Growth Strategy
SBFC Finance Limited has a structured growth strategy focusing on sustainable expansion, operational efficiency, and maintaining asset quality. The key elements of its growth strategy include:
- Consistent AUM Growth: The company aims for a 5-7% quarter-on-quarter increase in its assets under management (AUM). For December 2024, the AUM stood at ₹8,148 crores, reflecting a 30% year-on-year growth.
- Branch Network Expansion: SBFC added five new branches in Q3 FY25, bringing its total to 197 branches, with plans to expand further to strengthen its physical reach.
- Secured Lending Focus: The company maintains a 99% secured loan portfolio, primarily backed by properties and gold, minimizing risk.
- Cost Efficiency Measures: It has successfully reduced its cost-to-income ratio from 45% to 40%, exceeding its targeted cost reductions.
Future Outlook
The company maintains a cautiously optimistic stance towards the future, expecting moderate but steady growth in the coming quarters. Key projections include:
- Continued AUM Growth: SBFC expects to maintain its 5-7% quarterly growth guidance, driven by its focus on MSME and gold loans.
- Stable Profitability: With a Return on Assets (ROA) of 4.49% and Return on Equity (ROE) of 12.77%, the company anticipates gradual improvement in profitability.
- Interest Rate Stability: Despite a rising interest rate environment, SBFC has managed to keep its cost of funds stable at 9.31%, ensuring steady net interest margins (NIMs).
- Operational Expansion: The company is likely to continue branch expansions while maintaining operational efficiency.
- Targeting 15% ROE: Management expects to reach 15% ROE by the last quarter of FY26.
Challenges
While SBFC is on a strong growth trajectory, it faces several challenges:
- Economic Uncertainty: Slowing consumption, tightening liquidity, and increased consumer leverage could impact credit demand and repayment capacity.
- Rising Competition: The small-ticket MSME lending space is becoming more competitive, leading to pricing pressures.
- Credit Risk Management: The company has seen an increase in credit costs from 83 bps to 97 bps, signaling marginal stress in asset quality.
- Regulatory Risks: Any changes in NBFC lending regulations or compliance requirements may affect the company’s operations.
Key Advancements
- Technological Integration: The company is improving digital lending capabilities to enhance efficiency and customer reach.
- Diversification of Borrowings: SBFC is reducing dependence on bank financing, shifting towards NCDs and development financial institutions (DFIs).
- Cost Control Initiatives: Despite expanding operations, the company has effectively reduced operating costs, supporting profitability.
Is SBFC a Good Buy?
Pros:
- Strong and consistent AUM growth.
- Well-managed credit risk with a secured loan book.
- Steady profitability with improving ROA and ROE.
- Expanding branch network and growing MSME demand.
Cons:
- Economic headwinds may affect growth and asset quality.
- Competitive pressures could limit yield expansion.
- Liquidity concerns in the broader market may impact borrowing costs.
Investment Verdict:
SBFC Finance Limited appears to be a stable, growth-oriented NBFC, but investors should consider the macro-economic environment and competition-related risks. With cost efficiency, prudent risk management, and consistent growth, SBFC is a promising long-term investment, especially for those looking for exposure to India’s MSME financing sector. However, investors should monitor credit quality trends and economic conditions closely.