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Arman Financials: Serving India UnInc.


10% Per Day!

That’s the interest rate many small street vendors in villages and tier-3 cities pay to private financiers.

Picture this: Every morning, a local private financier visits street vendors—those selling flowers, vegetables, or running tea shops—who need money to buy raw materials for the day. Let’s say a vendor needs 1000/- to buy inventory but doesn’t have that amount. Enter the financier.

The vendor signs a surety note for 1000/- or gives a thumb impression, but the financier only hands over 900/-. The interest is deducted upfront. In the evening, the financier returns to collect the 900/- and gives back the surety note. The vendor pays a steep 10% interest rate for just one day.

The interest rate & process may differ from state to state, but you got the gist, right?

This is the harsh reality for people relying on daily loans to keep their small businesses running. We, as a nation, are starved for capital.

If you think of individual lenders’ profiles in India as a pyramid, we can see three categories:

  • Banked (white-collar jobs, businessmen, small & medium enterprises) – Majorly served by banks.
  • Underbanked (blue-collar jobs, micro-enterprises) – Majorly served by banks & NBFCs.
  • Unbanked (daily labourers, informal sector workers like migrant workers, domestic helpers, etc.) – Served by NBFCs & Micro Finance Institutions.

Microfinance players serve the underbanked & unbanked segment mainly. Even these MFI players also eventually strive to climb up the pyramid & become universal banks (Bandhan, Ujjivan, Equitas, etc.).

The cyclical nature of the MFI Sector

Banking in itself is cyclical. Historically, MFIs have seen a huge blow (typically a big one) once every three years. If our economy sneezes, people at the fag end of the economic pyramid catch a cold, and so does the MFI industry that serves them. The instances are many: the MFI crisis in Andhra Pradesh (2011), Loan waiver (2014), Demonetisation (2016), Covid (2019) – All these in less than a decade.

Arman Financials: Serving India UnInc.

We just have to understand that this cyclicality can’t be changed, and we have to make peace with it while analyzing companies in this sector.

One metric that helps all MFIs to navigate such volatility is – high NIMs.

Simply put, charge higher interest rates to all borrowers. This way, when things go south, you have a buffer to absorb the impact.

Even within these adverse sectors, there are many companies that are creating niches for themselves (to an extent) and have created shareholders’ wealth in the process. One such company is Arman Financials.

In this post, let’s discuss three key points about Arman:

  • How they handled crisis in the past
  • How they are handling risks now
  • Future plans & growth targets

An Agile Arman

Headquartered in Ahmedabad and incorporated in 1992, Arman started with microfinance (JLG model) and slowly ventured into two-wheeler and MSME loans. As of now, they operate in 10 states (concentrated mainly across Gujarat, UP, MP, Rajasthan, etc.) with approximately 400 branches.

In the last 10 years, the company has grown its AUM by 39% CAGR, NII by 33%, and PAT by 36%, all while maintaining healthy NIMs.

Arman Financials: Serving India UnInc.

*Source: Arman FY23 AR

What makes them interesting?

Well, it surely is not JLG. Joint Lending Group is not unique. Post the AP crisis in 2011, almost every MFI incorporated it to mitigate their risk.

However, the way the management handled some of the crises helps us understand their conservative nature.

A story of two black swan events.

Black swan 1: Demonetisation

Post the crisis, the company had:

  • Stopped disbursements for four months and shifted the focus to collections and maintaining asset quality. AUM came down from 230 crores to 200 crores.
  • Went aggressive on provisions and write-offs. Took significant and proactive write-offs. Consolidated write-offs increased from 73 lakhs to 3.2 crores (1.2% of the book) in the past fiscal.
  • Raised 33.3 crores in the form of NCDs to handle the liquidity situation.
  • Yields & NIMs have fallen, but nothing alarming. At the peak, the GNPA was at 2.6%.
  • More importantly, the promoter was buying from the open market.

Management statement on the impact of demonetisation:

Arman Financials: Serving India UnInc.

Source: Q2FY27 press release

Arman Financials: Serving India UnInc.

Arman Financials: Serving India UnInc.

Promoter increasing stake:

Arman Financials: Serving India UnInc.

Source: BSE Insider Trading

Black swan 2: Covid

The magnitude of the crisis may be 5x that of demonetisation, but the good thing is, they have the playbook ready.

  • Zero disbursements for Q1FY21 (Apr-May 2020). Post Q1, loans were given only to existing customers, with reduced ticket sizes.
  • Provisions of 51.5 Cr (6.7% of the AUM) were taken, along with additional write-offs of 16.5 Cr. They maintained net NPA at 0.6% as of FY21.
  • GNPAs went as high as 4.7%, but were completely provided.
  • Luckily, they were well capitalized going into Covid, having raised 260 Cr in debt a couple of months before the pandemic hit.

Here is their action plan. It’s interesting to read and see how it panned out (with a hindsight bias though):

Arman Financials: Serving India UnInc.

*Source: Covid Business Plan, Apr 2020

Arman Financials: Serving India UnInc.

*Source: Arman AR 2023

They have handled two black swan events in the less than five years and successfully came out of it. We have to give it for the management.

Let’s address risks

Any MFI lender will mainly face three major risks: Concentration risk, Asset risk, and Funding risk.

Concentration Risk:

MFIs always start as regional players and then slowly scale. That’s the playbook of every MFI you consider:

  • Bandhan – West Bengal
  • Ujjivan – Karnataka
  • Equitas – Tamil Nadu
  • AU – Rajasthan

All of these companies, over a period, have scaled to other states to reduce geography-specific risks like cyclones, local politics, etc.

Arman is fairly diversified across geographies (let’s not call it well-diversified). Their book is equally divided between Gujarat and UP, making up around 50% of the overall book, followed by Bihar (15%), MP (12%), and Maharashtra (9%).

Arman Financials: Serving India UnInc.

*Source: Arman Q4Fy24 Investors Presentation

Asset Risk:

Out of all three products they deal with (MFI, 2W & MSME), MFI is the most volatile. MFI currently contributes more than 80% of the overall book. The management understands this and is slowly increasing their exposure towards 2W & MSME lending.

The management has guided that over the next 3 years, the MFI segment is expected to decrease from 82% to 60% of the overall book.

Funding Risk:

Not just the asset side of the book, the liability profile of an MFI should also be diversified. Arman is taking the right steps in this direction. They borrow around 50% of their requirement from Banks & NBFCs, down from 60% in FY23. They are slowly increasing their exposure towards Development Finance Institutions like NABARD and SIDBI, which currently stands at 5.1%.

Arman Financials: Serving India UnInc.

*Source: Arman Q4Fy24 Investors Presentation

The growth story in numbers

In the past five years:

  • AUM grew by 31% CAGR to 2164 Cr
  • PAT grew by 37% CAGR to 174 Cr
  • Yields have been consistently maintained in the range of 23 to 28%.
  • Return ratios are best in the industry with ROE at 32.4% and ROA at 7.1%
  • Asset quality is strong at GNPA at 2.9% and Net NPA at 0.16%.
  • Arman’s rating was upgraded from BBB+ to A- by CARE. The consolidated net worth is currently at 815 Cr.
  • The company maintains a healthy liquidity position with positive ALM across tenures, 180 Cr in cash, and another 320 Cr in undrawn sanctions.

Arman Financials: Serving India UnInc.

*Click on the image to enlarge

Valuation: Fairly valued with a prudent approach to double AUM

There is some pressure on collection efficiency due to elections and overlending in some areas, but the management expects it to normalize over the next few quarters.

They are targeting loan book growth of 25-30% for FY25 and aiming for a 5000 Cr AUM in the next few years (double the current AUM). Of this, the MFI book is expected to reduce to ~60% from the current 82%.

The company raised 230 Cr in QIP in Dec 2023 at a price of 2195/-. You may see a small dip in the promoter holding in Dec 2023 shareholding pattern for the same reason and it is not due to any promoter selling.

Post the QIP, the net worth is currently at 770 Cr. As of now, the company is trading at 2.6 times book TTM and around 2.2 times FY25E. The valuations look reasonable.

To summarize:

  • They are agile and understand risk. They have handled the crisis well – twice.
  • They are maintaining healthy AUM and NII growth without compromising on asset quality.
  • Raised 230 Cr in QIP in Dec 2023 and are now adequately funded for the next leg of growth.
  • Targeting MFI to be around 60% of overall AUM over the next few years.
  • Aiming for 5000 Cr AUM over the next 3 years.
  • Reasonably valued at 2.2 times price to book for FY25E.

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Disclosure: Arman is part of our Capitalmind Premium Portfolios. This article is for information only and should not be considered a buy or sell recommendation for any stocks.

Feature image source: Arman Finance 2022-23 Annual Report


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