MAS Financial Services IPO Review: Leverage employed successfully

MAS Financial Services IPO opens for subscription on 6 October 2017 in what will be the 28^th mainboard IPO this year. The Ahmedabad-based NBFC has priced its upcoming IPO in the range of INR456 – 459 per share. Investors can place their bids for minimum 32 shares and in multiples thereafter. The IPO will mobilize INR460.04 crore, including INR233 crore by issuing fresh shares. As financial services stocks continue to fly high, MAS Financial Services IPO will be closely watched. Is MAS Financial Services also going to soar high post listing? We intend to find out through MAS Financial Services IPO Review.

MAS Financial Services IPO Review: Fresh + OFS

Like most other IPOs, MAS Financial Services IPO will be a mix of fresh shares and an Offer For Sale (OFS) by existing shareholders. As mentioned above, the company plans to raise INR233 crore by issuing new shares. These funds will be used towards augmenting its capital base to meet future capital requirements. As of 30 June 2017, the company’s CRAR (Capital to Risk Assets Ratio) stood at 23.8% in comparison to the regulatory requirement of 15%.

Another INR227 crore will be mobilized through sale of shares by existing investors. The company counts Deutsche Investitions-Und Entwicklungsgesellschaft Mbh (DEG), Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden NV (FMO), and Sarva Capital (earlier known as Lok Capital II LLC) among its investors and all of them will participate in the IPO. Leading the pack will be DEG which plans to sell shares worth INR112.6 crore while FMO and Sarva Capital plan to sell shares worth INR79.3 crore and INR35 crore, respectively. DEG and FMO will be completely exiting the company through the IPO.

The company also sold 3,990,422 shares or 8.05% through a pre-IPO placement to Motilal Oswal at the rate of INR338.31 per share. These shares are held through India Business Excellence Fund – III.

MAS Financial Services IPO Review: Middle and low income customers

The company operates across six states and the NCT (National Capital Territory) of Delhi. As of 30 June 2017, it had more than 500,000 active loan accounts, across more than 3,165 customer locations in its markets which are served through 121 branches.

MAS Financial Services focuses primarily on middle and low income customer segments. Its loan portfolio is divided into five categories – Micro-enterprise loans (up to INR300,000); SME loans (up to INR5 crore); Two-wheeler loans to farmers, self-employed, salaried individuals and professionals; Commercial vehicle loans (up to INR700,000); and Housing loans  (up to INR1 crore).

The company has its sales team to generate revenues but has also tied up with a number of sourcing intermediaries, including commission based DSAs. It has also signed revenue sharing arrangements with various dealers and distributors where part of loan default is guaranteed by such sourcing partners. As of 30 June 2017, it had 332 such sourcing intermediaries for two-wheeler loan segment and 395 such sourcing intermediaries for the Commercial Vehicle loan segment. For housing loan business, the company has entered into arrangements with 55 sourcing intermediaries.

Apart from individuals and small businesses, MAS Financial Services also lends to other financial institutions like micro-finance companies and housing finance companies. According to the latest account (30 June 2017), INR1,816.1 crore or 52.6% of its loan book is extended to other financial institutions.

MAS Financial Services IPO Review: Financial performance  

MAS Financial Services has been growing its loan book and it clearly reflects in its revenues which have not dipped in any of the last four years. Growing at an average rate of 26.3%, revenues jumped from INR143.1 crore in FY2013 to INR364.7 crore in FY2017. Profits have also maintained almost the same rate in recent years and as a result, earnings in FY2017 stood at INR68.6 crore. Margins have consistently remained in the healthy range of 16.7% to 19.1% in these years.

The company is on track to excel further as the performance in the first quarter indicates. Profitability in the latest quarter actually shot up to 22.4%, although it is always a good practice to discount the sudden jump in earnings or margins.

Source: MAS Financial services Red Herring Prospectus

MAS Financial Services IPO Review: Should you subscribe?

As can be seen from the text above, the company is on a strong footing and there are several positives we see with the business. It has a wide spectrum of products and this is kind of diversification is positive. Although the company has a high exposure to micro-enterprise loans (accounting for 59.5% of the loan book), this risk is mitigated by low gross NPAs of 1.06%. Net NPAs are even lower at 0.92%. Another positive development is that loan disbursement in SME and housing loan categories have outpaced the micro-enterprise category, resulting in increasing average loan size.

As of 30 June 2017, MAS Financial Services’ cost of borrowing stood at 9.05%, as a result of its excessive reliance on short term bank loans. However, this is likely to come down following the IPO as the company will use proceeds to augment its capital base.

In terms of valuations, the price band of INR456 – 459 per share and Earnings Per Share (EPS) of INR15.33 mean the company is asking for a Price/Earnings (P/E) ratio of 29.94 at the upper end. This is in line with the competition, although some NBFCs are still available at lower valuation, Shriram City Union Finance Limited – trading at a P/E ratio of 23.75 – being one of them. Nevertheless, valuations of almost financial plays have jumped in recent months and most of its competitors including Capital First Limited, Mahindra & Mahindra Financial Services Limited and Bajaj Finance Limited are quoting at high multiples. This valuation stands to come down if first quarter earnings are taken into consideration but we don’t see merit in doing that.

MAS Financial Services’ Return on Net Worth (RONW) of 20.65% is on the higher side among its peers and is even better than Bajaj Finance. While this is helpful and may give an impression that pricing is on the lower side, the company is seeking a high valuation on Price/Book Value (P/B) front. On this parameter, the company’s valuation is at 6.92 which is higher than Shriram City Union Finance, Capital First, Mahindra & Mahindra Financial Services.

An important consideration for IPO investors should be the way Motilal Oswal was roped in through pre-IPO placement at a much lower rate of INR338.31 per share. Bulk placements are usually carried out at discounted rates but such discounts seldom expand to as much as 26% in a gap of six months. If one looks at the situation from retrospective perspective, MAS Financial Services’ valuations jumped 35%. A similar tactic was employed in ICICI Lombard General Insurance IPO on a more aggressive level. Like we said earlier, this is a sign of bull market euphoria.

Overall, valuations do not appear extremely attractive, although they are not out of line either. It is the kind of growth story the market loves. MAS Financial Services IPO review tells us that the company is a solid play in the financial space and has a bright outlook ahead. Continued presence of PE investors further boost the attractiveness of the business.