Sakthi Finance Limited April 2023 NCD Public Issue Review

About the Issue

Sakthi Finance Limited has launched its public issue of NCDs to raise funds from the debt market. Read further to know more about the business of Sakthi Finance Limited.

The principal terms of each option of NCDs are set out below:

While here you can earn up to 9% for 24 months tenure, in the secondary market for higher rated bond you can earn a higher yield of 10% for a similar tenure of 24 months. For more details, check out our asset page.

About Sakthi Finance Limited:

Sakthi Finance Limited (“SAKTHIFIN”) was incorporated in the year 1955. The Pollachi based company, promoted by Dr. N Mahalingam was started with the intent of catering to hire purchase requirements of the TELCO dealerships of the Sakthi Group. SAKTHIFIN headquartered in the South Indian state of Tamil Nadu is a deposit taking “Middle Layer NBFC” (NBFC-ML) that has a track record of nearly six decades in financing commercial vehicles and construction equipment. The company has a presence of more than 51 branches in the Southern states of Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Telangana.

On a standalone basis, SAKTHFIN has an AUM of Rs. 1,160 crs as of December 2022. For the year ended March 2022, the income from hire purchase business constituted about 95.61% of operating income. The hire purchase business has grown by 8.34% from FY 2020 to FY 2022.

About Sakthi Group:

Sakthi Group is a popular name in Southern India that has multifarious business activities including Sugar, SG Iron foundry, Industrial Alcohol, Textiles, Transport, Finance, Dairy, Coffee Estates and Soya processing. It is a USD 2 billion industrial conglomerate and one of the fastest growing business groups in South India with a strong market presence in several Industrial Domains with a host of group companies, institutions, trusts and foundations operating under its umbrella.

Commercial Vehicle and Construction Equipment Industry:

The Indian commercial vehicle (CV) industry registered a healthy YoY growth of 39% in wholesale dispatches in Q2 FY2023, supported by replacement demand, improvement in the macroeconomic environment and healthy traction in the underlying industries. 

New CV loan book for NBFCs is estimated to have increased by 4.5% YoY in Q1 FY2023, while the used CV AUM grew by about 10%. Used CV AUM growth remained largely range-bound at 9-11% over the last eight quarters. The overall CV AUM grew by 7.5% YoY in Q1 FY2023, driven by the improvement in the new CV segment, resulting in the best growth rate witnessed over the past 10 quarters. Overall, the CV AUM stood at Rs. 2.31 trillion as of June 30, 2022.ICRA, a leading credit rating agency, expects the CV industry volumes to grow 18-20% in FY2023 and 7-10% in FY2024, driven by steady freight demand and economic recovery, the Government’s focus on infra spending, boom in e commerce as well as the replacement demand. However, inflation concerns, driven by the hike in interest rates and the continued high fuel prices and their impact on the viability of fleet operators, would need to be monitored.

Along with CV industry, as per ICRA the Mining and Construction Equipment (MCE) industry will witness a ramp-up in volumes from FY2023, supported by infrastructure spending by the government prior to the elections 2024. The orderbook remains robust and is expected to translate into healthy MCE demand in the coming quarters. Overall, MCE sales volumes are expected to grow by 10-12% YoY in FY2023.

Company Financials (Standalone):

The company’s leverage is high at 6.12x as of December 2022 resulting in a low CRAR of 19.07% relative to peers. As per the offer details, the post issue leverage is expected to increase further to 7.25x. Consequently, the CRAR will decrease further, and it will be important to monitor if the company maintains CRAR above the regulatory level of 15%. The AUM has seen a modest growth of 10% since FY21. The company has been reporting profits since FY20, however it has been depicting a declining trend which remains a concern. The GNPA has risen to 6.15% as of December 2022 which shows worsening asset quality.

Top Ten Equity Shareholders of the company as on December 2022:

The promoter and promoter group holds 67% of the total shares. Of the remaining 33%, majority is held by the following companies: Avdhoot Finance, Bridgewater Investment and Sakthi Management Services, who are also part of the top ten shareholders.

Borrowings (as of December 2022):

Peer Comparison (December 2022):

Conclusion

Comforts:

• Vintage of nearly six decades in the commercial vehicle finance segment.
• The company has reported profits consistently.

Concerns:

• High leverage of 6.12x as of December and post issue leverage of 7.25x.
• Business is concentrated in Tamil Nadu and Kerala which accounts for 96% of the total portfolio.
• Moderate asset quality indicated by GNPA of 6.15% relative to peers. 
• Modest growth in AUM since FY20.
• More than 80% of the funding is from NCDs, indicating high dependence on NCDs.
• Low size of operations compared to peers despite high vintage in business.
• Multiple instances of default by group companies in the past.