Update – 13/03/2016 : Post publication of this note, Rep from Satin credit care got in touch with me and provided some clarification on some concerns I had raised . I am editing this post to reflect same, This would provide completeness to a reader who is having similar questions.

Overall, I am happy that company has come forward and addressed our questions

Changes are highlighted in Red


Mid and small cap companies are not perfect diamonds there will be always something about them which we will dislike, As an investors we have to make a choice whether these irritants are ignorable or substantial

Over to case for today,

Satin Creditcare Network is one of the top ten largest[4th] Micro finance Institution (MFI) in India with an Asset under Management (AUM) of ~INR 25bn with primary focus on North & West India where it has a presence across 16 states and it is the largest player in terms of market share.

The investor presentation on their website gives a very good overview of business,their journey and important financial metrics.

Read the presentation here

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Satin is in business of money, a commodity business, sourcing cheap money and lending at better rates to needy.

Expanded insights into Satin’s business

Rep: [Satin is in the business of providing affordable credit to low income individuals who lack access to funds from formal financial institutions. We raise funds from over 65 financial institutions and lend it to our MFI clients as per the RBI guidelines for NFBC-MFIs.

We are in the business of providing credit to micro customers without collateral, and this requires significant amount of expertise. To be able to do this successfully (lowest NPA that too with unsecured lending) we have put in place stringent risk controls and processes which have been fine-tuned over time. NBFC-MFI is a niche business, and not a commodity business.

90% of our loans to micro borrowers are income generating in nature. We take great pride in helping our clients create a sustainable source of income. All our clients are imparted financial literacy before loan application, and also before loan disbursement. The end use of the loan is also verified at several stages. Hence calling these clients needy is not giving them or us due credit. Also compared to the alternatives they have in their villages, i.e. of money lenders who charge anywhere from 30-100% interest rates, Satin’s or any other MFIs’ interest rates are far more attractive. Hence the support this sector has from the RBI.

All our JLG loans have women as clients. In addition to availability of funds for income generating purpose, it also gives these women a say in the household financial matters, and uplifts their status in the society]

What attracted me to Satin ?

This simple graph on their annual report got me interested

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On digging further there were quite a few other things, I liked about its business not pointing out all still few stand out for me were

Tremendous growth in disbursements at profitabilitysatin 4 satin 3

Impressive per share improvement in diluted earnings – Indicating growth is taking care of equity dilution -The diluted EPS improved from INR 2.12 in 2013 to INR 11.93 in 2015

Impressive net NPA – Almost best in class in industry

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Management is expecting huge growth in near future while maintaining profitability

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Remember in the beginning I said Mid caps and Small caps can’t be perfect diamonds, Now let’s look at why

In 2013, when company was growing at brisk space, Satin Creditcare entered into an agreement with a private promoter owned entity Taraashna Services Private Limited to offer business correspondent (BC) services, 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

Satin receives 10% of gross receipts for its expertise, knowledge, skill and guidance to group company

In 2014 it earned INR 2 mn as income which increased to INR 18 mn in 2015 contributing ~5% to bottom line of INR 318

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Why I didn’t like this move from promoters

A. The private company is using public limited company’s resources to build its own business, but for its association with Satin Care and it’s promoters why would marquee names like Yes bank and RBL would tie up with a private company ?

Rep: [Operation and resources of Taraashna and Satin are completely independent of each other. Except for the overall strategic guidance from the top management of Satin, Taraashna has to rely on its own professional management and staff for day to day activities. There is no sharing of infrastructure between Satin and Taraashna.]

Why didn’t the promoters choose to start this Business Correspondence services under the listed company as a step down subsidiary ?

Rep: [When we started Taraashna, NBFC-MFIs were not allowed to act as BCs for Banks.] – I have not verified this fact

B. Taraashna sources high yield MFI loans that qualify as priority sector lending for banks – How does it sources these high yield loans ? obviously from Satin’s geographical presence, Is private company cannibalizing listed company’s prospects ?

Rep : [There is no cannibalization as the states within which Taraashna operates are very large and are currently highly under penetrated in terms of MFI outreach and will continue to be for the foreseeable future.

Taraashna is responsible for creating the joint liability groups, disbursement of loans from the Bank to ultimate borrowers, collection of repayment and paying the same to the bank. In all cases, some part of the risk is shared by Taraashna.

Satin has no obligation or liability for the business of Taraashna.

There is overall huge supply demand gap in MFI industry. There is huge opportunity for both companies to grow substantially into the future.]

C. The agreement with Taraashna is going to end in 2017. Great – Build a profitable business using public company’s resources and then say good bye. Why would Taraashna want to continue using Satin Care’s services if expertise is developed internally – The private company can save 10% at one go 😉

D. For a new business Taraashna is pretty profitable for FY 15 it made INR 24 mn as PAT, no wonder it is a separate promoter owned private entity J

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E. Most of what Satin Care is earning from Taraashna is not yet converted to cash, INR 2.2 mn is due from it in FY 2015 as per annual report , Converting revenue to cash is a non issue

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Floating multiple companies when they start is pretty normal for small cap promoters and often the companies operate in same businesses (example Kitex Garments), but to have a business engagement with a private company when the publicly listed is well established – reflects poorly on promoters ,at least in my eyes.

Rep: [The lenders who Satin gets funds from for its MFI business are also the ones seeking to grow their own book via the BC service. Had the BC business been done in Satin, these banks would have not have lent to Satin the amount they did and would have constrained the growth of Satin’s MFI business.]

From a bottom line perspective this decision seems minuscule to worry about, but these small things reflect management’s thinking.

Disclosure – This is not a recommendation to buy or sell, please use your brain and don’t destroy your wealth by investing in stocks by reading it in on blog. I hold a very small tracking position in company acquired in last 30 days.

Source of above graphs – Annual reports and this industry report