#37 Israel - Iran war intensifies and an interesting NBFC business model

16th June'25 - 20th June'25

Welcome to this week’s newsletter, grab a cup of coffee and let me show you last week’s highlights related to Indian market. If you haven’t subscribed, please use the `Subscribe` button below and get my newsletters every Sunday morning directly in your email.

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`Conviction pays only in long-term, you won’t get multi-baggers in short-term`

Markets and Macros

1. Global markets are reacting to the ongoing war and the impact of rate cuts and liquidity gush has not been able to make an impact on the Indian market yet.

2. Defence and Auto (ancillaries) specifically were holding the ground well and were trying to fight the sell off. Media specifically crashed this week and smallcap and midcap index also corrected.

3. FII Activity this week.

   

   DII Activity this week

   

4. We can observe that there is good amount of buying from DII and FII but the smallcaps and midcaps still corrected this week. I believe most of the money went to largecap stocks. Also, there was good amount of bulk and block deals.

5. Mutual fund houses who were sitting on cash made positions on few stocks. PP Flexi Cap Fund bought 46,27,111 shares of Zydus Wellness at 1900/- rupee. Stock went 7%-8% this week.

6. NBFCs are getting good amount of attention this summer as rate cuts and liquidity gush is making big houses and HNIs go for something which is going to fund the next years of inflation in India. Madhusudhan Kela, a renowned investor entered in Northern Arc Capital, i am studying this stock now.

7. Last week, RBI slashed provision coverage ratio from 5% to 1% which would make the consumption in India go to next level. Also, they exempted Infra projects from PCR, which would enable Banks and NBFCs to lend more loans to the markets.

8. A good number of IPOs are scheduled to be open for bidding in coming weeks. One of them is HDB financial with 700/- rupees per share. When it was trading at 1200+ in unlisted space. This signifies how bad the euphoria is in unlisted space. I am waiting for NSE and NDSL’s IPO price.

9. Groww has come up with India’s first tech based ETF and i am personally not a big fan of it. Have a look at the stocks in the list and feel free to have your own view on this. https://groww.in/etf-nfo/groww-nifty-india-internet-etf

Topic of the week: S G Finserve

SG Finserve Limited (formerly Moongipa Securities) is an NBFC backed by the APL Apollo Group. It focuses on supply‑chain financing—primarily bill‑discounting and working‑capital loans to dealers, vendors, logistics providers, and retailers, starting with the APL Apollo value chain. SG Finserve can scale its loan book profitably and maintain healthy returns—without unduly increasing risk.

Business Model & Moat

• Anchor-based lending: SG Finserve provides short‑term credit to members of large manufacturing conglomerates (anchors), such as APL Apollo, and recently added JSW, Adani, Bajaj, Tata, and Vedanta.

• Perceived moat: Targeting working‑capital loans for suppliers of strong anchors grants structural risk mitigation.

Loan Book Growth & Financial Trajectory

Strong AUM Acceleration

• December ’24: ₹1,568 Cr

• March ’25: ₹2,326 Cr (↑48% QoQ)

• Sept ’24: ₹822 Cr → Dec ’24: ₹1,568 Cr → Mar ’25: ₹2,326 Cr (almost 3× since Sep)

Management targets:

• ₹4,000 Cr AUM by FY26 (~1-year)

• ₹6,000 Cr by FY27

Revenue & Profit Metrics

From Q4 FY25:

• Total income: ₹54 Cr (vs ₹42 Cr in Q3 – 27% QoQ growth)

• Profit Before Tax (PBT): ₹31 Cr (flat QoQ despite AUM surge)

  • Profit flattening (PBT margin ~23%) puzzled investors: growth didn’t translate proportionally to profits. Management explained:

    • Q3 utilized low-cost internal funding; Q4 switched to bank borrowing, raising funding costs.

    • Lending spreads remain ~11–13.5%, with minimal fees and no complaints .

Forecasts:

• With current growth, quarterly EPS of ₹4–5 expected

• Assuming 4,000 Cr AUM in FY26 → EPS 18–22

• For 6,000 Cr AUM in FY27 → EPS 22–30 per share, even after QIP dilution.

Equity Base & Book Value Calculations

• Current equity: ~₹1,000 Cr

• QIP funds expected: ₹340 Cr

• Q4 FY25 PAT adds: ₹40 Cr to equity

• Projected FY26 PAT accretion: ₹200 Cr

• Projected FY27 PAT accretion: ₹260 Cr

Book value per share book value should be around ₹225 per share next year . By end‑FY27, BV ~₹273 (even higher).

Return on Equity (ROE) & Return on Assets (ROA)

Targets:

• ROA: 4–5%

• ROE: 18–20%

Credit Quality & NPA Risk

• Management emphasizes 0 NPAs in supply‑chain lending.

• Q2FY25 concall: Portfolio at Risk (PAR) controlled; slow-moving goods pose no issue so far; expansion to retailers will include distribution channel guarantees.

• Some concern: recent written-off bad debt—likely reversal of provisions, not outright defaults. Suggests provision methodology has yet to be stress‑tested.

Scalability: Anchor Diversification & Competitive Landscape

• Initially focused on APL Apollo; now boasts 45+ anchors including JSW, Adani, Bajaj, Tata, Vedanta, Whirlpool, Ingram, Polycab.

• Anchor concentration targeted at ≤25% of the loan book.

• Market size: ₹60,000 Cr segment; SG’s current AUM ₹2,100–2,300 Cr; significant runway to grow .

Risks

• Funding cost increases: transitioning from internal to external (bank) borrowing may compress net interest margins.

• Dilution: equity increase to ₹1,340 Cr via QIP will dilute EPS short-term.

• Credit risk: while early NPAs are low, scaling beyond anchor-backed loans (e.g. into retail) brings credit risk.

• Execution risk: aggressive AUM growth (₹6,000 Cr by FY27) depends on consistent anchor additions and prudent risk management.

• Valuation multiple: at ~2.1× current P/B and P/E ~29×, market expects high execution.

Conclusion

SG Finserve shows strong foundational elements:

• A moat from anchor-backed supply chain financing.

• Rapid AUM growth: ₹822 → ₹2,326 Cr in ~6 months.

• Clear financial roadmap: QIP, bank borrowing, and targets of ₹4,000+/₹6,000 Cr loans.

• Healthy financial ratios: projected 18–20% ROE and 4–5% ROA.

• Book value accretion: ₹200–260 Cr per annum.

Final Thoughts

SG Finserve is an attractive NBFC story with strong anchor-based lending, demonstrable early growth, and credible financial targets. The deep dive on ValuePickr shows both enthusiasm and caution—growth is promising, but execution, margin control, and credit discipline must follow. If AUM scales as planned, with ROA/ROE maintained and NPAs controlled, SG Finserve could be a compelling small-cap, albeit at a valuation that leaves little margin for error. Also full disclaimer, i am holding this stock so i am not recommending you to buy/sell.

Watchlist

I have been talking about stocks ever since i got to know about them. I would request you to also understand how bonds work. And recently you might have heard about how China and other countries are dumping US bond which were supposed to be the safest assets across the globe.

Thank you for all your attention till this point.
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