Arman Financial Services: thoughts on quarterly results and future direction

This post is not BUY/SELL/HOLD advice but a statement of my personal views and opinion on the latest results. I own stocks of Arman Financial Services and my views are biased.

Arman Financial Services is a Gujarat based NBFC with a presence in two-wheeler financing, microfinance & SME lending. By the name Arman Financial Services Limited “AFSL” (NSE: ARMANFIN) caters to two-wheeler finance and SME lending. By the name Namra Financial – a subsidiary of AFSL – the group caters to Micro-finance lending across Gujarat, Maharashtra, M.P, U.P and Uttarakhand.

What is my interest in the company?

  • I own 0.06% of its non-class A, public shares. No really. It is my moonshot
  • As some one who tracks the microlending sector closely, I have written about the Microfinance Sector and have been a believer that it will emerge stronger after demonetization

Investment Thesis

The macro trend of the financialization of Bharat is a leviathan force, recently rolling into motion via Jan-dhan accounts, growing income, aspirations and instant KYC enabled by Aadhar.

Already AFSL is doing 100% cashless disbursements for MFI loans. This brings down operational risks and costs, increasing profitability and decreasing risk.

For risk and capital reasons, Indian Public Sector Banks are not in a shape for unsecured lending to the poor, and their exposure to the segment is through MUDRA like lending to Indian NBFCs and in rare cases via acquisitions of NBFC-MFIs (“Micro Finance Institutions”)

But recent history has shown that the unsecured credit discipline of India’s poor exceeds the fancily externally rated and collateralized obligations of India’s industrialist class. In other words, lending to the little man has proved more profitable than lending to the Robber Barons of Industry – a lesson India’s banks are still learning.

NBFC-MFIs have built deep networks and relationships in this huge and uncatered to bottom-of-the-pyramid financing market. The business remains very profitable with ROEs in excess of 20% for well-managed MFIs.

For Arman, the loan loss rate in Microfinance disbursement is only 0.6-0.7%, its two-wheeler loans have 70% higher probability of loan loss with 30% lower yield

The traditional growth path of NBFCs has played out in Ujjivan, Satin etc. The story plays out something like this:

  1. Pure-play MFI
  2. MFI offers new products such as MSME loans
  3. Gets Private Equity (PE) funding
  4. Expands aggressively in existing and new segments such as LAP and house finance (Arman is currently here)
  5. Small Bank License
  6. PE Exit
  7. Diversifies away from Microfinance loans into traditional banking operations

Enter at the right time and the story creates huge wealth in the form of AUM and market cap expansion.

Growth has hit tipping point (source: AFSL Annual Report 2018)

The Story gets Sweeter

On paper, the non-deposit taking NBFC business is a fragile one. I wrote here, why in practice, it may  be more robust. The self-regulatory bodies under RBI oversight, together with bank’s having their skin in the game through priority sector lending has created a stable environment. Demonetization was a “stress-test” that has de-risked the environment further (such as the move towards cashless disbursements)


There are more borrowing options for non-bank NBFCs today than before. Private Equity is willing to offer funding via CCDs (compulsorily convertible debentures) for a stake. Deepening of the bond market and RBI relaxations have made NCDs (Non-convertible debentures) an attractive fund raising option so that MFIs with good accruals and profitability no longer need to dilute equity or borrow heavily from banks. The end result is funding costs have become reasonable.

Arman Financial Services Ltd recently raised funds from SAIF Partners to the tune of 50 crores via CCDs convertible after 18 months at a stock price of Rs 300. The money was used as an injection into the NBFC’s Tier-1 regulatory capital requirements

For SAIF, it is like buying 18 month futures set at Rs 300, when the current market price is already 400+

For Arman it will bring benefit from Private Equity guidance and expertise, short-term funds for expansion and sets up liquidity for further stake sale to institutional buyers (Arman is a very illiquid stock)

AFSL’s Quarterly Results

Highlights of Q4 2018 results last week:

  1. The total AUM of the company has grown from Rs 226.90 Cr on 30 June 2017 to Rs. 453.49 Cr as on 30 June 2018, a growth of 100%. Note that the current market capitalization of Arman is only 300 crores.
  2. Net Revenues increased by 108.66% to Rs. 29.15 Cr from Rs.13.97 Cr (over Q4 2017)
  3. Interest costs increased by 152.36% to Rs. 12.82 Cr from Rs. 5.08 Cr
  4. Consolidated EPS goes from 1.35 to 6.65 rs year on year

My interpretations of the above:

Company AUM has now begun to grow exponentially. The more the AUM the more diverse the financial products offerings can be due to increasing interest income and diversity in duration. I won’t be surprised if AFSL gets into home financing soon.

In the note accompanying the quarterly results Arman has also announced raising of an additional 200 crores via non-convertible debentures. This augurs well for further disbursements and AUM growth.

On the more worrying note, interest costs have gone up. This is in keeping with the global interest rate environment and must be watched going forward.

The Way Forward

From the results, it is apparent that SAIF has timed their entry well. The PE firm had been an investor in Ujjivan Small Finance Bank and knows the micro-lending space. It interests me that it is taking a stake in Arman at a higher price than mine (260 v/s 300), so I have increased my stake as well.

The growth engine of AFSL has been Namra, its microfinancing subsidiary, and I expect that to continue.

The MSME lending business, albeit profitable this quarter, is still some way from being a growth engine. It is targeted uniquely at clients in the Microfinance catchment area, and will use the MFI disbursement and collection network. You could see significant economies of scale kicking in.

Its third business – auto-financing is a steady old dog and is not expected to contribute to incremental EPS growth. Its a low yield business but the more legs to stand on for an NBFC, always the better.

Why Arman is My Special Snowflake

I have my reasons to choose being neck deep, in an illiquid counter, in a highly leveraged business. I have a confidence in the management of AFSL that cannot be borrowed. The confidence was acquired watching them survive the stress test of demonetization and come out aggressively. I believe their risk management framework is robust and can take on larger AUMs.

  • Arman has consistently maintained an industry beating Return on Assets of 3%

  • Arman’s profitability is so high, it can lend what it accrues as interest, maintaining AUM growth without the cost of equity dilution. Arman is more profitable than its peers
  • The MSME ticket size was designed to serve an underserved segment (Ticket size of Rs 40,000 to Rs 150,000 which has low competition). Gujarat is an entrepreneurship hub and the MSME business may hit bullseye
  • Credit decisions are not made at branch level but at central level – unlike many other MFIs. AFSL is the Kotak of MFIs
  • Arman is a highly illiquid stocks and is undiscovered by institutional buyers
  • Old-timers are still holding their stake. Babulall Dagar is a Marwari Seth who purchased AFSL during 2008, after looking for stocks trading under book value. His buy price was Rs 3



There are risks. Lots of risks, as with any leveraged business.

  • A rising interest rate environment will impact lending spreads and profitability
  • Liabilities are likely to rise in the short term with NCD interest and SAIF CCD interest (up to conversion) eating into Net Interest Income and EPS
  • ROE & Return on Assets are yet to catch up to pre-demonetization levels. Share price seems to be taking it for granted
  • Election year may bring loan waivers and political decisions that could impact credit discipline and asset quality across the board
  • The MSME business may increase NPAs of AFSL
  • Uttar Pradesh is a politically unstable state and Arman is counting on it for MFI growth

This is not Buy and Sell advice

Through this post, I am organizing my own thoughts. I am not trying to convince you. Price of NSE: ARMANFIN has run up a lot. There may be no margin of safety at this price. Please do your own independent research.


This post is not BUY/SELL/HOLD advice but a statement of my personal analysis and opinion. I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”. No BUY/SELL/HOLD advice is offered on this blog, in any form whatsoever. Views expressed are my own and not of my employer. Stock Markets are very risky and can cause a permanent loss of capital. You should seek professional advice.

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