Satin CreditCare – Ignore irritants ?

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

satin 1

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

satin 7

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

13 comments

  1. Pavan Pandey says:

    just to update you (and i think being a ex employee i can put better light on satin than others)-

    1. Satin credit has a history of showing fake data and fund transfer for personal business of CMD. they show fake loan and branch to show good balance sheet so that they can receive more money form investors and banks. RBI and SEBI are informed and they have initiated some inquiry also.
    2. Satin credit CMD run a illegal and non approved chit fund company which employee of satin and other companies of CMD manage
    3. Satin collected deposits for its another company ujala credit cooperative society by forcing the customers of satin care that they willget loan only if theyy open some deposit in ujala credit
    4. the employee culture of satin care is worst. No management culture.
    5. Satin is lying that they do not share resources with tarshana. Actually the entire team is same other than very few people.so a private business is at the cost of public limited company.

  2. Hi Vivek,

    Great work on the site. I’ve only just come across it, and it seems really useful. I’m intrigued by the above post, however there are some concerns regarding the sector as a whole which ought to be addressed before anyone invests. There is an Ambit report from March 2016 on the sector as a whole. If you can find it great, otherwise let me know how and where I can share it for everyone’s benefit. In a nutshell, it points out that the current outperformance of the sector is a one off and unsustainable looking at global and domestic historical trends. This includes the low credit cost for the companies, the frequency with which MFI’s are faced with mass defaults globally (although admittedly the instances in the report are limited to 2008 and the AP crisis), the pitfalls due to increasing loan sizes and loans per employee etc and the double edged sword that is a small bank license. While I may not agree with every concern raised in the report, it’s definitely food for thought.

    Coupled with the valuation ~3.85 P/BV when I last checked, it seems quite expensive. The recent Equitas IPO was valued at 2.2 pre money and 1.7 post money. I’m wondering how Satin’s valuation can be justified. While a high valuation isn’t necessarily a deal breaker (case in point – Symphony), I’m not sure that this company deserves it. Happy to be convinced otherwise though!

    • Vivek Bothra says:

      Hi Siddharth – Thanks for your thoughts, I have read Ambit’s report. The recovery in MFI sector in my opinion is going to continue as they have learned from Andhra fiasco, So I think most players would be prudent. On valuation wise if Satin has ability to grow its earnings while delivering high returns on incremental capital without need for heavy issuance or new shares than this level is fine again I am in no way rationalizing for people to buy it at CMP

  3. Kris says:

    Very nice to see your analysis,i have a couple of queries and would appreciate if you have any info on the same.
    In there recent results,they had an additional provision of Rs 5 Crores,do you have any idea why?
    Also why is the company not declaring gross and net npa no’s for every quarter.

    • Vivek Bothra says:

      Kris – the NPA calculation rules have changed from Dec’15 that’s why number is higher, Also it’s not mandatory to report gross and net npa in quarterly results

      • Kris says:

        It may not be mandatory but declaring NPA’s every quarter especially for the kind of business this is(unsecured lending) will give shareholders more confidence,it would definitely not hurt the company to give out a press release with every quarters result which can give the NPA figures,capital adequacy etc.

  4. Harsha Rama Rao says:

    Hi Vivek,

    Rice read on Satin. Infact I’ve been reading up a bit on this company for the last couple of weeks.
    The growth prospects do look very enticing and its certainly in a good space.
    I also think there would be a re-rating in this considering the upcoming IPOs of Ujjavin & Janalakshmi soon.
    Also another trigger would be if they are able to get their Banking license which would help them to source their funds at a cheaper price which will bump up their margins.

    Recently I hear they have pledged some shares which they claim is for business purposes.
    Invested recently in this company and looking to enhance as I gather more information.

  5. Bhavik says:

    MV Mauritius and NIM are part of the taraashna too, which large equity holders in Satin. Dont you think that other marquee investors would pay enough attention on cannibalisation ?

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