ICRA Nepal has assigned a grading of [ICRANP] IPO Grade 4+, indicating below-average fundamentals, to the proposed initial public offering (IPO) of NPR 70.78 Million of Sadhana Laghubitta Bittiya Sanstha Limited (SLB). SLB is proposing to come out with an IPO of 707,800 equity shares with a face value of NPR 100 each, at par. The proposed issue is being made to fulfil the regulatory provision requiring banks and financial institutions (BFIs) to float IPO within three years of coming into operation.
The assigned grading factors the presence of regulated institutional promoters; NCC Bank (rated BBB by ICRA Nepal) with one director representation in board and Shangri-La Development Bank Limited (Graded IPO 3 by ICRA Nepal in Oct 2017), each having ~14% shares. The grading also factors in SLB’s ability to scale-up the business in initial years of operation, aided by rapid branch expansion, acquisition of 10 district level MFI (Aarthik Samriddhi Laghubitta Bittiya Sanstha Limited- ASLB) and growth in client base, while maintaining healthy asset quality profile (gross NPLs of 0.16% as of Jul-2019, 0.32% as of Oct-2019). Additionally, adequate network base for its scale of operation (44 branches in 14 districts as of mid-Oct 2019); along with a further branch expansion plan, encompassing new geographies; and a large below-the-poverty-line population in Nepal, the target group for microfinance institutions (MFIs) spell positives from the growth perspective. Further, adequate profitability, with reported PAT of NPR 15 Million in FY 2019 (RoNW of ~21%) supported by healthy fee-based income and lower credit costs, has also been considered while assigning the grading. The current capitalization of SLB (~13% as of mid-Oct-2019) remains comfortable against the regulatory minimum of 8%. This, along with the proposed capital injection, could support the company’s growth plans. The grading additionally takes comfort from the regulatory changes—the removal of the 18% cap on lending rates for the MFI; which provides them the flexibility to pass on the increased cost of funds to borrowers.
Nonetheless, the grading is constrained by the limited track record along with the higher average ticket size for initial cycles of lending among the peers, with ~NPR 64K (on outstanding loans). It also takes note of the low share of deposits in the funding mix (~24% as of mid-Oct-2019 vs. ~43% for the industry) and the recent regulatory restriction to collect recurring deposits. Funding sources for the MFIs may also witness some constriction, going forward, as the banking sector is comfortably above its deprived sector lending target (6.65% as of mid-April 2019 against 5% target). The company’s increasing share of high-ticket collateral-based loans to marginal borrower profile (~19% as of mid-Oct2019), along with plans for a further increment in such loans also remains a concern. The grading also remains constrained by the frequent regulatory changes that impact the spreads and funding sources for the MFI sector. Moreover, the high-ticket sizes permitted by regulations, the presence of a large numbers of players in the industry (including comparatively weak regulated cooperatives), starting phase of the credit information bureau with low penetration of credit information for the MFIs, raise concerns of over leveraging by borrowers. Going forward, SLB’s ability to maintain asset quality indicators, ability to generate stable and adequate profitability over increasing capital base and generating economies of scale will have a bearing on its overall financial profile.
Incorporated in June-2016, Sadhana Laghubitta Bittiya Sanstha Limited (SLB) started its commercial operation from November 2017 on receiving license to operate 10 district institutions. It was later upgraded to national level class D microfinance institution after acquisition of Aarthik Samriddhi Laghubitta Bittiya Sanstha (10 district level), starting joint operation from mid-Jul-2019. As of mid-Oct-2019, SLB operated through 44 branches over its 14 districts. The registered and corporate office of SLB is located at Haramtari-6, Gorkha, Gandaki Province, Western Nepal.
SLB reported a net profit of ~NPR 15 Million in FY 2019, over an asset base of ~NPR 1,234 Million as of mid-Jul-2019, as against a negligible net profit of ~NPR 0.04 Million in FY 2018, the first year of operation, over an asset base of ~NPR 376 Million as of mid-Jul-2018. Further, it reported a profit after tax of ~NPR 8 Million in Q1 FY 2020 over as asset base of ~NPR 1,581 Million as of Oct-2019. SLB’s gross NPLs stood at 0.32% and CRAR at 13.05% as of mid-Oct-2019, while gross NPLs were 0.16% (overall delinquencies at ~1.98%) and CRAR were 8.08% as of mid-Jul-2019. On the technology front, SLB uses “Uranus” software, which is centralized across all its branches.
Source: ICRA Ratings Nepal