Northern Arc Capital Ltd. (Avoid)

HighlightsIssue Size –: 29,543,727 sharesIssue Open/Close – 16 Sept / 19 Sept 2024Price Band (Rs.)  249-263Issue Size (Rs.) – 7,770 mnFace Value (Rs) 10Lot Size (shares) 57Northern Arc Capital Limited (NACL), was incorporated on 1989 and is a diversified financial services platform that caters to the diverse retail credit requirements of the under-served households and businesses in India.  They have developed domain expertise in enabling credit across their focused sectors in India, namely, micro, small and medium enterprises (MSMEs) financing, microfinance (MFI), consumer finance, vehicle finance, affordable housing finance and agricultural finance. They have been operating in the MSME, MFI and consumer finance sectors for over 14 years, 15 years and nine years, respectively.The company cater to retail credit market through a multi-channel approach that includes: (i) Lending (ii) Placements (iii) Fund Management, delivered through its proprietary technology stack, enable streamlined and efficient digital financing solutions, and provide access to credit to the underserved categories of India across its focused sectors.They have built an efficient and scalable business model, their in-house technology stack consists of: (i) Nimbus, a curated debt platform that enables end-to-end processing of debt transactions; (ii) nPOS, a co-lending and co-origination technology solution based on application programming interfaces (API); (iii) Nu Score, a customised machine learning based analytical module designed to assist their Originator Partners in the loan underwriting process; and (iv) AltiFi, an alternative retail debt investment platform.Out of the total proceeds of Rs. 7,770 mn, Rs. 5,000 mn would go towards onward lending in focused sectors, namely, MSME financing (~Rs. 1,500 mn), MFI (~Rs. 1,500 mn), consumer finance (~Rs. 1,500 mn), vehicle finance (~Rs. 250 mn), affordable housing finance (~Rs. 50 mn), agricultural finance (~Rs. 200 mn) and Rs. 2,770 mn would go towards existing selling shareholders of the company.Key HighlightsThe Indian retail credit market is expected to grow at a CAGR of 17-18 pct between FY24-26 to reach Rs. 100.9 trillion by FY26. NBFCs loan outstanding for MSME, MFI, consumer finance, vehicle, affordable housing and agriculture loans are expected to grow at a CAGR of 13-15 pct, 23-25 pct, 17-20 pct, 12-14 pct, 14-16 pct and 9 10 pct, respectively, between FY24-26. Rural areas, which accounted for 47 pct of GDP, received only 9 pct of the overall banking credit, as of FY24, which shows the huge market opportunity for banks and NBFCs to lend in these areas.The company aim to leverage their rural finance network, which provides unsecured small-ticket loans to rural borrowers, by introducing new products and providing larger value loans to these borrowers as they go through their credit life cycle. Further, they intend to capitalize on their technology and data-first philosophy to foster growth and productivity in underserved rural and semi-urban areas of India.Most of the company’s Gross Transaction Volume (GTV) comes from MSME, MFI and consumer finance. In FY24 MSME contributes 27.83 pct of GTV, MFI contributes 26 pct of GTV, consumer finance contributes 34.50 pct of GTV and Vehicle finance, Affordable housing finance, agriculture finance contributes 6.48 pct, 3.46 pct, 1.72 pct respectively.Their risk management approach has enabled them to actively identify, monitor and manage risks towards creating strong and sustainable business operations. As a result of their approach to risk management, they had one of the lowest GNPA of 0.45 pct and NNPA of 0.08 pct, as of FY24.As of FY4, 67.93 pct of the company’s borrowing comes from Banks, 4.27 pct is from domestic DFIs, 15.92 pct is from offshore financial institutions, 9.04 pct from NBFCs and rest from other sources which provide them a strong base for increased funding.Company’s key strategies include (i) Enhance their ecosystem by growing and deepening relationships with partners, while leveraging and scaling up technology products (ii) Expand to adjacent sectors such as climate lending and gold loans, and enhance ESG risk management systems (iii) Expand their Fund Management channel (iv) Continue to scale their Direct to Customer Lending channel to enhance risk adjusted returns (v) Focus on credit quality to manage credit cost efficiently (vi) Continue to diversify source of funds and widen lender base to scale their borrowing requirements while lowering costs and (vii) Expansion through inorganic growth.The AUM of the company has grown by 28.35 pct CAGR over FY22-24 while profit of the company has grown by 32.16 pct CAGR over the same period. The company’s operating cost to adjusted net total income ratio is increased 37.33 pct in FY22 to 43.40 pct in FY24. However, the GNPA of the company declined by 33 bps YoY to 0.45 pct in FY25 and NNPA fell by 32 bps YoY to 0.08 pct in FY24.Key RiskNon-compliance with the RBI’s or any other regulators’ observations made during their inspections could expose them to penalties, restrictions and cancellation of their license.An inability of their borrowers to meet their repayment obligations or any increase in defaults or any large-scale defaults from their borrowers could adversely affect their business.Any adverse developments in their focused sectors could adversely affect NACL business.Financial PerformanceFinancial MetricsFY22FY23FY24AUM (Rs. mn)7108390087117100Net worth (Rs. mn)173901955423143Profit and Loss Metrics Total Revenue (Rs. mn)18901130509059Profit (Rs. mn)181924223177Spread (%)5.34%5.89%7.53%Cost to Adjusted Net Total Income (%)37.33%42.83%43.40%GNPA (%)0.50%0.77%0.45%NNPA (%)0.21%0.40%0.08%Balance Sheet Metrics RoA (%)2.60%2.73%2.97%RoE (%)10.38%12.55%14.54%Debt to Equity (x)3.273.43.9ValuationNorthen Arc Capital Limited (NACL) is a diversified are a diversified financial services platform that caters to the varied credit requirements of Indian households and businesses. Over the course of the last 15 years, they have created a differentiated play within the Indian retail credit ecosystem, extending their reach across six sectors. At the upper end of the price band of Rs. 263 the issue quotes at P/BV of ~1.3x based on FY24 post issue capital. One can avoid this issue.Also read: Why Is Financial Advisory Important?Disclaimer: The views shared in blogs are based on personal opinions and do not endorse the company’s views. Investment is a subject matter of solicitation and one should consult a Financial Adviser before making any investment using the app. Investing using the app is the sole decision of the investor and the company or any of its communications cannot be held responsible for it.