IPO of Adhikhola Laghubitta opens from sunday; Things to know before investing

Company Profile

Adhikhola Laghubitta Bittiya Sanstha Limited was incorporated in August 26, 2016 and it started commercial operation from February 12, 2017, upon receiving license to operate as 10 districts-level class D MFI. As of mid-January 2019, ALB had operations through 19 branches over its 10 licensed districts. ALB is promoted by 38 individual promoters engaged in different professions. Mr. Dolraj K.C is the chief executive officer of the company. The registered and corporate office of ALB is located at Veerkot-1, Syangja district of Gandaki Province in Western Nepal.

Objective of the issue

About the issue

Adhikhola Laghubitta Bittiya Sanstha Limited is issuing 4,00,000 units ordinary shares worth Rs 4 crore to the general public from Ashad 22, 2076. The early closing date of this IPO issue is on Ashad 25, 2076 and if the issue is not subscribed till Ashad 25 then this issue can be extended upto Shrawan 20, 2076.

Out of the offered 4,00,000 units; 5,000 units have been allotted for the employees of the company and 5% of total offered share to general public i.e. 20,000 units have been allotted for the mutual funds. The remaining 3,75,000 units are for the general public.

Applications can be place for minimum 10 units and maximum 2,000 units.

NIBL Ace Capital Limited has been appointed as the issue manager for the IPO issuance.

The paid-up capital will reach Rs 10 crore after the issuance of the public shares. After the IPO issue; public holding will be 40% and promoters holding will be 60%.

The company FY 2075/76 third quarter EPS is Rs 18.66 and net worth per share stands at Rs 106.38.

ICRA Nepal has assigned an [ICRANP] IPO Grade 4, indicating below-average fundamentals to the proposed IPO.

Capital structure

Shareholding composition

Primary shareholders

Board of Directors

Management Team

*The company has 77 employees in total.

ICRA Rating

ICRA Nepal has assigned an [ICRANP] IPO Grade 4, indicating below-average fundamentals to the proposed initial public offering (IPO) of Adhikhola Laghubitta Bittiya Sanstha Limited. It is proposing to come out with an IPO of 400,000 equity shares with a face value NPR 100 each, at par. The proposed issue is being made to fulfil the regulatory provision requiring banks and financial institutions (BFIs) to float IPO within three years of coming into operation.

Strengths and opportunities

• Ability to scale-up the business in its initial years of operations, aided by rapid branch expansion and growth in client base, while maintaining moderate average credit ticket size (~NPR 71,000 as of mid-January 2019).
• Adequate growth opportunities given the large below poverty line population in Nepal who are outside the reach of mainstream banking and act as target group for microfinance institution (MFIs).
• Comfortable capitalisation of 11% vs. regulatory minimum of 8%, which along with capital from proposed issue could support growth plans of the management.
• Regulatory change removing 18% interest rate cap for MFIs, which provides them the flexibility to pass on the increased cost of funds to borrowers.

Weaknesses and threats

• Recent deterioration in asset quality despite low seasoning of portfolio; non-performing loans (NPLs) have increased to 1.43% as of mid-January 2019 from 0% as of mid-July 2018 while 0+ days delinquencies have increased to ~6% from ~2% over the same period.
• Subdued return indicators so far despite some recent improvement (RoNW and RoA² of ~17% and ~1.7% for H1 FY2019 against loss reported earlier).
• Profitability indicators would further be impacted by capitalisation of proposed IPO and hence company’s ability to improve profitability over a longer time frame remains to be seen.
• Frequent changes in regulation impacting the spreads and funding sources for MFI sector.
• Limited track record (operating since February 2017), small scale of operations (assets base of NPR 635 million as of mid-January 2019) and competition from larger/established peers.
• Increased ticket size by regulations, presence of large number of players in the industry (including cooperatives), and absence of centralised credit information for MFIs raises concerns of overleveraging for the sector.
• Recent regulatory change has restricted further branch expansion before upgradation to national level status and hence the resultant uncertainty in company’s growth momentum

Going forward, ALB’s ability to increase its scale of operations while maintaining healthy asset quality indicators, by enhancing its credit appraisal capabilities and improving the internal controls, would have a bearing on its overall financial profile.

Source: (ICRA Nepal: https://icranepal.com/releases.php)

Financial performance and projection

Source: Company prospectus and ICRA Nepal rating report