Recently I wrote an article for special edition of Indian Economy and Investing – 75 Hidden Gems

This is reproduced for you below. I am long on stock not traded in last 90 days


Satin Creditcare is a large microfinance company providing collateral free, microcredit facilities to economically active women in both rural and semi-urban areas. Satin Creditcare Network Limited(“Satin”) was conceptualized and founded in 1990 by Mr. HP Singh – a qualified Chartered Accountant with over 25 years of experience in retail finance industry. In around 27 years since its inception, Satin today is India’s second largest MFI (as of Jun 2017) having started its journey with individual microloans to urban shopkeepers. Today, the Company has an established, scalable and a sustainable business model. On a consolidated basis, Satin had an AUM of Rs. 4,493 Crores as on Sep 30, 2017. SCNL offers its clients a variety of loan products under the MFI segment. The company also offers a bouquet of financial products in the Non-MFI segment (comprising of loans to MSMEs), and business correspondent services & similar services to other financial Institutions through TSL, a business correspondent company and an 88% subsidiary of SCNL. In April 2017, SCNL also incorporated a wholly owned housing finance subsidiary for providing loans to the affordable housing segment further diversifying its portfolio.

What attracted me to Satin?

Skin in the game – In spite of continuous equity dilution, the promoters continue to hold 35% of equity by providing regular infusions matching private equity. Apart from this the company provides very detailed investor presentations

 Lending to unbankable – Satin targets the segment where traditional banks can’t reach – Micro borrowers. This sort of lending requires expertise as there is no collateral, company has to carefully analyse end use of credit and cash flows on daily or weekly basis. The repayments are daily / weekly / fortnightly and in cash therefore require much localised knowledge difficult to master.

Stupendous profitable growth [Pre Demonetisation] – Some key metrics

FY14 H1FY17
Gross AUM – 3.5X INR 1056 Cr INR 3751 Cr
No of Branches – 2.7 X 199 544
Active customers – 3X 800K 2.4 Mn
Diluted – EPS – 2.3X 6.67 15.76
Net NPAs – 12X 0.01% 0.12%

 Profitable Diversifications – A scaling business correspondent business, Taraashna sources
high yield MFI loans that qualify as priority sector lending for banks and has partnered with
Ratnakar Bank and Yes Bank to route these high yield loans. In 2014 it earned INR 2 mn as
income which increased to INR 18 mn in 2015 contributing ~5% to bottom line. I had
reservations that this was a promoter owned entity; however, the management alleviated
this concern by merging this into Satin.

Joint Liability group – Peer Pressure to maintain discipline – In Joint Liability Group, The borrowers make a group among themselves and the microfinance institutions give loan to that group. One person in that group is appointed as leader of the group and each person is responsible for the loan taken by any member of the group. If any one person in the group defaults then other group members will have to pay for that.

My theory at the start of initiating the position was when diluted earnings and AUM are growing at 70-80% every year with negligible NPAs. In 3-4 years a significant value would be built and paying 25- 30 times diluted earnings is cheap. I had seen this with SKS (now Bharat Financial Inclusion) and other MFI lenders as long as I keep a keen eye on lending quality [Net NPAs]

Enter Demonetisation

On 8 November 2016, the Government of India announced the demonetisation of all INR 500 and INR 1,000 banknotes making 86% of circulating currency invalid. This was a watershed moment for the industry, the lending cycle for microfinance is very small with often daily cash collections now with cash out of systems and unlikely to be replenished soon the industry was looking at dire consequences, Add to that a double whammy of a lending oriented very high levered business a 10% Net NPAs can wipe out complete equity of the business and it almost did for many MFIs

Hold that 10% number in mind a 10% Net NPA number on AUM of 4000 Cr is 400 Cr

SATIN’s net worth prior to funds infusion was INR 662 Cr ,In a normal year like FY16 SATIN earned 60 Cr now even if 25% of the NPA number ends up as the actual NPA the business has gone back by 1.5-2 year at a minimum due to demonetisation.

How did company overcame this black swan ?

 Funds Infusion – INR 464 Cr was infused in current financial year to recapitalise business with INR 30 Cr contribution from promoters
 Digitisation – About 16% of current disbursements are now cash less with aim to increase this number to 40-50% by end of FY18 with digitisation of branches
 Focus on collections – With collections Normalised to 99% in most states in Q2 FY18, the company can now re focus rebuilding business


Positive aspect was that the management did not lose focus on strengthening business

 Increased number of branches through the post demonetisation phase
 Applied for affordable housing finance license
 Tied-up with Capital First to expand into non Micro finance products


The current market cap of the company (Nov 2017) is INR 1200 Cr down ~60% from last year; I can’t put an earning number for next FY (2018). However if I do a hypothetical exercise that demonetization robbed off two years profits and FY19 should be a normal year then the company should be earning 2.5% (ROA) on INR 6,000 cr AUM which is 150 Cr and at 15-18 times earnings may be valued between INR 2250 Cr to INR 2700 Cr doubling from current levels

As someone who is invested, I will continue to monitor deliverables

– Steady reduction in Net NPAs to pre demonetisation levels in next 2 quarters (Less than 1 %)
– Disbursements growth to pre demonetisations levels (25% +)
– Progress of Housing Finance arm

Some of the key risks that come with investing in high levered companies

NPAs – Although there are RBI guidelines banks and NBFC continue to use their discretion on reporting them. If company has substantially underreported NPAs then investors can be taken for toss

Unable to grow – The Company is well funded now and if it’s unable to grow is loan book then there is significant risk to continue to be valued like currently