Northern Arc Capital coming with IPO to raise Rs 806.61 crore

Northern Arc Capital

• Northern Arc Capital is coming out with a 100% book building; initial public offering (IPO) of 3,06,69,592 shares of Rs 10 each in a price band Rs 249-263 per equity share. 
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on September 16, 2024 and will close on September 19, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 24.90 times of its face value on the lower side and 26.30 times on the higher side.
• Book running lead managers to the issue are Axis Capital, ICICI Securities and Citigroup Global Markets India.
• Compliance Officer for the issue is Prakash Chandra Panda. 

Profile of the company

The company is a diversified financial services platform set up primarily with the mission of catering to the diverse retail credit requirements of the under-served households and businesses in India. Over the last 15 years, its approach has been to create a differentiated and comprehensive play on the retail credit ecosystem in India spread across sectors. Since 2009, when it entered the financial inclusion space, it has facilitated financing of over Rs 1.73 trillion that has impacted over 101.82 million lives across India, as of March 31, 2024. It has developed domain expertise in enabling credit across its focused sectors in India, namely, micro, small and medium enterprises (MSMEs) financing, microfinance (MFI), consumer finance, vehicle finance, affordable housing finance and agricultural finance. It has been operating in the MSME, MFI and consumer finance sectors for over 14 years, 15 years and nine years, respectively. 

The company has built an efficient and scalable business model, supported by its proprietary end-to-end integrated technology product suite customised to multiple sectors. Its in-house technology stack consists of: (i) Nimbus, a curated debt platform that enables end-to-end processing of debt transactions; (ii) nPOS, a co-lending and co-origination technology solution based on application programming interfaces (API); (iii) Nu Score, a customised machine learning based analytical module designed to assist its Originator Partners in the loan underwriting process; and (iv) AltiFi, an alternative retail debt investment platform. Its differentiated credit underwriting processes and risk models have helped it deliver strong asset quality and risk adjusted returns consistently across business cycles and macro events. The company’s three primary channels: (i) Lending; (ii) Placements; and (iii) Fund Management, delivered through its proprietary technology stack, enable streamlined and efficient digital financing solutions, and provide access to credit to the underserved categories of India across its focused sectors.

Proceed is being used for:

• Meeting future capital requirements towards onward lending.
• Receiving the benefits of listing of the Equity Shares on the Stock Exchanges.
• Enhancing the company’s brand name and creation of a public market for its Equity Shares in India.

Industry overview

The NBFC sector has, over the years, evolved considerably in terms of size, operations, technological sophistication, and entry into newer areas of financial services and products. The number of NBFCs as well as the size of the sector have grown significantly, with a number of players with heterogeneous business models starting operations. The increasing penetration of neo-banking, digital authentication, and mobile phone usage as well as mobile internet has resulted in the modularization of financial services, particularly credit. Overall NBFC credit during Fiscals 2020 to 2024, witnessed a CAGR of around 12% which was majorly led by retail segment which accounts for around 48% of overall NBFC credit and witnessed a CAGR of around 15%, while NBFC non-retail credit witnessed a growth of around 9% during the fiscals. Going forward, growth in the NBFC retail segment is expected at 16-18% CAGR between Fiscals 2024-2026 which will support overall NBFC credit growth, with continued focus on the retail segment and multiple players announcing plans to reduce wholesale exposure. The retail segment’s market share is expected to rise further to 48% by end of Fiscal 2025 and remain around 48.5% in Fiscal 2026.

Under-served households and businesses represent a significant proportion of India’s population that faces challenges in obtaining credit due to reasons such as a lack of credit history and the inability to provide collateral. Government initiatives such as Pradhan Mantri Jan-Dhan Yojana (PMJDY), Aadhaar, and widespread digitization (referred collectively as the ‘JAM Trinity’) have expanded the formal financial inclusion for underserved Indian population. Additionally, the widespread availability of affordable data and digital disruption has transformed the financing landscape in India. NBFCs have generally been able to address this opportunity on account of their strong origination skills, extensive reach, better customer service, faster processing, streamlined documentation requirements, digitization of customer on-boarding process, customized product offerings, local knowledge, and differentiated credit appraisal methodology. The rapid evolution of fintechs over the last few years has added another dimension to the market served by NBFCs and has fuelled rapid growth across the landscape. NBFCs have consistently gained or maintained market share across most asset classes over the last few years. Though, in certain segments such as housing finance to prime customers, they have lost market share to banks due to the decline in market interest rates. In the gold loans market, NBFCs slightly lost market share in Fiscal 2022 due to increasing focus of banks (both public and private) towards gold loans as well as RBI permitting banks to offer gold loans at a higher loan-to-value amidst the COVID-19 pandemic. Nevertheless, NBFCs continue to have a healthy market share across other segments.

Pros and strengths

Large addressable and underpenetrated market with strong sectoral expertise: By leveraging the company’s diversified business model and proprietary technology product suite customised to multiple sectors, it has, over the last 15 years, developed strong sectoral expertise in enabling credit across its focused sectors: MSME, MFI, consumer finance, vehicle finance, affordable housing finance and agriculture finance. It has been operating in the MSME, MFI and consumer finance sectors for over 14 years, 15 years and nine years, respectively. More recently, it has strengthened its retail MSME outreach by introducing, loan against property (LAP) financing in Fiscal 2022, and supply chain finance in Fiscal 2023. Its LAP financing provides secured business loans directly to MSMEs through 50 branches, as of March 31, 2024. Its technology-driven supply chain financing business offers financing solutions to various participants within the enterprises’ supply chain network. In addition, it incorporated its dedicated rural finance partner subsidiary, Pragati, in Fiscal 2021, which acts as a business correspondent and serves rural and semi-urban areas through which the company provides small ticket loans through a digital platform and aims to be a one-stop lending solution for rural borrowers. Further, it offers a comprehensive portfolio of products and services in the consumer finance sector, including consumer durable loans, cash or personal loans, salary advance loans and buy-now-pay-later financing, through both online and offline channels as well as in collaboration with its Retail Lending Partners.

Large ecosystem of partners and data and technology platform creating strong network effects: The company has, over the last 15 years, by serving the Indian retail credit market and facilitating financing of over Rs 1.73 trillion since 2009, that has impacted over 101.82 million lives, created an ecosystem of 328 Originator Partners, 50 Retail Lending Partners and 1,158 Investor Partners, as of March 31, 2024, multi-channel offerings comprising Lending, Placements and Fund Management channels, propertiary technology solutions and a substantial data repository of over 35.17 million data points, as of March 31, 2024. This large and growing community of Originator Partners, Retail Lending Partners and Investor Partners coupled with its track record in diversified product offerings and the proprietary technology stack, has resulted in an expansion in its opportunities for debt raising and investment. This helps it in accessing large pools of liquidity, serve wider classes of investors and to meet their varied requirements. This generates an annuity effect providing it with a combination of fee income and interest income. Accordingly, this creates positive network effects and a scalable and diversified platform. The company’s technology products and data capabilities are the backbone of its ecosystem, which ensure the seamless interaction between Originator Partners and Retail Lending Partners as well as Investor Partners, facilitated through its technology platform, Nimbus, that enables end-to-end processing of debt transactions.

Robust risk management based on domain expertise, proprietary risk models and data repository driving asset quality: The company considers risk monitoring as a central aspect of its operations, extending across all sectors, channels, and borrower categories. Risk management forms the core of its business, and over time, it has developed and deployed a tailored risk management system. It has customized its risk management systems for each of the focused sectors and channels in which it operates and these systems which are specific to each offering, enable it to develop a diversified portfolio and address both risks. It leverages its own expertise and data to develop customized and proprietary risk models that suit its offerings, products and markets, and enhance its capital efficiency. Most of its credit risk management processes are enhanced through deep analytical models built on Nimbus, which leverages internal and external data sources to create in-depth risk analytics and modelling, and also has early warning systems that help it to be proactive in dealing with and minimising risks. With additional data points and sources being added every year to Nimbus, the risk models continue to become more robust. In addition to its large data repository, it also adds insights from its on-field surveillance to Nimbus to allow for a comprehensive data repository. It also obtains and periodically update the credit information of its customers by checking the credit bureaus, which is used in pool selection and building its financials models. 

Diversified sources of funding for own deployment and proactive liquidity management: The company maintains a well-diversified funding profile that is underpinned by its established relationships with its lenders and investors, proactive liquidity management system and strong credit rating. Its diversified base of lenders (including various banks, offshore financial institutions and NBFCs) and investors provide it a strong base for increased funding. In addition, it has also conducted 12 rounds of equity fund raises (including issuances of CCPS) in the last 11 Fiscals which has allowed it to benefit from the capital sponsorship of a marquee set of equity investors which include impact focused funds and a global systemically important bank. It has also been able to service its debt obligations during challenging industry and macro-economic events and credit cycles for NBFCs. It has demonstrated the ability to improve its borrowing costs, even in environments characterized by rising interest rates in recent years. Further, the company has adopted an asset/ liability management policy which requires it to monitor and manage interest rate and liquidity risks, from time to time. This has enabled it to maintain a positive asset liability management (ALM) position with no cumulative negative mismatches (in the maturity bucket for the period of up to one year), in line with its ALM policy, as of the last three Fiscals. It reduces the interest rate mismatch while maintaining sufficient liquidity to comply with the LCR norms by investing in low risk, liquid investments such as short-term treasury bills. 

Risks and concerns

Operate in highly competitive industry: The company operates in a highly competitive industry and each of its businesses competes against distinct sets of market players. Its lending offerings, especially to larger, better rated borrowers, face competition from various types of lenders including private and public sector banks, certain NBFCs, development financial institutions, debt funds (including venture debt funds). Further, due to its increased Direct to Customer lending activities, its competition from certain other banks, NBFCs, MFIs, informal money lenders and commercial banks, operating in the same space has significantly increased. Further, Pragati, its dedicated rural finance partner subsidiary which acts as its business correspondent for its direct rural financing business, faces competition from banks (including small finance banks), MFIs as well as local, unorganised money lenders. A variety of players operate in the Placements channel space and provide competition to its business. At a national level, this includes the syndication desks of various private sector banks and merchant bankers, certain NBFCs that act as arrangers and structurers, and certain other entities that operate as arrangers. At a local level, various chartered accountants and unorganised players provide a sub-set of the services that it offer.

Face asset-liability mismatches: The company faces liquidity risk due to the varying periods over which its assets and liabilities mature. Asset-liability mismatches, which represent a situation when the tenure of assets and liabilities do not match, are a key financial parameter. As is typical for NBFCs, part of its funding requirement is met through short-term borrowing sources such as revolving loans and cash credit facilities. However, each of its financial assets has varying average tenure, average yield and average maturity and it may happen that maturity of assets do not match the liabilities. The company has adopted an asset-liability management policy which establishes the parameters for monitoring and managing liquidity risks. However, there can be no assurance that it will be able to ensure compliance with such parameters at all times. Consequently, its inability to raise further credit facilities, collect sufficient cash from borrowers as per the scheduled maturity period or renew its existing facilities in a timely and cost-effective manner or at all, may lead to mismatches in its assets and liabilities, which in turn may adversely affect its operations, financial performance and cash flows.  Further, mismatches between its assets and liabilities are compounded in case the assets are restructured and it needs to give the customers longer tenure loans. 

Business requires funds regularly: The company’s business and results of operations depend on its ability to raise both, debt and equity from various external funding sources, which refers to the various means of obtaining capital to finance its operations, on suitable terms and in a timely manner, along with the costs associated therewith. Its funding requirements have been met through a combination of funding sources such as (i) lenders including banks, offshore financial institutions, NBFCs, development financial institutions (DFIs) and high net-worth individuals (HNIs); and (ii) instruments such as non-debt instruments, non-convertible debentures, term loans, working capital and revolving credit facilities, external commercial borrowings (ECBs), commercial papers, sale of investments, and assignment or securitization of a portion of the receivables from its loan portfolio to banks and other financial institutions. The company’s ability to borrow funds on acceptable terms and refinance existing debt may be affected by a variety of factors, such as its performance, credit ratings, regulatory restrictions, regulatory environment and government policy initiatives, liquidity in the credit markets, financial health of the lenders from whom it borrows, the amount of eligible collateral, foreign exchange (particularly in relation to ECBs) and accounting changes that may impact calculations of covenants in its financing agreements. 

Locations in which the company operate could experience natural disasters: A natural disaster, severe weather conditions or an accident that damages or otherwise adversely affects any of the company’s business operations, or its customers’ business operations or livelihood, could have a material adverse effect on its business, financial condition, cash flows and results of operations. Severe flooding, lightning strikes, earthquakes, extreme wind conditions, severe storms, wildfires, and other unfavourable weather conditions (including those from climate change) or natural disasters could damage its offices or other assets, or require it to shut down its or its Retail Lending Partners field operations, impeding its ability to on-board new customers or collect repayments from its existing customers. For instance, some of the states in which it and its customers operate are prone to natural disasters and have suffered these in recent years including floods in Assam and Bihar and cyclones in Odisha, Tamil Nadu and West Bengal. Further, catastrophic events such as explosions, terrorist acts, riots or other similar occurrences could result in similar consequences or in personal injury, loss of life, environmental danger or severe damage to or destruction of its offices or field activities, or suspension of its business operations or its customers’ business operations. Any of these events could have an adverse effect on its business, financial condition, cash flows, results of operations and prospects.

Outlook

Registered with the RBI as a systemically important, Northern Arc Capital is a non-deposit-taking non-banking finance company (NBFC) and has been operating in the financial inclusion space for over a decade. The company is a leading player amongst the country's diversified NBFCs, with a business model diversified across offerings, sectors, products, geographies and borrower segments. It provides access to credit to under-served households and businesses directly and indirectly through Originator Partners. The company maintains a well-diversified funding profile that is underpinned by its established relationships with its lenders and investors, proactive liquidity management system and strong credit rating. Its diversified base of lenders (including various banks, offshore financial institutions and NBFCs) and investors provide it a strong base for increased funding. It has an experienced leadership team who have played a pivotal role in building its business and brand. It has also benefited and expect to continue to benefit from the strong capital sponsorship and professional expertise, especially in the area of corporate governance and risk management, of its shareholders, which include funds and a global systemically important bank. On the concern side, as an NBFC, it can subject to periodic inspections by the RBI under Section 45N of the RBI Act, pursuant to which the RBI inspects its books of accounts and other records for the purpose of verifying the correctness or completeness of any statement, information or particulars furnished to the RBI. 

The company is coming out with a maiden IPO of 3,06,69,592 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 249-263 per equity share. The aggregate size of the offer is around Rs 763.67 crore to Rs 806.61 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by 45.37% from Rs 13,112.00 million in Fiscal 2023 to Rs 19,060.33 million in Fiscal 2024 primarily as a result of an increase in its revenue from operations on account of broad based growth across certain of its focused sectors, namely, consumer finance sectors, MSME and MFI. The company’s restated profit for the year was Rs 3,176.93 million in Fiscal 2024 compared to Rs 2,422.14 million in Fiscal 2023. Meanwhile, the company plans to expand its footprint to better reach and serve underserved households and businesses in its focused sectors in India by: (i) adding to and strengthening its origination channels, i.e., by on-boarding new Originator Partners onto its platform and financing the debt capital requirements for the growth of its Originator Partners, and on-boarding new Retail Lending Partners who can help it reach more Direct to Customer Borrowers; and (ii) increasing the use of as well as scale and leverage its in-house technology and data enabled products and platforms. It also plans to add more products on its AltiFi platform to offer full scale wealth management services comprising products across savings, investments (such as listing of commercial papers, fixed deposits and mutual funds) and insurance, which will help in broadening its coverage of retail investors as well.