Ravi Dharamshi of ValueQuest Investment Advisors discussed the opportunity in small finance banks in India at Asian Investing Summit 2018. Ravi presented an industry analysis rather than specific investment ideas.
Small finance banks in India (SFBs): The largest financial inclusion program in the world has brought 300+ million people under the formal banking system in a short period of time. The business models of SFBs are broad-based, with entry into verticals such as micro, small and medium enterprises. Housing finance lends sustainability. Growth prospects in microfinance have improved after the crisis caused by de-monetization. SFBs also benefit from value migrating away from PSU banks as they struggle with bad loans. SFB models combine the profitability of the NBFC model (ROA of 2+%) and the regulatory protection of the banking model. SFBs’ access to low-cost funds has increased, and borrowing rates have come down from 11-12% to ~8%. Over the next 2-3 years, Ravi expects SFBs to grow at a CAGR of 25+%, with ROA of 1.5+% and ROE of 15%. SFBs are evolving to combine stable business models with long profit runways. Industry participants include AU Small Finance Bank (NSE: AUBANK), Ujjivan Financial Services (NSE: UJJIVAN), and Equitas Holdings (NSE: EQUITAS). Unlisted players that may go public over the next 18-24 months include Suryoday Small Finance Bank, Janalakshmi, and ESAF Small Finance Bank.
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About the instructor:
Ravi Dharamshi has an MBA in Finance from McCallum Business School, US. He returned from the US after a brief internship stint at Salomon Smith Barney. He has been associated with the Indian stock markets for over 13 years. After graduating, he worked his way up through the stock market business, spending four years at RARE Enterprises, where he was involved with research, private equity deals and value creation activities before moving to ValueQuest and taking charge of research. With an enviable track record in stock picking and his ability to take bold calls, he has been instrumental in generating outsized investment returns. Ravi currently heads Investment Strategy and Research at ValueQuest and has proven to be an able leader. He is constantly focused on generating research ideas to maximize investment returns.