Are you thinking to invest in Deprosc Laghubitta Bittiya Sanstha (DDBL) ? Know in detail about its performance

Introduction:

Deprosc Laghubitta Bittiya Sanstha Limited (DDBL) is a microfinance company registered on January 12, 2001, under the Company Registration Act 1997. It obtained the operating license from Nepal Rastra Bank on July 3, 2001, under the Bank and Financial Institution Act 2007. DDBL having a long history is present in 71 districts as of FY2076. The company is serving 200,562 customers to the date.

With a vision to constantly access financial services to the poor, particularly those living below the poverty line, Deprosc Laghubitta Bittiya Sanstha Limited is a financial institution that provides microloans to the deprived sector of the country.

Major promoters for Deprosc Laghubitta Bittiya Sanstha Limited (DDBL) are Nabil Bank Limited (9.42%), Nepal Bank Limited (9.42%), Agricultural Development Bank Limited (7.03%) among “A” class commercial banks, and Lumbini Bikas Bank (9.42%) i.e. “B” class development bank, Deprosc-Nepal (10.93%).

Financial Highlights

Despite the moderate retention ratio for the company in the last few years, it has been able to increase its reserve and surplus at a rate of 32.35% annually. As per Q4 report, FY 2076/2077 Rs. 83.31 crores.

The major source of microfinance to satisfy loan obligations towards its customers is borrowing from other banks. For the last 5 years, borrowings for the company have increased at an annual rate of 30.48%. As of FY2077, the Q4 report, its borrowings stood at Rs. 6.50 Arba. The cost of funds for the company has stood around 9% for the past 3 years.

Total loan and advances till Q4, 2076/2077 for Deprosc Laghubitta Bittiya Sanstha Limited stood at Rs. 11.549 Arba. The loan and advances of the company have increased by 33.31% annually for the last 5 years (excluding Q4, 2077). The higher loan for the company is backed by an increase in its customers in FY2076.

The company has not fully relied on the borrowings from other banks and financial institutions but their loan portfolio is also covered by the deposit it has collected from its members which grew at a rate of 35.55% annually for the last 5 years. Out of total loans, the company’s portfolio is mostly concentrated in the service industry which stood around 87% till FY2075. In FY2076, the company’s loan portfolio was concentrated in agriculture which stood around 57%.

With an increase in loans and advances, it has maintained healthy growth in its interest income (core business) of 29.16% annually for the last 5 years. Total interest income for the company till Q4, 2076/2077 stood at 2.08 Arba.

Despite an increase in unhealthy competition in the sector and the low-interest-rate environment in mid-July FY2076/2077, Deprosc Laghubitta Bittiya Sanstha Limited has maintained a healthy total interest income in Q4 which is 24.95% higher than the previous quarter of the same year.

In terms of Net Profit, Deprosc Laghubitta has retained a fair amount of income after paying all its obligations which came at an average of 26%. However, the net profit for the company decreased in FY2075 due to the higher cost of funds. Despite an increase in its branches, management has been able to maintain its variable and fixed cost in relation to its earnings growth because of which Net profit of the company has increased at a CAGR of 25.84%.

As of reported earnings from the company in Q4 of FY 2076/2077, the net profit has plunged to Rs. 27.49 crores because of higher impairment the company has created for the possible bad loans. This is mainly because the government had announced a nationwide lockdown which forced the business to shut for an extended period for which the company was not able to

Key Ratios:

The net interest margin tells us how much it earned from loans and advances after paying out to the depositors. NIM is highly affected by monetary policy. However, it also depends on how well the company allocates its capital and how efficient they are in collecting capital and cost related to it.

The net interest margin for the company has remained in a downtrend but the company has also increased its loans and advances every year at a rate of 33.31%.  

Due to the increase in the capital base of the company earnings per share has slightly decreased. Since the company has been in an expansion phase, it has issued bonus shares in the past which has increased the number of shares in the market which led the company to share its profits among higher shares which led to a decrease in earnings per share.

Non-performing loan of the company has been fairly stable which stood at 0.91% in FY2076. Since the NPL of the company has stayed low for the last 5 years, the company’s loan allocation has been very much efficient. They have collected 99% of their loans in the past.

In terms of provisioning, from the total provision of bad debts the company created, management is able to recover an average of 71% of total provision which has a positive impact on the profitability.

With the increase in equity, how the company utilizes the shareholder's money determines the company's returns. Even though the company’s ROE has shown a decreasing trend, the return remained moderate. Since, the industry average return on equity of 24%, Deprosc Laghubitta Bittiya Sanstha Limited has fairly utilized the shareholder's money.  

Return on assets for the company has remained fairly consistent for the last 5 years. Since the industry average has stayed around 2.2%, Deprosc has maintained its ROA above the industry average.

Dividend History:

Risks:

Since the regulatory body has decreased the base rate for microfinance to 15% from 19%, this might have an impact on overall profitability

Since there are 89 microfinance companies operating in the country, it has created an unhealthy competition

Collection of the Loan depends on their client and if the management could not recover their loans then their Non-performing loan increases

Future Outlook

With an ever-increasing demand for loans from the deprived sector to invest in agriculture or any other sector, microfinance seems to have an advantage. Since customers prefer hassle-free loans, microfinance provides similar services.

However, it comes down to how efficiently the management allocates its resources. Their expansion plays a huge role in increasing the current consumer base. Since the company has already been able to cater its services to 200,562 customers to the date, the company trying to expand its horizon might enable it to cater its services to other possible customers. Also, With the current notice to promote the merger of microfinance and reduce the number down to 29 within 2 years, this will create a somewhat healthy environment to cater to the service to a larger extent.

On the other hand, due to the lower interest rate environment and regulatory body decreasing the industry base rate to 15% might have a negative impact on the industry's profitability. So, it goes without saying that the ability of the management will determine if the company will be as competitive as it was before. 

How attractive is the current market price?

With the market sell-off on Feb 24, 2020, due to fear of coronavirus, the stock started to plunge from the high of Rs. 1080 to Rs. 757 till the 22^nd of March. The stock yielded around 4.62% if the stock was bought at Rs. 757. However, the microfinance sector was hit hard in the period and its earnings went down to Rs. 27.35 and current earnings would have yielded 3.61% on the initial bought price decreasing the yield of the stock.

However, when we consider the current price of Rs. 850 and the current earnings of Rs. 27.35 the stock will yield about 3.21% which if we compare it with the risk-free asset (fixed deposit) of 7.5% is less. So, from the earnings perspective and the current roller coaster ride (volatility) in the market, the stock could be overvalued.

However, the earnings yield does not consider future earnings and the ability of the management to improve profitability. So, it will be logical to use other valuation metrics before buying the stock.