Spandana Sphoorty Rating: Buy- Strengthening of B/S in Q2 augurs well

Spandana Sphoorty Financial (Spandana) in Q2FY21 continued its proactive approach in strengthening its balance sheet by building additional Covid-related provisions at Rs 1.14 bn (~155bps of AuM), taking cumulative contingency buffer to ~450bps (highest in MFI space). Notably, collection efficiency improved steadily to as high as 93% in October with customer activation remaining robust at ~94%. Collections in states like Maharashtra, Odisha and Chhattisgarh remained lower than the average due to lockdown and a few instances of political interference.

While the ~6% inactive customer base poses near-term risk, we believe it will navigate through current cycle relatively better than peers due to: (i) diversified operations with 95% of districts having <1% exposure per district; (ii) provisioning buffer at Rs 3.3 bn (4.5% of AuM); and (iii) comfortable capital position (CAR 45%). Maintain Buy with a revised TP of Rs 900 (earlier: Rs 740).

Collection efficiency surprises positively: Spandana’s collection efficiency at 93% in October is one of the highest in MFI space. Customer activation is reflected in non-paying borrowers pool falling to 0.16mn or 6% (5.6% in value). We believe building higher contingency buffer is correct approach in the current scenario given that tail-end risk is yet to unfold. Further, strong PPoP margin at an average of 14% over past 5 quarters and adequate contingency buffer would ensure Spandana navigates through the current challenging cycle relatively better than peers.