Proposed 100% right share issue of Womi Laghubitta Bittiya Sanstha receives Grade 4+ from ICRA Nepal; what is the rationale behind the rating?

ICRA Nepal has assigned [ICRANP] IPO Grade 4+, indicating below-average fundamentals to the proposed rights issue of Womi Laghubitta Bittiya Sanstha Limited (WOMI) worth Rs.10.10 Crore. WOMI has proposed a 100% rights issue of 1,010,880 equity shares of face value of Rs.100 each, which will be issued to its existing shareholders at par.

The assigned grading factors in WOMI’s healthy credit growth, albeit on a low base (CAGR growth of ~59% over last three years ending FY2018), established underwriting norms and good asset quality maintained over the years. The grading also factors in WOMI’s good profitability indicators which in turn remains supported by strong net interest margin (NIMs~10%over last three years). WOMI’s past track record of growth and profitability, coupled with its recent upgradation into a national level MFI (from erstwhile regional status) augurs well for its incremental growth and profitability prospect. The grading also factors in WOMI’s adequate branch network, which is expected to grow going forward, with the upgradation into a national level MFI. This, coupled with a large below-poverty population, still is outside the reach of mainstream banking, remain positive from a growth perspective. The grading also factors in the institution’s good management team and adequate capitalization profile (capital to risk assets ratio (CRAR), of 12.39% as of mid-January 2019 against regulatory minimum of 8%). The proposed equity injection is likely to further strengthen the capitalization profile (assuming full subscription) and support incremental growth.

Nonetheless, the grading is constrained by WOMI’s limited track record (operating since 2012) leading to a small scale of operations. Geographical concentration of credit portfolio also remains a concern, although likely to moderate going forward with WOMI’s upgradation from regional level status. However, the MFI’s ability to grow and expand geographically could be a challenge, given the intense competition from established national level MFI players. WOMI’s funding profile is highly reliant on bank borrowings (~61% of total external fund as on mid-January 2019), which exposes it to interest rate volatility in the banking industry. Grading concerns also emanate from the absence of a centralized credit information for the MFI, which could result in overleveraging of the borrowers. The grading also takes note of the frequent changes in regulation, impacting the spreads and funding sources for the MFI sector.

Going forward, WOMI’s ability to maintain growth, generate scale economies, and achieve geographical diversification while maintaining commensurate risk mitigation practices and asset quality will have a bearing on its overall financial profile.