Moneyboxx ltd is a NBFC that provides loans to the rural segment particularly the dairy and Kirana segment and they have managed to grow their AUM by 100% the past few years and are determined to do so without sacrificing their asset quality. This blog will aim to cover the triple digit growing financial institution and analyse the growth potential and the risks of the company.
Disc: Invested and biased and not a buy or sell recommendation
About the business
Moneyboxx ltd was founded in 2018 by Deepak Aggarwal and Mayur Modi, who have had experience in reputed firms like JP Morgan, Bank of America, Deutsche bank etc. Moneyboxx ltd offers secured and unsecured loans to the rural segment (highly focused on dairy) and operates in eight states of India with the aim to expand to 12 states by the end of FY25.
Now you might be thinking since it lends to the rural segment, it must be a MFI ( Micro finance company) but thats where you are wrong. It is not!
Not a Microfinance NBFC
Typically, a MFI gives out loans which are below a lakh rupees and that generally makes sense. However, Moneyboxx has an average ticket size of 70,000-3,00,000 rupees for unsecured and 3,00,000-10,00,000 rupees for secured lending.
How does it manage to give out such big loans to the rural segment without going bust?
Instead of giving out loans in a cluster like approach, they give out loans in the basis of essentials type approach which makes it a game changer. These businesses such as dairy, Kirana, mico-manufacturers, traders etc are less sussceptible to the economic downcycle and hence have reduced cyclicality. Just think about it, do peoole stop drinking milk, or do they stop buying the essential pulses if the times are bad? these are the areas that are probably gonna be the last to be affected as they are essentials to our daily lives.
Hence, due to them being essentials, the people who do these businesses are less likely to suffer losses and downturns and pay off the interest effectively.
Due to this characteristic and stringent underwriting, Moneyboxx is able to loan out such big amounts and still maintain a very strong asset quality (we will get to it soon)
AUM by sector as of December 2023
Industry growth potential
As mentioned above, it is a NBFC but serves the micro entrepreneurs in the rural segment particularly focused on the essentials industry which is largely untapped and poses a huge potential to grow.
According to the promoters and CRISIL, the addressable market for 1-10L loans is 22 lakh crores! While the industry is only able to meet the demand for 2L crores. Hence, there is a huge area to be covered and credit to be met for this segment. Out of this, Moneyboxx has a significant opportunity to grow as it goes deeper into its existing states and wider by expanding into new states.
Another thing to note is that MFI is a segment that seems to be over burdened with credit as the amount of accounts are twice the size of active borrowers (signalling that an individual has multiple accounts) while companies like Moneyboxx have 20-30% of new borrowers who are being introduced to formalised credit for the first time. It signals that a lot of people are yet to be met with their needs and the industry is far from doing that.
Loan portfolio and loan accounts of MFI industry
Agriculture as a % share of GDP of India.
As of 2023, Agriculture represented a 15% share in the GDP of India which translates to 0.57 trillion dollars which too signals a significant supply gap that has to be met.
Now that we understand the basics of the industry, Lets understand the company by looking at its thesis and anti thesis of the company and understanding the key variables to track for the future
Why I like the business
High Growth
Aided by tailwinds and promoter intent, The business has been able to consistently grow its AUM, branches and disbursements in the past few years. Recently, the company raised equity worth 270 crores out of which 65% came from existing investors (in which the promoters too subscribed) which will help the company meet its AUM targets. As of Q1 FY25, the company has an AUM of 746 crores against 344 crores in March-23. Moreover, the company aims to double its AUM to 1500 crores and aim for 2500 crores of AUM in FY26. It might sound hard to believe but it definitely becomes possbile when we look at their past execution. Another thing that struck me was when I was listening to their Q1 FY25 Concall was that as a % the rise in disbursements and AUM feels huge. However, 700 crores as an absolute amount in such a big industry is a drop in the ocean. The market is so big that the business can grow its AUM at a good pace without much concerns on their asset quality (provided they act rationally.)
To support this AUM growth, the company aims to increase their branch count from 104 to 175 and expand into 4 new states. The new states which are being added are: Tamil nadu, Karnataka, Telengana and Andhra Pradesh, Out of the 70 incremental branch openings, 25 will be in South India.
Moreover, The company is targetting 1100 crore incremental disbursements for FY25
Asset quality and underwriting
With a high growth coming from a lender, the biggest doubt that comes is is the company sacrificing its asset quality to pursuse growth? (which has destroyed wealth in multiple companies)
To answer this, we will look at in two ways: The qualitative factors and the quantative results
Qualitative factors
Reject ratio: The business has strong and stringent underwriting skills. They reject 85% of the leads they get and only serve the customers that meet their multiple strict criterias. This helps the business limit its downside during bad times. Moreover, the reason that such a strict underwriting has not impacted the growth is because of the demand supply gap that this industry possesses.
Sector being served: As mentioned before, the sector that they cater to are essentials like sectors which are less likely to be disrupted by credit cycles. Everything is cyclical and hence even these businesses will be affected, but the intensity should be low and the recovery should be faster. Moreover, the AUM per state too is well diversified for the size of their company. This ensures natural calamities like drought or flood do not cause a detrimental impact on their business.
Minimum sources of income: Moneyboxx requires that the people they lend to have a secondary source of income and have a minimum amount of cattle. Currently, their customers have a median cattle of eight and a secondary source of income: which further reduces the chances of asset quality deterioration .
Working on collection efficiency: Most of their collection is done online as their customers have access to UPI.
Quantitive results
Historically, the company has had some of the best asset quality amongst peers. However, they have faced a few setbacks in terms of asset quality in the last couple Quarter. Currently, the credit costs have shot up to 2.3% but the management remains confident in maintaining the guidance of staying under 2%. The GNPA and NNPA has seen a moderate rise like the peers and other lending companies focused on rural India.
The asset quality in absolute terms still remains one of the best across industry, but definitely has seen problems recently on a relative basis to its past. Hence, we must track it closely and see if the credit costs stays under the management guidance.
However, there are a few reasons that give me comfort (which are purely my opinions and hence a serious subject like asset quality must be studied independently)
Rural distress: I would be more concerned if my business was suffering despite of the whole industry doing well. Hence, the problems have a lot to do with the rural economy rather than a problematic underwriting. We will delve deeper into Rural economy later,
Guidance: The credit costs guidance has been to be around 2% and as H2 helps with rural recovery, I think the management should be successful in maintaining their guidance. The credit costs are still below 2.5% and with the rural economy improving and secured lending rising, it should decrease soon.
Advances growth: the company has grown remarkably and have maintained that quality relatively well with respect to that. With the increasing share of secured landing, I think the growth should be maintained without sacrificing asset quality.
Previous track record: Despite of facing covid and the lumpy skin disease which impacts cows, the company has been successful in maintaining a credit cost below 3% and maintain great yields. Hence, the company has managed external problems well and gives me the confidence that they can repeat this again if needed.
Secured lending rising: The company is rapidly expanding into secured lending which should help the creidt costs fall. The company has guided for credit costs be around 1.5% which helps mitigate the 2-2.5% credit costs on the unsecured side.
reject ratio, minimum 2 income sources, median cattle, 250 check points, Asset quality during covid and mention increasing NPA but guidance
Falling Opex, Cost of borrowing, strong NIMs and increasing secured lending
One of the biggest advantages Moneyboxx's aggressive growth is the operational advantages that the company gets. The company has had a consistently falling Opex as the AUM per branch keeps expanding. The company aims to reduce the Opex to 10% by FY26! thats a very impressive drop in costs. Moreover, the AUM per branch has the potential to go up to 20 crores which is what should drive the Opex further below.
Since the company is a non-deposit taking NBFC, they rely on debt from other lenders and equity raising for capital to lend out. Moneyboxx has managed to have one of the most diverse sets of lenders where they do not rely on anyone and, aim to reduce the cost of borrowing by 50 basis points by H2! These numbers are in the right direction at a great pace and the management has been able to deliver on their guidance consistently.
Lender distribution when the AUM was 450 crores:
Moneyboxx has some of the highest yields across the sector, with FY24 having yields touching 20% and NIMs at 16.5% Thats a very impressive number. However, with the cost of borrowing decreasing; the company is aggressively moving towards secured lending so that the company can maintain their NIMs around 15% (as guided) and increase asset quality by moving to secured lending.
In Q1FY24, the company had secured lending share at 8% which currently stands at 27% and is expected to go to 40% by the end of FY25. This shift to secured lending ensures that the credit costs fall but the NIMs will still be maintained as the cost of borrowing fall as well. There are also other advantages of secured lending. For example, the ticket size and tenure increases drastically and hence the disbursements can increase exponentially without risking asset quality.
Improving ROE trajectory
As the costs reduce, NIMs stay rich and the turnaround contiues, the ROE is only going to go up. As of Q1 FY25 the ROE stands at 10% and the management is guiding for a 12% ROE minimum for the end of year and 15% by FY26 and hit 20% soon.. This is a significant boost up and the actions and trajectory point towards the same.
Free Added services
Moneyboxx provides add on services for free such as having vets on their payrolls which will check up on the cows whenever needed. They also provide cattle management, feed stock, vaccination drives and helped the farmers tackle the onslaught of the lumpy virus diseases. This helps Moneyboxx create a strong trust relationship with their borrowers, increase brand image and allow them to charge a premium in terms of lending.
Anti thesis
Intense competition
The reason the companies have been able to grow at a fast pace, have solid yields and still maintain a good asset quality is because there is a substantial supply demand gap. The law of capitalism dictates that this should not exist and hence we should expect increasing competition from banks and other platforms to enter this blue sky. The way Moneyboxx maintains an edge is in its underwriting process+ ability to reach out and maintain customers where fintech lenders and banks have failed to do so. However, in the longer run we should expect competetion to intensify. Currently, there is enough demand that the companies dont end up in a pricing war.
Rural distress
However good the business may be, it will not make us returns if the rural economy continues to remain subdued. One thing to not though is that lenders like Moneyboxx will be expected to recover the fastest as the section they cater to are less cyclical. However, let us try to understand what the rural economy might do in the near term.
Rural economy suffered due to a number of reasons: rising inflation, bad monsoons, COVID-19 slowdown etc. Due to these factors, the rural economy has been a laggard compared to the urban economy. However, the data by CRISIL on rural consumption suggests that the slump to some extent has bottomed out and we should expect recovery,
The monsoons India had were above normal which has aided in better crop production resulting in reduction in inflation and rise in real wages. Moreover, the MSP prices too have seen some increases and hence should help farmers get higher income.
These effects are visible as water reservoirs are increasing and so are the sales of multiple products such as fertilisers, two wheelers etc which are leading indicators of rural recovery.
However, all of these can only help us make a calculated guess on what we should expect and hence there are always chances of rural distress continuing. If it does, the factors aiding the growth of moneyboxx will turn against it and spoil the thesis. Hence, it must be looked at very carefully.
Valuations
Owing to the recent correction, the valuations of Moneyboxx have fallen quite drastically. Due to this, the company becomes quite attractive as it is growing at 100% and can maintain a good asset quality. If it does manage to do so, it definetely desrves the valuation five star gets which is around 4-5 P/B. This gives an upside potential of 75-100%.
Disc: Invested and biased, this is not a buy/sell call and hence should be studied independently.
Technicals
On a daily basis, the business looks to have broken its support and is moving in a downward channel. I would expect the price to breakout if the asset quality stabilises and the business continues to grow. On a weekly timeframe, the current correction does not feel significant and looks like that the trend is intact with a consolidation.
That marks the end of the blog, I took me quite a lot of time to write this one so i hope it was worth it! Let me know your feedback, thanks!
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