Northern Arc Capital Company is coming up with its IPO fresh issue of Rs. 500 crores and offer for sale worth Rs. 277 crores, totalling Rs. 777 crores. which will open on 16th September 2024. The issue will close on 19th September 2024 and be listed on the exchange on 24th September 2024. In this article, we will look at the Northern Arc Capital IPO Review and analyze its strengths and weaknesses. Keep reading to learn about the company.
Northern Arc Capital IPO – About the Company
The company was founded in 2009. Northern Arc Capital is a diversified financial services platform in India. It focuses on providing retail credit to underserved households and businesses. The company operates across multiple sectors, including MSME financing, microfinance, consumer finance, vehicle finance, affordable housing finance, and agricultural finance. It has facilitated financing of over Rs. 1.72 lakh crore, impacting over 10.18 crore lives across India.
They use a multi-channel approach to enable access to debt capital. Its three primary channels are Lending, Placements, and Fund Management. Through proprietary stack tech, it provides loans directly to customers and intermediary partners. Placements involve structuring and syndicating financing for originator partners. Fund Management includes managing debt funds and providing portfolio management services.
The company has built a scalable business model supported by proprietary technology. It uses data-driven risk management and credit underwriting processes. The company has achieved consistent growth and demonstrated resilience through various business cycles. It has a diverse lender base and has received high credit ratings from agencies like ICRA and India Ratings.
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Northern Arc Capital IPO – About the Industry
Digital lending has transformed retail credit in India. Lenders use web platforms and apps to quickly register, score, approve, and disburse loans. This improves decision-making through data insights and faster customer onboarding. Customers can easily compare lenders, apply for loans remotely, and submit documents digitally. The India Stack, including Aadhaar and UPI, has further streamlined the lending process.
The personal loan outstanding reached Rs. 12.2 lakh crore in Fiscal 2024 and may exceed Rs. 18.5 lakh crore by Fiscal 2027. Factors driving this growth include granular retail loan books, technology used for scale, changing consumption patterns, and improved customer income profiles. NBFCs financing personal loans will need around Rs. 1.49 lakh crore in funding between Fiscal 2025 and 2027.
Despite competition from banks, NBFC profitability is improving. Net interest margins are expanding due to portfolio growth and the softening cost of funds. Operating costs are expected to decrease as efficiencies improve. Credit costs may decline with projected NPA levels. Overall, the return on assets for NBFCs is likely to improve in the coming fiscal year.
Northern Arc Capital IPO – Financial Highlights & Segments
Northern Arc Capital reported a Net Interest Income of Rs. 985.72 crores in FY24, and Rs. 590.93 crores in FY23. Net Profits in FY24 stood at Rs. 317.69 crore, and Rs. 242.21 crore in FY23. Apart from finance costs are Commission expenses, other expenses, and Employee Benefit expenses.
Net Interest Margins in FY24 was 8.42% compared to 6.31% in FY23. In FY24, the Basic EPS was Rs. 34.61 per share and Rs. 25.85 per share in FY23. There is an increase from Rs. 19.52 per share in FY22. The improvement in EPS shows value increasing for its shareholders.
RoE was 13.32% in FY24 compared to 11.76% in FY23. The RoE increase was due to higher profits and net income improvement which contributed to the increase in returns. The RoA stood at 2.97% in FY24 and improved from 2.60% in FY22.
The Capital to Risk Assets Ratio (CRAR) stood at 18.26% in FY24 compared to 20.77% in FY23, which is higher than the regulatory requirement of 15%. To understand operational efficiency looking at Operating Expenses to Net Total Income makes it relevant. The ratio stood at 43.40% in FY24 compared to 42.83% in FY23.
Northern Arc Capital recognises its revenue from financing activity which accounts for 92.14%, investment management services account for 1.77%, portfolio management services account for 0.81%, and others for 5.26% in FY24. Their major states involved Tamil Nadu has 14.59%, Maharastra has 11.99% and Karnataka has 9.45% of the AUM as of FY24 of Rs. 11,710.01 crore.
NNPA (Net Non-Performing Assets) in FY24 stood at 1.50% compared to 1.70% in FY23. Gross Non-Performing Assets were 4.10% in FY24, which decreased from 5.0% in FY23.
Northern Arc Capital IPO – Listed Key Players
The listed peers of Northern Arc Capital are Five Star Business Finance Limited, SBFC Finance Limited, CreditAccess Grameen Limited, Fusion Micro Finance Limited, Bajaj Finance Limited, Cholamandalam Investment and Finance Company Limited, Poonawalla Fincorp Limited and MAS Financial Services Limited.
Compared to its peers, the AUM of Northern Arc is around 11,710 crore which is near to the lower range. The range stood from 6.8k crore – 2.4 lakh crore with Bajaj Finance having the highest AUM and SBFC Finance having the lowest among its peers in FY24. The net NPA of Northern Arc is around 1.50% when compared to its peers it stands in the range of 0.46% to 2.32%. Northern Arc is in the mid-range among its peers in asset quality.
Five Star has a high CRAR in FY24 of around 50.50% compared to Northern Arc’s 18.26%. The peers ranged from 18.26% to 50.50%. Based on AUM size, Northern Arc has a relatively lower CRAR among its peers.
When Northern Arc has compared Operating expenses to total income, MAS Financial fares better than its peers with a 25.04% margin in FY24. The range stood between 25% to 45.74%. Northern Arc is at the higher range of the margin which suggests there is room for improvement. Overall the Northern Arc has underperformed in some parameters and was on par with the peers.
Strengths of the Company
- Presence in Rural Market: The company operates in a large, underpenetrated market with strong sector expertise. It capitalizes on India’s low credit penetration and vast untapped potential, especially in rural areas. The company’s diversified business model and technology suite enable credit across multiple sectors.
- Technology and Networking: Northern Arc has built an ecosystem of partners and a data-driven technology platform. This creates strong network effects. Its multi-channel offerings, supported by proprietary technology, enable funding to end-customers and help partners expand their reach and access new capital pools.
- Credit Platform: They use proprietary technology products to transform the debt market ecosystem. Their platforms like Nimbus, nPOS, AltiFi, and Nu Score enable end-to-end processing of debt transactions, streamlined loan processes, retail debt investments, and real-time risk assessment for partners.
- Risk Management: The company employs robust risk management based on domain expertise, proprietary models, and a large data repository. From this approach it has resulted in low non-performing asset ratios. The company’s diversified presence across India and sectors mitigates geography-specific and sector-specific risks.
- Lending Diversification: Northern Arc maintains diversified funding sources and practices proactive liquidity management. It has established relationships with various lenders and investors. The company’s strong credit rating and ability to raise funds through multiple channels provide a stable base for growth.
Weaknesses of the Company
- Increasing Unsecured Credit: The company invests heavily in unsecured credit facilities and subordinated debt instruments. This increases the risk of non-performing assets if they fail to recover these investments. Such exposure could affect their business, financial condition, and results of operations.
- Asset-Liability Mismatch: They face asset-liability mismatches. This exposes them to interest rate and liquidity risks. Their inability to manage these mismatches could lead to financial difficulties and negatively impact their operations and cash flows.
- Funds Regularity and Cost of Borrowings: The business requires regular funding, and any disruption in funding sources could severely impact operations. Their ability to raise funds on suitable terms depends on various factors. In recent years the average cost of borrowing has also increased.
- High Attrition Rates: Northern relies heavily on key management personnel and senior employees. High attrition rates, especially among permanent employees, could hinder their growth. Attracting and retaining qualified professionals in a competitive market remains a challenge for them.
- Lender Concentration: The company depends significantly on a small number of key lenders for their borrowings. Losing these lender sources or experiencing a decrease in borrowings from them could affect their business, financial condition, operation difficulties and ability to extend credit to borrowers.
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Northern Arc Capital IPO – GMP
The shares of Northern Arc Capital Ltd’s price in the grey market were trading at a 0% premium as of September 12th, 2024. The shares in Grey Market traded at Rs.263. This gives it a premium of Rs.0 per share over the cap price of Rs. 263.
Northern Arc Capital IPO – Key IPO Information
Promoters: No Identifiable Promoter.
Book Running Lead Manager: ICICI Securities Limited, Axis Capital Limited and Citigroup Global Markets India Private Limited.
Registrar to the Offer: KFin Technologies Limited.
The Objective of the Issue
- Increasing capital base to meet future requirements for lending – Rs. 500 crore.
Conclusion
Northern Arc Capital Limited has a diversified business and portfolio. The use of technology has been crucial in developing new products, entering new markets, and diversifying lending. It has helped to manage the business operations and helps to maintain client relations. Northern Arc is into the lending which the country is showing tremendous growth.
The competition is also fierce as there are many lenders in the market offering better rates and time periods. However, by leveraging technology it is essential to improve on the financial base to improve on some parameters to better bargain on the cost of borrowing.
So what do you think of this company? Will it be able to increase and improve its presence and sustain growth while competing with its peers in the same space? What is your view? Let us know in the comments below.
Written by Santhosh
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