maharashtra 107
Gujarat 92
Tamil Nadu 77
Andhra 57
Telengana 49
Delhi NCR 38

**Top 5 states constitute 78% of AUM** of banking outlets in rural/ semi-urban areas.

**Products**

1.**Gold loans**

3.2 lakh gold loan accounts. 279 gold loan branch, 13 door step hubs
\- doorstep appraisal

2.**Small ticket LAP and housing loans**

\- self-employed customers with shops/ small busiess
\- salaried customers with a medium income
\- periphery of Tier 1 cities/Tier 2/ Tier 3 cities

3.**Medium ticket LAP**

\- MSMEs- including traders, wholesalers, distributors, retailers, self- employed persons/ companies
\- purpose – capital infusion,expansion of businesses, working capital, capital expenditure.

4.**Unsecured business loans**

\- self-employed professionals and non-professionals, and salaried doctors.
\- target customer segment- turnover of 1 cr per year and a minimum of five years of business experience in their current business

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**Industry overview**

**Rural areas, which account for 47% of GDP, received just 8% of the overall banking credit**.
According to the CRISIL Report, as of FY23, **MSME credit demand is estimated to be around Rs 117 lakh crore, of which 21% of demand was met through organized financing**.

**Gold loans**

India’s private gold holdings is highest in the world at 27000 tonnes ( vs China 16000tonnes).

**Gold loans Demand triggers**

1.to fund working capital and personal requirements for rural
2.doorstep gold loans model
3. gap between unorganized lender ( lends at > 30% pa) and organized lender lending rates
4. improved rural penetration of bank/ NBFC
5. emergence of Fintechs

Top NBFCs in gold loans are Muthoot Finance, Manappuram Finance, IIFL Finance control majority of NBFC gold loan market.

**SME Finance**

Prominent players focusing on SME Finance are SBFC Finance, Five Star Finance, AU SFB. All other major NBFCs , small finance banks are aggressively eyeing to grow in this segment.

**Drivers**

1.UPI led digital trails, online shopping, utility bill payments creating more data points
2. huge credit gap
3. sharp rise in new SME registrations in FY23
4. emerging fintech models partnering with NBFCs

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**Operating metrics**

**Loan book composition as on FY24 (Q1)**

Gold 33%
Medium ticket LAP+Housing 25%
Small ticket LAP+Housing 24.5%
Unsecured business loans 16%

Total AUM 19430cr
**86% of loanbook is secured**
80% of borrowing is from banks.

They follow a phygitail model for collections. Doorstep gold loans ( currently a norm in NBFC industry) helps de-leveraging branch network. Fedbank has partnered with 1796 channel partners to complement 584 branches to deepen their reach.

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**Financials**

Total FY23 revenues of 1180cr . PAT 180cr ( 3 times in 2 years)
Operating profit 310cr ( has become 2 times in last 2 years ).
**Impairments reduced from 71cr (FY21) to 49cr.**

Comparable peer is IIFL ( though yields of IIFL are much higher, one must compare it with discretion)

Gross NPA is 2.26% in Q1 (increased from 2.03% FY23) ( peers SBFC 2.43%, IIFL 1.8%, Manappuram 1.3%)
GNPA FY22 2.22% , FY21 1.10%
NNPA Q1 1.76% ( FY23 1.59%, FY22 1.75%, FY21 0.71%) ( peers SBFC 1.41%, IIFL 1.1%, Manappuram 1.1%)
**GNPA , NNPA has increased in Q1 vs FY23.**

Cost of funds 7.77% ( SBFC 8.2% , IIFL 8.7%)
Yield 15.7% ( SBFC 15.9%, IIFL 19.7%)
NIM 8.36% ( SBFC 7.7%, IIFL 15.8%)

Cost to income 51.5%
Credit cost 0.6% ( SBFC 0.6%)
ROA 2.3% (SBFC 2.9%, IIFL 3.3%)
ROE 14.3% (SBFC 9.9%, IIFL 9.8%)
CRAR 19.7% ( Tier 1 14.7%)

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**Points to consider**

1.Having strong parentage (Federal Bank as promoter) will help Fedbank financial services to scale operations and in terms of risk management practices.

2.Very fast growth ( 33% AUM CAGR last 3 years) of loanbook was possible as it is less than 10000cr, may not be able to replicate this.

3.Though present in 17 states, 93% business comes from 6 states. But this style of deepening presence in few states is better than having few branches in all states.

4.Most loans are given to MSME and self employed, so economic downturns may affect Fedbank business more than other diversified NBFC.

5.Competition has heated up in gold loans segment – apart from NBFCs , banks are going aggressive in growing their gold loan book. Same for SME Finance. **Deep rural network , non-traditional underwriting methods for sourcing unbanked customers will be defining competitive edge ( moat) for NBFCs like Fedbank Financial services vs others. As banks won’t compete for unbanked deep rural customers.**

**6.Small finance banks have similar edge of serving unbanked customers, and are growing SME loanbook fast as they are moving from unsecured to secured.**

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**Valuation**

Fedbank Financial Services is valued at Price/ Book ratio 2.57.
Peers IIFL Finance at 2.3, SBFC Finance at 3.6


View on r/IndianStreetBets by TheMoatInvestor


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