SBFC Finance Limited

03-Aug-23

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Shivam Gupta
shivamgupta@rathi.com Company Description
Issue Details
SBFC Limited is a systemically important, non-deposit taking non-
banking finance company (“NBFC-ND-SI”) offering Secured MSME
Issue Details
Loans and Loans against Gold, with most of its borrowers being
Issue Size (Value in ₹ million, Upper Band) 10,250 entrepreneurs, small business owners, self-employed individuals,
Fresh Issue (No. of Shares in Lakhs) 1052.6 salaried and working-class individuals.
Offer for Sale (No. of Shares in Lakhs) 745.6
Bid/Issue opens on 03-Aug-23 Among MSME-focused NBFCs in India, the company has one of the
Bid/Issue closes on 07-Aug-23 highest assets under management (“AUM”) growth, at a CAGR of 44%
Face Value Rs. 10 in the period from Fiscal 2019 to Fiscal 2023.
Price Band 54-57
Minimum Lot 260 As of June 20, 2023, approximately only 16.9 million MSMEs have
registered on UDYAM, of the estimated 70 million MSMEs in India,
Objects of the Issue leaving many MSMEs without access to organized finance owing to
their unregistered status. As of March 2022, less than 15% of MSMEs
➢ Fresh issue: ₹ 6000 million have access to credit in any manner and traditional institutions have
Company proposes to utilize the Net Proceeds towards historically refrained from providing credit to underserved or
augmenting its Company’s capital base to meet its future capital unserved MSMEs and self-employed individuals, leaving them to
requirements arising out of the growth of its business and assets. resort to credit from informal sources.

➢ Offer for sale: ₹4,250 million. Further, with increasing presence of MSME lenders in smaller cities
and lenders increasingly focusing on underserved customers, the
Book Running Lead Managers portfolio of secured MSME loans with ticket size between ₹ 0.50
ICICI Securities Limited million and ₹ 3.00 million is expected to grow at a CAGR of 18% -
Registrar to the Offer 20% between Fiscal 2023 and Fiscal 2026. In addition, there has
been credit growth in non-metro cities, owing to financial literacy,
KFIN Technologies Limited mobile penetration and government schemes aimed at bringing the
unbanked within the formal banking system. As a result, the industry
has witnessed an increase in access to formal credit to MSMEs, which
Capital Structure (₹ million) Aggregate Value could be attributed to the increase in the number of MSMEs
Authorized share capital 13000.0 registered with the Ministry of Micro, Small and Medium Enterprises,
Subscribed paid up capital (Pre-Offer) 9589.1 to 13.09 million in Fiscal 2023, from 0.50 million in Fiscal 2016.
Paid up capital (post-Offer) 10641.7 Accordingly, it focuses on disbursing loans with a ticket size in the
range of ₹ 0.50 million to ₹ 3.00 million and as of March 31, 2023,
87.27% of its AUM had a ticket size within this range.
Share Holding Pattern % Pre-Issue Post Issue
The company believes that its products allow many underserved and
Promoters & Promoter group 80.5% 65.5%
underbanked customers to thrive. As of March 31, 2023, the average
Public 19.5% 34.5% ticket size (“ATS”) of its Secured MSME Loans, Loans against Gold
Total 100.0 100 and other unsecured loans, based on disbursed amounts was ₹ 0.99
million, ₹ 0.09 million, and ₹ 0.69 million, respectively. Among
Financials NBFCs, the Gross NPA for Secured MSME Loans for ticket sizes
between ₹ 0.50 million and ₹ 3.00 million was 4.2% in March 2023.
Particulars (₹ In million) FY23 FY22 FY21
As of March 31, 2023, its Gross NPA to AUM ratio for ticket sizes
Revenue from operations 7,328 5,291 5,071 between ₹ 0.50 million and ₹ 3.00 million was 1.97%. Its total AUM
as of March 31, 2021, March 31, 2022, and March 31, 2023, was ₹
Operating expenses 2,498 2,116 1,495 22,213.23 million, ₹ 31,921.81 million, and ₹ 49,428.23 million,
respectively. As of March 31, 2021, March 31, 2022, and March 31,
EBITDA 4,830 3,175 3,576 2023, it had provided loans to 56,587, 72,816 and 102,722
Other Income 75 17 44 customers, respectively.

Depreciation 127 118 95

Valuation
EBIT 4,778 3,073 3,525

Interest 2,765 2,206 2,385 The company has diversified pan India presence with an extensive
network and can cater to large target customer segment.
PBT 2,014 867 1,140
At the upper price band company is valuing at P/BV of 2.6x with a
Tax 516 222 291 market cap of ₹ 60,658 million post issue of equity shares and return
Consolidated PAT 1,497 645 850
on net worth of 9.93%.

EPS 1.41 0.61 0.80 We believe that issue is fairly priced and recommend “Subscribe –
Long Term” rating to the IPO.
Ratios FY23 FY22 FY21
EBITDAM 65.91% 60.00% 70.52%
PATM 20.43% 12.20% 16.76%
Sales growth 38.51% 4.33%

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The company has a diversified pan-India presence, with an extensive network in its target customer segment. As of March 31, 2023, it has an
expansive footprint in 120 cities, spanning 16 Indian states and two union territories, with 152 branches. Its geographically diverse distribution
network, spread across the North, South, East, and West zones, allows us to penetrate underbanked populations in tier II and tier III cities in India.
Among MSME focused NBFCs, the company had the lowest proportion of AUM emanating from the largest state in its portfolio as of March 31,
2023.

As a result of its active management of state concentration, they have been able to maintain low levels of AUM concentration per state despite its
growth over the years. The company’s AUM is diversified across India, with 30.84%, being ₹ 15,242.41 million, in the North (in the states of
Chandigarh, Delhi, Haryana, Punjab, Rajasthan, Uttar Pradesh and Uttarakhand), 38.53%, being ₹ 19,047.97 million, in the South (in the states of
Karnataka, Andhra Pradesh, Telangana, Tamil Nadu and Puducherry), and 30.63%, being ₹ 15,137.85 million, in the West and East (in the states of
Gujarat, Madhya Pradesh, Maharashtra, West Bengal, Assam and Bihar) collectively, as of March 31, 2023. Its disbursements across zones are also
well-distributed, and company have reduced its concentration risk across industries and sectors, as demonstrated by the fact that no single
industry, including the manufacturing sector, contributes more than 10% of its loan portfolio as of March 31, 2023.

The company’s complete portfolio of loans has in-house origination and benefits from the risk management framework. Leveraging their
significant operational experience, they have set up stringent credit quality checks and customized operating procedures that exist at each stage
for comprehensive risk management. With a demonstrable track record of servicing loans such as gold loans, loans for two-wheeler vehicles and
have a CIBIL score above 700 at the time of origination. They source customers directly through its sales team of 1,911 employees as of March 31,
2023, and have adopted a direct sourcing model through branch-led local marketing efforts, repeat customers or through walk-ins. Its risk
management and underwriting processes, including the extensive customer assessment methods, and monitoring systems, have aided its healthy
portfolio quality indicators such as low rates of Gross NPAs and Net NPAs. As of March 31, 2021, March 31, 2022, and March 31, 2023, its Gross
NPA ratio was 3.16%, 2.74% and 2.43%, respectively, and Net NPA ratio was 1.95%, 1.63% and 1.41%, respectively.

Its collections process is also technology driven. As of March 31, 2023, approximately 89.49% of its Secured MSME Loan collections and 90.92% of
its unsecured loan collections were non-cash-based EMI collections, thus reducing the cash management risk, and enabling customers to receive
real-time payment receipts through SMS. The company’s business model focuses on the collection of cash flows. Its AUM has grown at a CAGR of
49.17% from ₹ 22,213.23 million as of March 31, 2021, to ₹ 49,428.23 million as of March 31, 2023. In terms of business momentum, it witnessed
disbursement growth at a CAGR of 40% between Fiscal 2019 and Fiscal 2023.
The company has an experienced and dedicated management team with significant industry experience and who have demonstrated their ability
to deliver growth and profitability across business cycles. Each of them has extensive experience in banking or related industries such as finance,
commercial operations, strategy, audit, business development, human resources, compliance, and public relations. They are backed by marquee
institutional investors such as the Clermont Group, Arpwood Group and Malabar Group, who provide their expertise in their operations.

Key financial and operational parameters in the relevant period:

As of / For the year ended March 31,

Particulars
2021 2022 2023
Customers 56587 72816 102722
AUM (₹ million) 22213.23 31921.81 49428.23
Net Worth (₹ million) 12051.08 12871.67 17272.68
Tangible Net Worth (₹ million) 9447.16 10267.75 14668.76
Leverage (AUM/ Net worth) 1.84 2.48 2.86
AUM/ Tangible Net Worth 2.35 3.11 3.37
Restated Profit After Tax for the Year / Period (₹ million) 850.1 645.21 1497.36
RoA (%) 2.0% 1.5% 2.9%
ROE (%) 7.7% 5.2% 9.9%
Return on Tangible Equity 10.0% 6.6% 12.0%
Branches 124 135 152
Employees 1471 2048 2822
AUM per branch (₹ million) 179.14 236.46 325.19
AUM per employee (₹ million) 15.1 15.59 17.52
Disbursement (Secured MSME Loans) per branch per month (₹ million) 4 8.23 12.48
Disbursement (Secured MSME Loans) per employee per month (₹ million) 0.66 0.89 1.07
Gross NPA ratio (%) 3.2% 2.7% 2.4%
Net NPA ratio (%) 2.0% 1.6% 1.4%
Operating Expenses to Average AUM (%) 6.6% 6.6% 5.7%
Average cost of borrowing (%) 8.1% 7.7% 8.2%
Cost to income ratio (%) 46.3% 57.2% 49.8%
Provision Coverage Ratio (%) 38.3% 40.4% 42.0%
Average yield on Gross Loan Book (%) 15.1% 14.9% 15.9%
Net Interest Margin (%) 11.7% 9.4% 9.3%

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The following table sets out key financial and operational parameters pertaining to the Secured MSME Loan portfolio as of/ for the relevant
periods:

As of / For the year ended March 31,

Particulars
2021 2022 2023
Live MSME loan accounts 12250 23018 40872
MSME borrowers 9665 19004 34738
MSME disbursements (₹ million) 5955.21 13328.28 22768.2
AUM from MSMEs (₹ million) 14422.75 23262.7 39200.03

Competitive Strengths

Diversified pan-India presence with an extensive network to cater to target customer segment.

The company has strategically focused its expansion within its target customer segment, which offers significant growth opportunities. It is a
lender that provides loans to borrowers being entrepreneurs, small business owners, self-employed individuals, salaried and working-class
individuals. Most small businesses in India do not maintain documents such as income proof, business registration, GST registration, income tax
filings, and bank statements, which makes access to credit challenging.

As of March 31, 2023, it has an expansive footprint in 120 cities, spanning 16 Indian states and two union territories, with 152 branches. They
have lowered their geographic concentration risk and its extensive, geographically diverse distribution network allows it to penetrate
underbanked populations in tier II and tier III cities in India. As of March 2022, less than 15% of the approximate 70 million MSMEs in India have
access to formal credit in any form. As a result of its active management of state concentration, it has been able to maintain low levels of AUM
concentration per state despite the growth over the years. Set forth is the AUM distribution across regions, including as a percentage of its total
AUM, for each of the period indicated:

As of March 31,
2021 2022 2023
Region
Percentage of total Percentage of total Percentage of total AUM
AUM (₹million) AUM (₹million) AUM (₹million)
AUM (%) AUM (%) (%)
South India 8632.54 39% 11994.16 38% 19047.97 39%
North India 6486 29% 10303.28 32% 15242.41 31%
West India 5743.41 26% 7410.05 23% 10370.45 21%
East India 1347.79 6% 2212.04 7% 4767.4 10%
Total* 22213.23 100% 31921.81 100% 49428.23 100%

While MSME focused NBFCs have a significant portion of their portfolio (between 25% to 42%) emanating from the largest state in their
respective portfolio, it had the lowest proportion of AUM, being 17% in Fiscal 2023, emanating from the largest state in its portfolio,
demonstrating better diversification and a granular, even spread.

The company’s branches are also spread across India to reduce concentration risk, with 28.95% in the North, 31.58% in the South, and 39.47% in
the West and East collectively, as of March 31, 2023, and through its 152 branches, they strategically focus for untapped customers with potential
for beneficial yield. Its presence in 16 states and two union territories reduces the concentration risk in comparison to peers, while also allowing it
to penetrate a larger number of territories without the risk of entry into an unfamiliar market. As of March 31, 2023, they have reached an average
district level penetration of 27.68% in the states in which they operate, calculated based on location 205 of its branches, which gives it the ability
to scale, expand, underwrite prime risk and mitigate concentration risk. Set out below is the regional distribution of its branches as of March 31,
2023:

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100% in-house sourcing, leading to favorable business outcomes.

Prohibitive cost of delivering services and high-risk perception have constrained traditional institutions’ ability to provide credit to underserved
or unserved MSMEs and self-employed individuals. They source customers directly through their sales team of 1,911 personnel as of March 31,
2023, and have adopted a direct sourcing model through branch-led local marketing efforts, repeat customers or through walk-ins, which has
helped them to maintain contact with their customers and establish close relationships with them, high levels of customer 206 satisfaction and
increased loyalty. Its AUM per employee has also increased from ₹ 15.10 million as of March 31, 2021, to ₹ 15.59 million as of March 31, 2022, and
further to ₹ 17.52 million as of March 31, 2023.

For Loan against Gold portfolio, through the gold Genie application, customers can apply for gold loan via social media or their website, receiving
an immediate call-back after demonstrating interest. The customer can input all KYC details, reducing turnaround time, check progress of
disbursal, and capture images of the jewelry on the application itself, enabling easy customer onboarding directly.

Comprehensive credit assessment, underwriting and risk management framework.

They have a credit assessment and risk management framework to identify, monitor and manage risks inherent in the operations. Credit
management is crucial to its business since a significant number of its customers are from the underserved financial segment. It has a core focus
area of small enterprise borrowers, whose monthly income is up to ₹ 0.15 million, with a demonstrable track record of servicing loans such as gold
loans, loans for two-wheeler vehicles, among others. Accordingly, as a lender, its lending decisions are contingent on evaluation of the ability of the
individual and the business to service the loan, and the basis for such assessment is a combination of credit history and present cash flows.

Its grade-based classification shows differential credit performance which ranks risks. Its Gross NPA as on March 31, 2023, for Grade 1, Grade 2,
Grade 3, Grade 4 and Grade 5 was 0.79%, 1.09%, 1.56%, 2.42% and 5.73%, respectively. Set forth below are details of the customer segmentation
in terms of AUM:

As of March 31,
2021 2022 2023
Region
Percentage of Percentage of total Percentage of total AUM
AUM (₹million) AUM (₹million) AUM (₹million)
total AUM (%) AUM (%) (%)
Grade 1 1296.82 12% 3667.11 18% 7326.57 20%
Grade 2 2280.07 20% 5647.89 28% 12252.12 34%
Grade 3 1284.35 11% 2439.93 12% 4270.43 12%
Grade 4 2619.1 23% 4455.41 22% 8028.58 22%
Grade 5 2360.15 21% 3010.55 15% 3312.26 9%
Not Segmented 1355.61 12% 1192.84 6% 759.73 2%
Sub-total 11196.1 100% 20413.73 100% 35949.69 100%

Set forth below are details of the customer segmentation in terms of disbursal amount:

As of March 31,
2021 2022 2023
Percentage of
Region
Disbursement Percentage of total Disbursement total Percentage of total
Disbursement (₹million)
(₹million) disbursement (%) (₹million) disbursement disbursement (%)
(%)
Grade 1 1094.89 20% 2851.28 22% 4748.27 22%
Grade 2 1458.77 27% 4158.86 33% 8267.01 39%
Grade 3 640.35 12% 1515.55 12% 2535.66 12%
Grade 4 1046.68 20% 2635.16 21% 4896.09 23%
Grade 5 915.17 17% 1257.85 10% 818.81 4%
Not Segmented 202.83 4% 316.34 2% 203.2 1%
Total 5358.69 100% 12735.04 100% 21469.04 100%

Extensive on-ground collections infrastructure leading to maintenance of asset quality.

While its underwriting model contributes to suitable customers being onboarded, they have also created an extensive on-ground collections
infrastructure to ensure that they maintain high asset quality. Its branches are staffed with people sourced from the local area, with each branch
servicing an area with a limited radius, resulting in branch staff being able to quickly attend to a customer’s location as issues arise.

They also have an in-house collections team, responsible for detecting likely default early, thereby maintaining relatively low Gross NPA ratios.
They have a three-tier collections infrastructure, comprising (i) tele-calling, (ii) field collection, and (iii) legal recovery, in order to optimize
collections and minimize NPAs.

For customers categorized as NPA accounts, if its recovery team is unable to recover payments, they typically initiate legal action, including in
respect of dishonored non-cash instruments. For this purpose, they have an in-house legal team which supports and amplifies collections efforts to
ensure that credit costs are minimized. For Fiscal 2021, 2022 and 2023, its Gross NPA ratio was 3.16%, 2.74% and 2.43%, respectively, and its Net
NPA ratio was 1.95%, 1.63% and 1.41%, respectively.

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Healthy liability franchise with low cost of funds

Its ability to access diversified sources of funding is a key contributor to the growth. The company intends to continue to diversify its funding
sources, identify new sources and pools of capital and implement ALM policies with the aim of further optimizing its borrowing costs and helping
expand its net interest margin. The following table sets forth the average cost of borrowings trend by ratings category among NBFCs:

The company believes it could access borrowings at a competitive cost due to its stable credit history, credit ratings, conservative risk
management policies and brand equity. Its average cost of borrowing was 8.11%, 7.65% and 8.22% for Fiscal 2021, 2022 and 2023, respectively
and its Incremental Cost of Borrowings (which represents weighted average rate of interest on fresh borrowings in the relevant period) was
8.76% for Fiscal 2023.

As of March 31, 2023, their outstanding borrowings included ₹ 29,121.73 million from public and private sector banks and ₹ 3,672.49 million from
NBFCs and other financial institutions. As of March 31, 2023, its total borrowings aggregated to ₹ 37,458.33 million, comprising primarily of term
loans of ₹ 32,794.22 million, working capital demand loans from banks of ₹ 600.00 million, non-convertible debentures of ₹ 430.00 million and
other collateralized borrowings of ₹ 3,634.11 million. It has received a credit rating upgrade of [ICRA] A+ (Stable) in October 2022 from [ICRA] A
(Positive) in October 2021. The company has received a rating of CARE A+; Stable for its long-term bank facilities in April 2023. It/s ratings
indicate resilient liability origination despite challenges faced by the Indian economy for varied factors.

Consistent financial performance backed by profitable growth.

In a limited period, they have demonstrated a history of healthy financial performance. As of March 31, 2023, its average yield on Gross Loan Book
was 15.91%, with Secured MSME Loans and Loans against Gold accounting for 15.89% and 15.64%, respectively. Its AUM has grown from ₹
22,213.23 million as of March 31, 2021, to ₹ 49,428.23 million as of March 31, 2023, at a CAGR of 49.17%. It has witnessed consistent
improvement in its balance sheet position in the last three Fiscals.

The table below sets forth the contribution of each of its product categories in terms of AUM and as a percentage of total AUM and yield for each of
the corresponding periods:

As of March 31,
2021 2022 2023 AUM CAGR (Fiscal 2021-Fiscal
AUM Percentage of AUM Percentage of AUM Percentage of total 2023) (%)
(₹million) total AUM (%) (₹million) total AUM (%) (₹million) AUM (%)
Secured
MSME
Loans 14422.75 65% 23262.7 73% 39200.03 79% 65%
Loans against
Gold 5600.5 25% 6395.64 20% 8641.02 17% 24%
Others* 2189.98 10% 2263.47 7% 1587.18 3% -15%
Total 22213.23 100% 31921.81 100% 49428.23 100% 49%

Its Return on Tangible Equity was 10.02%, 6.55% and 12.01% in Fiscal 2021, 2022 and 2023. Further, its Return on Total Tangible Assets was
2.15%, 1.57% and 3.07% in Fiscal 2021, 2022 and 2023.

Experienced, cycle-tested, and professional management team with good corporate governance backed by marquee investors.

The company has an experienced and dedicated management team, including KMPs and Senior Management, with significant industry experience
and who have demonstrated their ability to deliver growth and profitability across business cycles. CEO, Aseem Dhru, has more than 25 years of
experience, and was previously Group Head - Business Banking, Working Capital, and Retail Agri business at HDFC Bank. It’s Chief Financial
Officer, Narayan Barasia, has experience in financial management, accounts, tax, treasury, secretarial and legal matters.

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He has worked at Godrej Foods Limited, Godrej Sara Lee Limited, and subsequently worked with Olam Agro India Limited. Prior to joining the
Company, he was working with Greaves Cotton Limited, where he was the President – Auxiliary Power Business & Industrial Engineering
Business. Mahesh Dayani, its Chief Business Officer, has worked at ICICI Bank Limited and HDFC Bank.

Business Strategies

Leverage its pan-India network to deepen its penetration in its target customer segment.

Its business model is scalable and by drawing on the experience of its team, they expect to be able to expand its operations efficiently, with low
incremental costs. Owing to its geographical diversification at present, they intend to undertake geographical expansion by penetrating further in
states in which they are already present. They witness higher AUM at branches with higher vintage and intend to set up new branches gradually as
the branches we have added in Fiscal 2021 increasingly mature.

They are constantly evaluating additional locations using its criteria and expect to continue to add branches to grow their network in the near
term. As of March 31, 2023, they had reached an average district level penetration of 27.68% in the states in which they operate, calculated based
on location of its branches.

Expand its product portfolio through offering affordable housing finance to the target customer segment, utilizing its existing network.

In December 2022, they incorporated a subsidiary, SBFC Home Finance Private Limited, through which it intends to commence its housing finance
business. To meet the minimum net owned funds requirement of the Subsidiary under Paragraph 5.1 of the Master Directions – Non-Banking
Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021, Company will be required to subscribe to the equity share
capital amounting to ₹ 200.00 million of the Subsidiary. The increasing demand for housing is likely to continue the momentum of the NBFC
housing credit market, especially affordable housing finance companies.

Diversify sitsce of borrowings and improve operating leverage.

Its average cost of borrowings was 8.11%, 7.65% and 8.22% in Fiscal 2021, 2022 and 2023, respectively. Its low cost of funds is due to several
factors, primarily its stable credit history, credit ratings, conservative risk management policies and brand equity. A lower average cost of
borrowing enables it to competitively price its loan products and helps to grow their business and operations. They have also diversified their
funding sources by using term loans, proceeds from loans securitized, proceeds from the issuance of NCDs from banks and financial institutions to
ensure that its debt capital requirements are met at optimal costs.

They will continue to review and identify means to improve its cost to income ratio and improve its overall net interest margin from current levels,
which stands at 9.32% as of March 31, 2023.

Utilize technology to drive operational efficiency.

They have made strategic investments in its information technology systems and implemented automated, digitized technology-enabled platforms
and tools, to strengthen its offerings and derive greater operational, cost and management efficiencies.

The company plans to ensure that its information technology systems continue to help it with several functions, including loan origination, credit
underwriting, collections, and customer service. They intend to strategically invest its 212 resources in leveraging technology for efficient
operations as they scale up to ensure increased effectiveness of the operations. They intend to reduce its operating costs and increase efficiency in
its business operations to improve the overall customer experience through increasing use of technology. They intend to continue strengthening
and increasing the user-friendliness of its existing technology infrastructure.

Business Operations

They are an NBFC-ND-SI, headquartered in Mumbai, India, offering Secured MSME Loans and Loans against Gold, and received its registration
from the Reserve Bank of India on September 24, 2008. Its AUM has grown from ₹ 22,213.23 million as of March 31, 2021, to ₹ 49,428.23 million
as of March 31, 2023, at a CAGR of 49.17%. Its restated profit after tax for Fiscal 2021, 2022 and 2023 was ₹ 850.10 million, ₹ 645.21 million, and ₹
1,497.36 million, respectively, and its Tangible Net Worth as of March 31, 2021, March 31, 2022, and March 31, 2023, was ₹ 9,447.16 million, ₹
10,267.75 million and ₹ 14,668.76 million, respectively. They focus on disbursing loans which have an ATS in the range of ₹ 0.50 million to ₹ 3.00
million and as of March 31, 2023, 87.27% of its AUM had an ATS within this range. As of March 31, 2023, 4.44% of its AUM comprised loans below
₹ 0.50 million and 8.29% comprised loans above ₹ 3.00 million.

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The following chart shows a breakdown of its AUM by states in India, including as a percentage of the total AUM, for each of the corresponding
periods:

As of March 31,2021 As of March 31,2022 As of March 31,2023

State/UT
(₹ in millions, except percentages)
Chandigarh 228.36 1.0% 191.7 0.6% 133.31 0.3%
Delhi 1537.56 6.9% 1415.22 4.4% 1204.61 2.4%
Haryana 948.77 4.3% 1680.58 5.3% 3282.27 6.6%
Punjab 626.09 2.8% 679.81 2.1% 728.32 1.5%
Rajasthan 579.35 2.6% 877.19 2.8% 1175.69 2.4%
Uttar Pradesh 2004.33 9.0% 4695.13 14.7% 7674.22 15.5%
Uttarakhand 561.54 2.5% 763.65 2.4% 1043.99 2.1%
Andhra Pradesh 1883.56 8.5% 2069.5 6.5% 2708.7 5.5%
Karnataka 3659.34 16.5% 5350.25 16.8% 8611.08 17.4%
Puducherry 61.06 0.3% 64.89 0.2% 123.5 0.3%
Tamil Nadu 972.11 4.4% 1090.25 3.4% 1404.89 2.8%
Telangana 2056.47 9.3% 3419.27 10.7% 6199.8 12.5%
Gujarat 1405.26 6.3% 1379.47 4.3% 1548.41 3.1%
Madhya Pradesh 1467.24 6.6% 2416.23 7.6% 3616.76 7.3%
Maharashtra 2870.91 12.9% 3614.35 11.3% 5205.28 10.5%
Assam 991.94 4.5% 1452.67 4.6% 2286.44 4.6%
Bihar 7.87 0.0% 438.35 1.4% 1955.58 4.0%
West Bengal 347.98 1.57% 321.02 1.01% 525.38 1.06%
Total 22,213.23 100.0% 31,921.81 100.0% 49,428.23 100.0%

Secured MSME Loans

Under its Secured MSME Loans portfolio, they offer a wide range of financial solutions that help entrepreneurs and MSMEs meet their growing
credit needs. The average ticket size of their Secured MSME Loans is ₹ 0.99 million, with average contractual tenure of 9.84 years, as of March 31,
2023.

Collections for its Secured MSME Loans occur on an installment basis. For processing payments, its collection representatives can access customer
data on the phone and issue receipts digitally in real time through their mobile application. As of March 31, 2023, approximately 89.49% of its
collections from Secured MSME Loans were non-cash-based EMI collections, thus reducing its cash management risk. As of March 31, 2023, we
service over 34,738 borrowers in its Secured MSME Loans portfolio. As of March 31, 2021, March 31, 2022, and March 31, 2023, its disbursements
of Secured MSME Loans were ₹ 5,955.21 million, ₹ 13,328.28 million, and ₹ 22,768.20 million, respectively. For the same periods, its disbursement
yield on Secured MSME Loans was 14.61%, 15.59% and 16.39%, respectively. Its Gross NPA ratios for the same periods were 3.41%, 2.86% and
2.55%, respectively.

Loans against Gold

Under its Loan against Gold portfolio, borrowers can capitalize on their gold possessions by pledging these to them in lieu of a loan. Up to 75% of
the gold item’s value can be sanctioned as a loan. Since the Loans against Gold are all collateralized by gold jewelry, there are minimal
documentary and credit assessment requirements, which also shorten its turnaround time and increases the ease with which its customers can do
business with us.

It can process Loans against Gold within a short time frame because of the efficient technology support, skilled workforce and clear policies on
internal processes. Although the duration for disbursement may vary due to the loan size and the number of items pledged, we can disburse loans
within a few minutes from the time gold is tendered to the appraiser. As of March 31, 2023, the average ticket size of the Loans against Gold is ₹
0.09 million, average tenure of 11 months. Collections for the Loans against Gold occur on a monthly interest payment basis.

We operate the secured Loans against Gold portfolio in 16 states and two union territories across India as of March 31, 2023. They service 59,437
borrowers in their Loans against Gold portfolio as of March 31, 2023. As of 214 March 31, 2021, March 31, 2022, and March 31, 2023, its AUM of
Loans against Gold were ₹ 5,600.50 million, ₹ 6,395.64 million, and ₹ 8,641.02 million, respectively. Its Gross NPA ratios for Loans against Gold
portfolio for the same periods were 1.50%, 1.71% and 1.21%, respectively.

Other loans

Other unsecured loans comprise (i) personal loans, (ii) business and professional loans. The personal loans are provided to salaried individuals
intended to support requirements such as financing weddings, dependent’s education, home renovation or purchase. The average ticket sizes for
their personal loans were ₹ 0.69 million, and with an average contractual tenure of 4.83 years, as of March 31, 2023.

As of March 31, 2021, March 31, 2022, and March 31, 2023, Its AUM of other loans were ₹ 2,189.98 million, ₹ 2,263.47 million, and ₹ 1,587.18
million, respectively. They have discontinued disbursal of other unsecured loans from September 2022.

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Branch Network

They have an extensive network of 152 branches, as of March 31, 2023, spread across 16 states and two union territories, and approximately 129
districts (out of 466 districts) across India, with Karnataka, Uttar Pradesh, Maharashtra, and Telangana being its key states.

The following table sets forth certain details of its branch network on a state/territory basis, as of March 31, 2023:

State/Union Territory Number of Districts Number of Branches % of Total Branches AUM (₹ millions) % of total AUM
Andhra Pradesh 13 9 5.92% 2708.7 5.48%
Assam 27 9 5.9% 2286.44 4.6%
Bihar 38 6 4.0% 1955.58 4.0%
Chandigarh 1 1 0.7% 133.31 0.3%
Delhi 9 4 2.6% 1204.61 2.4%
Gujarat 33 9 5.9% 1548.41 3.1%
Haryana 21 8 5.3% 3282.27 6.6%
Karnataka 30 21 13.8% 8611.08 17.4%
Maharashtra 35 20 13.2% 5205.28 10.5%
Madhya Pradesh 51 12 7.9% 3616.76 7.3%
Punjab 22 2 1.3% 728.32 1.5%
Puducherry 4 1 0.7% 123.5 0.3%
Rajasthan 33 7 4.6% 1175.69 2.4%
Tamil Nadu 32 3 2.0% 1404.89 2.8%
Telangana 10 14 9.2% 6199.8 12.5%
Uttar Pradesh 75 20 13.2% 7674.22 15.5%
Uttarakhand 13 2 1.3% 1043.99 2.1%
West Bengal 19 4 2.6% 525.38 1.1%
Total 466 152 100.0% 49428.23 100.0%

Set forth below are details of its market share* in the secured MSME lending portfolio, with a ticket size of ₹ 0.5 million - ₹ 3.0 million, in the
corresponding states, as of March 31, 2023:

State/Union Territory Portfolio outstanding ₹ 0.5 million - ₹ 3.0 million Asset Under Funding (₹ million) Market Share (%)

Assam 15869 770.78 4.9%

Bihar 25940 1505.63 5.8%
Uttar Pradesh 161898 4847.14 3.0%
Uttarakhand 25829 719.02 2.8%
Haryana 86554 2441.19 2.8%
Karnataka 236890 5663.6 2.4%
Telangana 169713 4050.93 2.4%
Madhya Pradesh 111632 2255.35 2.0%
Delhi 58450 665.52 1.1%
Andhra Pradesh 149562 1849.11 1.2%
Pondicherry 5133 59.44 1.2%
Maharashtra 360142 2831.03 0.8%
Chandigarh 4613 30.67 0.7%
Punjab 95801 452.1 0.5%
West Bengal 53065 265.21 0.5%
Rajasthan 195290 691.63 0.4%
Gujarat 241519 647.55 0.3%
Tamil Nadu 304156 731.73 0.2%

Treasury Operations and Funding

Its treasury operations are mainly focused on raising funds for meeting its funding requirements and managing short term surpluses. They have
secured financing from diversified sources of capital, including term loans, proceeds from loans securitized, proceeds from the issuance of NCDs
from banks and financial institutions to meet its capital requirements. As of March 31, 2023, its outstanding borrowings included ₹ 29,121.73
million in term loans from public and private sector banks, ₹ 3,672.49 million from NBFCs and other financial institutions and ₹ 600.00 million in
secured working capital demand loans from banks.

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The following table sets out its sources of capital for the periods indicated:

Fiscal 2021 Fiscal 2022 Fiscal 2023

Particulars Percentage of total Percentage of total Percentage of total
(₹ million) (₹ million) (₹ million)
borrowings (%) borrowings (%) borrowings (%)
Term loans - Secured
Banks 25,179.91 90.82% 27,253.65 92.42% 29121.73 77.75%
NBFCs and financial
institutions 375 1.35% 1,293.48 4.39% 3672.49 9.80%
Working Capital Demand Loan - Secured
Banks - - - 600 1.60%
Debt securities - Secured
Non- convertible
debentures 1,500.00 5.41% 430 1.46% 430 1.15%
Others
collateralized
borrowings 670.61 2.42% 511.05 1.73% 3634.11 9.70%
Total 27,725.52 100.00% 29,488.18 100.00% 37458.33 100.00%

➢ Industry Snapshot:

Constituents of NBFC industry in India

India’s COVID-19 emergency response and health-system preparedness package of ₹ 150 billion was announced in three phases (for the
medium term of 1-4 years) to address immediate requirement in the wake of the pandemic. A separate health-worker life insurance cover of ₹
5 million under Pradhan Mantri Garib Kalyan Yojana (“PMGKY”) was also announced to offer support to families of frontline health workers.

The Indian financial system includes banks and non-banking financial companies (NBFCs). Though the banking system dominates financial
services, NBFCs have grown in importance by carving a niche for themselves by catering to customers in underbanked regions or those who
would not be catered to by traditional financial institutions, due to absence of credit history or lack of proper collateral records.

Classification of NBFCs

NBFCs are classified based on liabilities into two broad categories: a) deposit-taking; and b) non-deposit taking. Deposit-taking NBFCs are
subject to requirements of capital adequacy, liquid assets maintenance, exposure norms, etc. Further, in 2015, non-deposit-taking NBFCs with
an asset size of ₹ 5 billion and above were labelled as ‘systemically important non-deposit taking NBFCs’ (“NBFC–ND–SI”) and separate
prudential regulations were made applicable to them.

Systemic credit to grow at 10% -12% CAGR between Fiscal 2023-2025

Corporate credit determines the growth in overall credit as it accounts for nearly two-third of systemic credit. Overall systemic non-retail
credit grew approximately 9% in Fiscal 2019, mainly driven by public sector undertakings and energy sector (oil and gas and power
generation and distribution). The corporate credit of banks grew approximately 3% year-on-year as of March 2019, as demand dropped
sharply, and alternate capital market channels opened up.
In Fiscal 2021, credit grew by approximately 6.4% supported by disbursements to MSMEs under the ECLGS and an uptick in economic activity
post the COVID-19 lockdown. In Fiscal 2022, the systemic credit growth picked up steam despite the second wave of COVID-19 hurting
economic growth in the first quarter of the Fiscal. The systemic credit grew at 9% from the previous year to reach approximately ₹ 166 trillion.

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NBFC credit to grow faster than systemic credit between Fiscal 2023 and Fiscal 2025

Retail segment to support NBFCs overall credit growth.

Post COVID, NBFCs are back on track with an estimated credit growth of 12% - 13% during Fiscal 2023. Going ahead, CRISIL MI&A expects the growth
trend to continue, with credit growth at 13% - 14% during Fiscal 2024. The industry will continue to witness the emergence of newer NBFCs catering to
specific customer segments. The pandemic and consequent acceleration in adoption of technology and change in consumer habits and increasing
availability of data for credit decision-making has made it possible to build an NBFC lending business without investing large sums to have brick-and-
mortar presence on the ground. Overall, between Fiscal 2023 to Fiscal 2025, CRISIL MI&A forecasts NBFC credit to grow at a CAGR of 12% - 14%.
Further, retail credit given out by NBFCs is forecast to grow at a pace of 13% -15% CAGR over the same period.

Housing and auto to lead NBFC credit growth

Housing outstanding book of NBFCs and HFCs grew at a healthy CAGR of 15% over Fiscal 2015 to Fiscal 2020, led by increasing demand from Tier II
and III cities, rising disposable incomes, and government initiatives such as the Pradhan Mantri Aavas Yojana.

NBFCs' auto finance book is anticipated to have increased by 15% – 17% year-on-year in Fiscal 2023, up from a 4.6% year-on-year increase during the two
preceding years. In Fiscal 2024, pent-up demand and new launches is expected to drive sales of cars and utility vehicles, while the infrastructure sector will
have a significant impact on the demand for commercial vehicles, fleet replacement, and last-mile connectivity, causing auto loans to grow at 12% - 14%.

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NBFCs have a reasonable market share across segments.

NBFCs have consistently gained or maintained market share across most asset classes over the last few years. Though, in certain segments such as housing
finance to prime customers, they have lost market share to banks due to the decline in market interest rates. In the gold loans market, NBFCs slightly lost
market share in Fiscal 2022 due to increasing focus of banks (both public and private) towards gold loans as well as RBI permitting banks to offer gold
loans at a higher loan-to-value amidst the COVID-19 pandemic.

MSME lending in India

The National Sample Survey in its 73rd round dated June 2016 estimated that there are around 63.5 million MSMEs in India. Since then, the number of
MSMEs is estimated to have increased further to around 70 million as of Fiscal 2022. The segment currently contributes to 30% of the GDP, over 40% of
exports and creates employment for about 110 million people in the country, thus supporting economic development and growth.

The RBI has adopted the definition of MSMEs in line with the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. This
definition is based on investments in plant and machinery in the manufacturing and services sectors.

To bring in more enterprises under the ambit of MSMEs and widen the definition of MSMEs taking into account inflation over the past few years, in
June 2020, the Government revised the MSME investment limit across each category and introduced an alternate and additional criterion of
turnover buckets to the definition. It further removed the difference between the definition of manufacturing based and services based MSMEs.

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Overall MSME lending has grown at a CAGR of 10% in past decade; NBFC share estimated at 24%

Total size of MSME lending market across ticket sizes and various player groups (banks, NBFCs, small finance banks, and other formal lenders) to
be around ₹ 26 trillion as of March 2023. This market size includes loans taken by MSMEs across various constitution types (sole proprietorships,
partnership firms, private and public limited companies, and co-operatives) and the ticket size spectrum, and includes loans extended in the name
of the firm/entity/company as well as the individuals in case of micro enterprises or entrepreneurs.

CRISIL MI&A estimates loans to MSMEs to have grown at a CAGR of 10% during Fiscal 2012 to Fiscal 2023, which is similar to the nominal GDP
growth in this period. This can be attributed to various events during this time span that has impacted MSMEs – demonetisation of high-value
currency loans in November 2016, the implementation of GST subsequently, the economic slowdown in Fiscal 2020 followed by the COVID-19
pandemic.

In Fiscal 2023, with recovery in economic activity, MSME lending is estimated to have grown at a 13% growth rate year-on-year. Further, in Fiscal
2024, CRISIL MI&A projects the MSME overall industry growth to be at 13% - 15% owing to budgetary push and rise in entrepreneurship in India.

➢ Comparison of Accounting Ratios with Listed Industry Peers

Name of Company Face Value (₹ Per share) EPS (₹) FY23 PE (FY23) PAT FY23 (in ₹ million)
SBFC Finance Ltd 10 1.71 40.42x 1,497.96
Peer Companies
Aavas Financials Ltd 10 54.38 28.80x 4,296.44
Home First Finance 2 26.01 31.12x 2,282.92
AU Small Finance 10 21.86 35.01x 14,279.25
Five-star business 1 20.71 32.47x 6,034.96

Key Risk:

➢ The risk of non-payment or default by the borrowers may adversely affect its business, results of operations and financial condition.
➢ The company depends on the accuracy and completeness of information provided by the customers and certain third-party service providers
and their reliance on any erroneous or misleading information may affect judgement of their creditworthiness, as well as the value of and title
to the collateral.
➢ The quality of their portfolio may be impacted due to higher levels of NPAs, and its business may be adversely affected if they are unable to provide for
such higher levels of NPAs.
➢ Its inability to assess and recover the full value of collateral or amounts outstanding under defaulted loans in a timely manner, or at all, could
adversely affect its business, results of operations and financial condition.
➢ The company requires substantial capital for its business and any disruption in sources of capital could have an adverse effect on its business,
results of operations and financial condition.
➢ Its business is particularly vulnerable to interest rate risk, and volatility in interest rates for both lending and treasury operations, could have
an adverse effect on its net interest income and net interest margin, thereby affecting their results of operations and cash flows.

Valuation:

The company has diversified pan India presence with an extensive network and can cater to large target customer segment.

At the upper price band company is valued at P/BV of 2.6x with a market cap of ₹ 60,658 million post issue of equity shares and return on net
worth of 9.93%.

We believe that issue is fairly priced and recommend “Subscribe – Long Term” rating to the IPO.

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Ratings Guide (12 months) Buy Hold Sell

Large Caps (Top 100 companies) >15% 0%-15% Below 0%
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