SEIL, a New Delhi-based non-banking financial company (NBFC), focuses on small business loans. While, the company has managed its asset quality well in the past, we expect the same to deteriorate owing to macro-economic challenges. Low gearing and the partly secured nature of lending are expected to help SEIL weather the challenging environment. We maintain the fundamental grade of 2/5, indicating that SEIL's fundamentals are moderate relative to other listed securities in India.
Business loan segment to drive strong growth in AUM
CRISIL Research expects SEIL's business segment loan book to grow by 29% over FY12-14 driven by increasing penetration of key cities such as Delhi, Mumbai and Agra. SEIL has demonstrated strong growth in the past, albeit on a lower base, despite stiff competition from other players in this segment. The company is expected to maintain its cautious stance on the microfinance segment due to regulatory and business challenges. Total assets under management (AUM) are expected to grow at a two-year CAGR of 24% to Rs 15 bn in FY14.
Concentrated portfolio increases risk; scalability in other geographies yet to be tested
Business loans constitute 80% of SEIL's AUM; Delhi, Mumbai and Agra account for 82% of AUM. In an environment marked by a weak economy and regulatory changes, SEIL's dependence on a few products and geographies exposes it to higher risks than its NBFC peers. SEIL's ability to scale up its business in other products and geographies while managing asset quality is yet to be tested over the long term.
Asset quality to be under pressure though manageable
While asset quality has been historically good, a weak economic environment and seasoning of the loan book have led to an increase in write-offs. Write-offs as percentage of AUM rose from 0.6% in FY11 to 1.1% in FY12. The high credit risk was compensated by higher yield on the book. While the company has taken proactive measures such as reducing average ticket size in business loans to reduce risk, we expect write-offs to increase to 2.5% of AUM by FY14. However, strong capital adequacy of 36% and the partly secured nature of lending are expected to help the company to weather the challenging environment.
Adjusted PAT to grow at 11% CAGR over FY12-14
CRISIL Research expects operating income to grow at 22% CAGR over FY12-14 driven primarily by growth in AUM. However, an increase in operating costs due to lower ticket size and higher bad debt write-offs will lead to slower growth in adjusted PAT, which is estimated to grow at a two-year CAGR of 11% to Rs 790 mn in FY14.
Valuations: Current market price has strong downside
CRISIL Research has valued SEIL at a P/B multiple of 1.6x FY14E book value per share. Our fair value is Rs 209. At the current market price of Rs 344, our valuation grade is 1/5.
Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report. The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.
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