Spandana Sphoorty Financial Stock Research Report by HDFC Securities
Sector: Finance – NBFC
CMP Rs. 656, Target Rs. 795 (21% upside potential)
Target Period: 12 Months
Spandana Sphoorty Financial Stock Research Report:
Spandana Sphoorty Financial Ltd. (SSFL), has weathered well the storm of Covid and management related challenges which had led to disruptions in its business. Over the last 2 years it has written off / sold its pre-Covid stressed assets which now account for only 3% of tis AUM. The company is now focused on growing its book under the new management and has accelerated its branch opening. It has re- launched LAP loans and plans to launch a new product – nano enterprise. Asset quality is within comfortable levels according to management and it has guided for sub 2% credit costs. Net collection efficiency has been improving which is a healthy sign.
SSFL aims to achieve assets under management (AUM) of Rs 15,000cr by FY25, supported by its new customer acquisition strategy, increasing ticket sizes for its existing customers as needed and by diversifying within its distribution models, such as business correspondence, co-lending, and balance sheet funding in the near to medium term.
We had come out with an Initiating Coverage report on Spandana in Dec’20 and a Stock Update in Jun’22.
Valuation & Recommendation:
The management of Spandana presented the Vision 2025 document on 11th July 2022, where it had articulated the path for the company for the next three years (including Rs 18164cr AUM – incl Rs 15000cr Micro finance). Over the year FY23, it has taken all the steps to ensure to lay a strong foundation and then progress on the key fundamental blocks. It has reached AUM of Rs 8511cr in FY23. It has made large provisions of Rs 544cr and Rs 481cr in FY23 and FY22 respectively. With this most of the bad/doubtful loans have been provided for and provisions from hereon will be much smaller.
We expect advances of the company to increase at 27% CAGR over FY23-FY25E after a strong growth of 40% in FY23. Return ratios are likely to improve as the company has cleaned up its balance sheet and it focusses on growing its book and improving its yield. We have valued the company at 1.3x FY25E ABV for a base case target of Rs 735 and 1.4x FY25E ABV for a bull case target of Rs 795 over 2 quarters. Investors can buy the stock in the band of Rs 650-665 and add on dips in Rs 590-600 band (1.05x FY25E ABV).
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