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Buy SBFC Finance; target of Rs 125: ICICI Securities

ICICI Securities Recommends 'Buy' on SBFC Finance with Target Price of Rs 125

In a detailed research report, ICICI Securities has initiated coverage on SBFC Finance, a non-banking financial company (NBFC) specializing in small business loans, with a strong 'Buy' recommendation and a target price of Rs 125 per share. This optimistic outlook is grounded in the company's robust business model, impressive growth trajectory, and potential for sustained profitability in the competitive MSME lending space. SBFC Finance, which went public in 2023, has quickly established itself as a key player in providing secured loans to micro, small, and medium enterprises (MSMEs), particularly in underserved markets. The brokerage highlights SBFC's unique positioning, leveraging a mix of physical branches and digital capabilities to tap into high-yield lending opportunities while maintaining prudent risk management practices.

SBFC Finance operates primarily in the secured MSME lending segment, focusing on loans backed by property collateral. This approach minimizes credit risks compared to unsecured lending, which has been a pain point for many peers in the industry. The company's asset under management (AUM) has shown remarkable growth, expanding at a compound annual growth rate (CAGR) of over 40% in recent years. ICICI Securities attributes this to SBFC's strategic expansion into semi-urban and rural areas, where access to formal credit remains limited. By targeting self-employed individuals and small business owners with loan sizes typically ranging from Rs 1 lakh to Rs 30 lakh, SBFC fills a critical gap left by traditional banks, which often shy away from such borrowers due to higher perceived risks and operational costs.

One of the standout aspects of SBFC's operations, as per the report, is its efficient cost structure. The company maintains a low operating expense to average AUM ratio, which stood at around 4-5% in the latest fiscal periods. This efficiency is driven by a hybrid model that combines a network of over 150 branches with advanced digital underwriting tools. These tools use alternative data sources, such as GST filings, bank statements, and credit bureau scores, to assess borrower creditworthiness quickly and accurately. ICICI Securities praises this tech-enabled approach for reducing turnaround times and improving scalability, which is essential in a market where MSME credit demand is projected to grow significantly amid India's economic recovery.

Financially, SBFC Finance has demonstrated resilience and profitability. The report notes that the company's return on assets (ROA) has been consistently above 3%, a healthy figure for an NBFC in this segment. This is supported by net interest margins (NIMs) in the range of 9-10%, benefiting from higher yields on MSME loans, which often carry interest rates of 15-20%. On the asset quality front, SBFC has maintained gross non-performing assets (GNPA) below 3%, even during challenging periods like the COVID-19 pandemic. The brokerage credits this to SBFC's conservative lending practices, including a high collateral coverage ratio—typically over 2x the loan amount—and proactive collection mechanisms. Looking ahead, ICICI Securities forecasts that SBFC's AUM could grow at a CAGR of 25-30% over the next three years, driven by branch expansions, deeper penetration in existing markets, and potential inorganic growth opportunities.

Valuation-wise, the target price of Rs 125 implies a significant upside from current levels, based on a price-to-book value (P/BV) multiple of 2.5x FY26 estimated book value. ICICI Securities justifies this multiple by comparing it to peers like CreditAccess Grameen and Fusion Microfinance, which trade at similar or higher valuations due to their growth prospects. The brokerage's discounted cash flow (DCF) model further supports this target, incorporating assumptions of sustained ROE above 15% and a cost of equity around 12%. Key drivers in the model include expected improvements in funding costs as SBFC diversifies its borrowing mix, moving beyond bank loans to include more market-linked instruments like non-convertible debentures (NCDs) and commercial papers. This diversification is expected to lower the overall cost of funds from the current 9-10% to around 8% in the medium term, enhancing profitability.

The report delves into SBFC's competitive advantages, emphasizing its focus on co-lending partnerships with banks. These partnerships allow SBFC to leverage banks' lower-cost funds while sharing credit risks, thereby boosting volumes without straining its balance sheet. For instance, collaborations with entities like Kotak Mahindra Bank have already contributed to a notable portion of its disbursements. ICICI Securities believes this model will become increasingly important as regulatory norms encourage such tie-ups to promote financial inclusion. Additionally, SBFC's emphasis on gold loans as a complementary product line adds diversification, providing a hedge against cyclical downturns in the MSME sector.

However, the brokerage does not shy away from highlighting potential risks. Macroeconomic headwinds, such as rising interest rates or a slowdown in economic activity, could impact MSME repayment capacities and lead to higher delinquencies. Competition from fintech lenders and larger NBFCs is intensifying, potentially pressuring yields and market share. Regulatory changes, including tighter norms on NBFC lending or capital requirements, pose another challenge. SBFC's relatively short track record as a listed entity means it must continually prove its ability to manage growth without compromising asset quality. Despite these risks, ICICI Securities remains bullish, assigning a low probability to severe downside scenarios given SBFC's strong underwriting and capital adequacy ratio, which exceeds 25%.

In terms of growth catalysts, the report points to India's broader MSME ecosystem. With the government pushing initiatives like the Atmanirbhar Bharat scheme and increased credit guarantees, the sector is poised for expansion. SBFC is well-positioned to capitalize on this, especially in Tier-2 and Tier-3 cities where it has a strong presence. The company's management team, led by experienced professionals from the banking sector, is seen as a key strength, with a track record of navigating economic cycles effectively.

Expanding on the financial projections, ICICI Securities estimates that SBFC's profit after tax (PAT) could grow at a CAGR of 35% over FY24-26, reaching upwards of Rs 400 crore by FY26. This growth is underpinned by AUM scaling to Rs 10,000 crore, up from current levels of around Rs 5,000-6,000 crore. Revenue is projected to benefit from higher disbursements, expected to hit Rs 4,000-5,000 crore annually, with a focus on maintaining a healthy mix of new and repeat borrowers. The brokerage also anticipates improvements in the credit cost ratio, potentially declining to 1-1.5% as the portfolio matures and collection efficiencies improve through data analytics.

From an investor perspective, SBFC Finance appeals to those seeking exposure to high-growth financial services stocks with a defensive edge due to its secured lending focus. The stock's liquidity has improved post-listing, and institutional interest is building, as evidenced by recent stake acquisitions by mutual funds. ICICI Securities advises long-term investors to accumulate shares on dips, viewing any short-term volatility as buying opportunities.

In conclusion, ICICI Securities' 'Buy' call on SBFC Finance underscores the company's potential to deliver superior returns in a dynamic MSME lending landscape. With a target of Rs 125, the recommendation reflects confidence in SBFC's ability to sustain growth, manage risks, and enhance shareholder value. As India continues its push towards formalizing small businesses and expanding credit access, players like SBFC are likely to thrive, making this an attractive investment proposition for those betting on the sector's long-term prospects.

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Read the Full moneycontrol.com Article at:
[ https://www.moneycontrol.com/news/business/earnings/buy-sbfc-finance-target-of-rs-125-icici-securities-2-13343751.html ]