Kamlesh Chimanlal Gandhi is a founder and chairman and has been the managing director since inception.Mukesh Chimanlal Gandhi is a founder and a whole-time director and chief financial officer. Darshana Saumil Pandya was appointed as executive director on 23 September 2016.

Assets under management (AUM) recorded a five-year CAGR of 33% to Rs 3332.56 crore end March 2017 and improved to Rs 3451.74 crore end June 2017. There are more than five lakh active loan accounts across more than 3165 customer locations, served through 121 branches.

AUM of the micro-enterprise segment registered a CAGR of 32%, SME 138%, two-wheeler 6%, CV 3% and housing 44% in the five years to end March 2017. The total outstanding debt including security deposits excluding assignments of customers stood at Rs 1860.33 crore end June 2017.

Commercial arrangements have been entered into with a large number of loans sourcing intermediaries, including commission-based direct sales agent (DSAs) and revenue-sharing arrangements with various dealers and distributor. These sourcing partner guarantees part of loan default. There were 332 loan sourcing intermediaries for the two-wheeler loan segment, 395 for CV loan segment and 55 for the housing loan segment end June 2017.

A significant part of the business origination in the various segments is represented by loans extended to microfinance institutions (MFIs), housing finance companies (HFCs) and other NBFCs that provide financing products including micro-enterprise, SME, CV, two-wheeler and housing loans, enabling geographical reach extending beyond direct customer locations. Loans worth Rs 1816.07 crore amounting to 52.61% of AUM have been extended to 98 such financial institutions.

There are two categories of micro-enterprise loans: loans up to Rs 75000 are given to self-employed individuals in trading or manufacturing and loans ranging between Rs 75000 and Rs 3 lakh go to sole proprietors and partnership firms.

Loans up to Rs 5 crore are extended to SME customers. These include working capital loans, loans for machinery and facilities, loans against property and loans extended to housing finance companies.

Two-wheeler loans are primarily provided to farmers, self-employed and salaried individuals as well as professionals.

CV loans up to Rs 7 lakh are provided for the purchase of new and used CVs, used cars as well as tractors to traders and manufacturers (for loading vehicles), travel businesses and small road transport operators.

Housing loans are to purchase new and old houses, construction of houses on owned plots, home improvement and for purchase and construction of commercial property. Customers include salaried and self-employed individuals. Loans are extended to developers for construction of affordable housing projects. The housing finance business is primarily operated through a subsidiary, MAS Rural Housing and Mortgage Finance (MRHMFL).

The capital-to-risk (weighted) assets ratio (CRAR) was a healthy 23.80% end June 2017. The gross non-performing asset (NPA) ratio as a percentage of AUM was a low 1.14% and the net NPA ratio as a percentage of AUM, too, was low at 0.96% end June 2017.

There were 606 full-time employees end June 2017. In addition, temporary sales, marketing and recovery personnel are hired on commission.

The Offer and the Objects

The initial public offer (IPO) is to collect around Rs 460.04 crore by issuing 1.01 crore shares at the lower band of Rs 456 per share (face value Rs 10 per share) and one crore shares at the upper band of Rs 459 per share. The issue consists of a fresh issue of equity shares (0.508-0.508-crore shares) aggregating up to Rs 233 crore and offer for sale of equity shares (0.495-0.498-crore shares) aggregating up to Rs 227.04 crore.

The offer for sale comprises an offer aggregating up to Rs 112.66 crore by DEG (Deutsche Investitions-und Entwicklungsgesellschaft MBH), Rs 79.34 crore by FMO (Nederlandse Financierings - Maatschappij voor Ontwikkelingslanden N.V.) and Rs 35.04 crore by Sarva Capital LLC. The offer includes a reservation aggregating up to Rs 7.0 crore for eligible employees. The issue is to be made through the book-building process and will open on 06 October 2017 and will close on 10 October 2017.

Net proceeds from the fresh issue will go to augmenting the capital base to meet future capital requirements. Further, there will be the benefits of listing of the equity shares on the stock exchanges, enhancement of the brand name and creation of a public market for equity shares in India.

AUM registered a healthy five-year CAGR of 33% to Rs 3332.56 crore in the fiscal ended March 2017 (FY2017). The micro-enterprise loan segment AUM CAGR was 32% to Rs 1984.86 crore and the SME loan segment AUM CAGR 138% to Rs 763.84 crore. Revenues recorded CAGR of 26% to Rs 364.70 crore, while profit after tax (Pat) registered CAGR of 26% to Rs 68.56 crore in FY2017. The return on the average AUM was 2.34% and on the average net worth was 23.68% in FY2017.

A relatively low NPA ratio is the result of entering into revenue-sharing arrangements with a large number of sourcing partners. Part of a loan default is guaranteed by these sourcing partners, effectively making them directly accountable for the quality of the loan portfolio they originate. The gross NPAs as a percentage of AUM were 1.14% and net NPAs 0.96% end June 2017. The quality loan portfolio also enables effective assignment or securitization of a significant portion from time to time, thereby reducing operational risks. Around Rs 1512.51 crore were obtained in FY2017 through assignment and securitization of loans. About 34.1% of the AUM was off-book end June 2017.

There is a diverse range of financial products and services targeted at the low- and middle-income customer segments. The SME loan segment represented 24.23%, micro-enterprise 57.81%, two-wheeler 9.25%, CV 3.54%, and housing 5.17% of the AUM end June 2017. The diversified product portfolio and customer base aligned with increasing market demand is a key component of growth and success. The wide, multi-channel business sourcing network enables introduction of new financing products with relatively low incremental investment and operating expenses. Exposure is insulated from sector-specific declines, local or regional economic downturns, disruptions from political circumstances and/or natural disasters.

A dedicated resource mobilization team addresses funding requirements, reduces cost of borrowings, diversifies sources of funds, manages interest rate risk and invests surplus funds. The funding requirements have been primarily met through term loans. Funds are also raised through non-convertible debentures, subordinated debt, commercial paper and assignment of loans. The cost of borrowings stood at 9.05% in Q1 of FY2018.

An extensive operational network has been developed in Gujarat and Maharashtra. In addition to the sales team, commercial arrangements has been entered into with a large number of sourcing intermediaries including commission based DSAs as well as sourcing partners. Part of a loan default is guaranteed by such sourcing partners.

Customized credit analysis procedures have been developed for each product depending on the nature of the customer, purpose of the loan and the amount of loan advanced. Typically, past financial information and the applicant's business trends are analyzed to assess their income levels. In addition to document verification and credit bureau reports, site verification, interviews, and market and banking reference checks are conducted on the applicant, co-applicant and guarantor, as applicable.

Weaknesses

A significant portion of the customer base is typically economically less stable than large corporate. As a result, declining economic conditions adversely affect the borrowers. The earning capacity of the customers in these segments depends on various macro and micro economic factors. Thus, there is greater risk of loan defaults and losses in the event of adverse economic conditions.

Loans are extended to other financial institutions such as MFIs, NBFCs and HFCs. Loans worth Rs 1816.07 crore had been extended to 98 such institutional borrowers end June 2017. If there is default by these financial institutions or relationships are not maintained with these institutions, the business and financial condition might be adversely affected.

The inability to maintain relationships with loan sourcing intermediaries can have an adverse effect on the business and prospects.

There is need for effectively competing in an increasingly competitive industry. Else, the net interest margins, income and market share will be affected. A majority of small finance banks, which have received approval for commencement of operations from the Reserve Bank of India, are focused on low- and middle-income individuals and micro, small and medium enterprises. Many of these competitors might have greater financial resources, larger business volumes and significantly lower cost of funds. Many of them might also have a greater geographical reach and long-standing partnerships and might be in a position to offer their customers other forms of financing.

As part of business strategy, assignment or securitization of a significant has been undertaken of a significant portion of the receivables from loan portfolio to banks and other financial institutions. Any deterioration in the performance of any portfolio of receivables assigned to banks and other institutions might affect its ability to conduct further assignment and securitization.

AUM in the micro-enterprise loan segment constituted 57.81% and the SME loan segment constituted 24.23% of the total AUM end June 2017. There is a need to increasingly diversify the product portfolio by increasing focus on other segments. If not, business prospects might be materially affected.

The unsecured loan portfolio stood at Rs 510.07 crore out of on-book AUM of Rs 2276.24 crore end June 2017 and can face a high risk of loss in case of a credit default compared with loans to customers in other asset-backed financing products.

The business relies significantly on operations in Gujarat and Maharashtra. Any adverse changes in the conditions affecting these states can adversely impact business and financial condition.

Business Strategies

New branches are expanded strategically and selectively. Expansion is in geographies with growth potential. Penetration is to be increased in Madhya Pradesh, Rajasthan, Karnataka, Tamil Nadu and the NCT of Delhi. To diversify the deployment of funds, loans to financial institutions are to be increased, thereby allowing to expansion of geographical reach, while maintaining a relatively lower risk profile. In addition, the network of sourcing intermediaries will continue to be expanded.

Market assessment studies are undertaken to strategically evaluate additional product offerings. For example, as part of SME loans, loans are to be extended to the agricultural input and equipment segment. Long- and short-term working capital requirements of manufacturers, distributors and dealers of agricultural input products will be financed. Loans will be offered to farmers to acquire accessories, implements and tractors in collaboration with dealers, manufacturers and distributors as sourcing intermediaries.

The housing finance business is to be expanded by increasing the geographic reach of MRHMFL's operations. MRHMFL currently operates in Gujarat, Maharashtra, Rajasthan and Madhya Pradesh. The existing operational network and customer base is to be leveraged to cross-sell housing loans to existing customers. The aim is to establish more local sourcing arrangements in regions identified through market potential studies.

All branches have been centrally connected to the corporate office in Ahmedabad. Systems are updated regularly and credit approval, administration and monitoring processes continuously streamlined to meet customer requirements and maintain risk profile. The focus is on developing and strengthening the IT capabilities to support growth and improve the quality of services.

A private placement of 3,990,422 equity shares to Motilal Oswal Financial Services was undertaken in March-April for cash consideration aggregating to Rs 135 crore at Rs 338.31 per share. Now the shares are being offered in the price band of Rs 456-459.

The annualized EPS on post-issue equity works out to Rs 17.1 for Q1 of FY2018 and Rs 12.5 for FY2017. At the price band of Rs 456 to Rs 459, P/E works out 26.6 to 26.8 times for Q1 of FY2018 and 36.3 to 36.6 times for FY2017.

Post-issue, the book value (BV) works out to Rs 122.8 at the issue price of 456 and Rs 122.9 at the issue price of Rs 459. P/BV at both the bands works out to 3.7 times. Post issue adjusted BV (net of net NPAs) works out to Rs 117 per share and P/Adj BV works out to 3.9 times.

Among peers, Shriram City Union Finance is trading at P/BV of 2.7 times (Price: Rs 2037.7, BV: Rs 762.6). Mahindra and Mahindra Financial Services at P/BV of 3.7 times (Price: Rs 422.1, BV: Rs 114.6) and Capital First at P/BV of 3 times (Price: Rs 733, BV: Rs 244).

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