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Satin CreditCare - The Ark of Financing 🌦️

Updated: Nov 5, 2023

In 8 out of the last 10 years, the Brahmaputra river has faced flooding, affecting lakhs of lives in the state of Assam. The region is particularly prone to flooding because of high-intensity rainfall, and the geography of the state, which is marked by easy erodibility of rocks, steep slopes, and high seismicity.

While these floods naturally have a devastating impact on human life, there is also one stock which got ended up drowning along through these years. Satin Creditcare Network, an NBFC (non banking financial company), which had 8% of its loan book coming from the state of Assam in 2019.

Satin Creditcare Network is an MFI (microfinance institution), which provides small loans to people who don’t have access to banking facilities. Naturally, this is the strata of society that’s also the most affected by events like floods.

But it wasn’t just Assam’s frequent floods that Satin Creditcare Network was marred by. It has been on a bad luck spree - demonetisation before the floods and COVID after. Over 2016 to 2021, the stock got reduced to a fraction, falling by 75%, from Rs. 350 at the start of 2016 to just Rs. 90 at the end of 2021.

In a classic distress-builds-resilience situation, Satin Creditcare Network is in the process of revamping its business to not let it get thrown away at each shake. From the Rs. 90 at the end of 2021, it has already gone almost 3x in just the last two years.

As the company further transforms its business, it can come out as a much more lucrative bet, for much lesser risk than before.

Diversifying Geographical Exposure

While demonetisation and COVID impacted the entire country, there are several events, like the Assam floods, which impacted specific regions for Satin Creditcare Network.

The simple way of de-risking adopted by Satin Creditcare Network was to:

Transformation from MFI to a Diversified NBFC

Despite risk reduction in the MFI business, it is one marked by high overall risk, primarily because of the vulnerability of the consumers serviced, which diversification within the business can’t solve.

To make the overall business stronger, Satin Creditcare Network simply started adding new businesses and diversifying its loan book in 2017-18.

Both the new businesses (MSME and housing finance), offer several benefits including - higher growth, healthier business and more profitability.

Over the next 3-4 years, Satin Creditcare Network expects to further ramp up on this diversification, with MSME and housing finance expected to together constitute to 25% of the overall AUM, from 15% now.

Improvement in Business and Financial Metrics

The two-fold strategy of (i) improving the health of the MFI business, and (ii) diversifying into other businesses like MSME and housing finance have resulted in a dramatic improvement in business and financial metrics.

While growth numbers for Satin Creditcare Network appear modest, that’s simply because of the chase for a healthier mix. This is evident from a massive reduction in cost ratios, and improvement in profitability metrics.

Improvement Done, Scale up to Start

Now that the clean-up in MFI business has been executed, and the stage set for scaling up MSME and housing finance businesses, Satin Creditcare Network expects the following:

  1. AUM growth of 25% in FY24, which is vastly superior to the 7% CAGR achieved over FY18-23

  2. AUM for the MSME and housing finance business are expected to grow at 60-70% YoY for the next 5-7 years

  3. The MSME and housing finance businesses are expected to reach 25% of total AUM over the next 3-4 years (from 15% now), diversifying and de-risking the business further

Along with growth, profitability too is expected to see improvement for Satin Creditcare Network. The primary drivers for this would be:

  1. The company receiving its first tranche of recoveries from the government for Assam, which accounts for nearly half the consolidated GNPA of 2.5%

  2. Reduction of opex ratio to ease to 5.25-5.5% from 6%

What Next?

With growth reviving, and improvement in health, the stock of Satin Creditcare Network can benefit from both (i) higher growth, and (ii) valuation re-rating.

Higher growth: Basis management commentary and momentum seen in growth so far, the book value of Satin Creditcare Network is expected to see a 20% CAGR over the next two years.

Valuation re-rating: The stock has historically traded at a one-year forward P/BV of 0.9x. However, it can command a material premium to historical valuations given a healthier business, lower risk, higher growth, improved profitability and better return ratios.

The stock is currently trading at 0.6x P/BV, which is lower than historical averages, while it deserves a premium, leaving immense room for re-rating, and subsequent upside.

From utter desolation, Satin Creditcare rose and cleaned up its act in little to no time, setting itself up for success. With its aim to make a difference in people’s lives, maybe the stock might make a difference to your watchlist as well!


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