Northern Arc Capital IPO Alert

Northern Arc Capital Limited IPO Summary

Overview of Northern Arc Capital Limited

Northern Arc Capital Limited, founded in 2009, is a financial services company that provides diverse retail lending solutions to underserved households and businesses across India. The company offers multiple financial products, including MSME finance, microfinance, consumer finance, vehicle finance, affordable housing finance, and agriculture finance. It operates across 671 districts in 28 states and 7 union territories, showing significant geographic reach and diversification.

Financial Performance

• Revenue Growth: Northern Arc Capital’s revenue grew by 45% year-on-year to ₹1,906.03 crore in FY 2024.
• Profit After Tax (PAT): The company’s profit increased by 31% to ₹317.69 crore in FY 2024.
• Assets: Total assets increased to ₹11,707.66 crore as of March 31, 2024.
• Net Worth: Improved to ₹2,314.35 crore in FY 2024.

Key Financial Ratios:

• Debt/Equity Ratio: 3.9
• Return on Net Worth (RoNW): 13.32%
• Price to Book Value (P/BV): 1.49

Key Risk Factors to Consider

1. Lack of Identifiable Promoter:
   Northern Arc Capital does not have a defined promoter as per SEBI regulations. This means that the company relies heavily on its senior management team and key personnel to drive business success. Additionally, there is no minimum promoter’s contribution in the IPO, which may raise concerns about governance and stability. The entire pre-IPO equity share capital will be locked in for only six months, which is a shorter duration compared to the usual 18-month lock-in period.
2. Audit Modifications and Regulatory Observations:
   The company’s statutory auditors have noted modifications in their reports for FY 2024 and FY 2023, relating to the maintenance of audit trails and other regulatory requirements. These modifications also include remarks about delays in statutory dues and non-completion of physical verification of assets. These observations could potentially affect the company’s financial statements and overall financial health in future periods.
3. Negative Cash Flows:
   Northern Arc Capital has experienced negative cash flows in FY 2022, FY 2023, and FY 2024, primarily due to funds used in lending activities. Negative cash flow could impact the company’s ability to operate effectively and implement its growth plans.
4. Regulatory Non-Compliance:
   There have been instances of delays and non-compliance with legal and regulatory requirements, including late filings and inaccuracies in certain documents filed with regulatory authorities. Although corrective measures have been taken, these issues could affect the company’s reputation and legal standing.
5. Sector and Credit Risk:
   The company has a significant concentration of exposure to high-risk sectors such as microfinance, consumer finance, vehicle finance, and agriculture finance. These sectors are susceptible to regulatory changes, economic conditions, and natural calamities. Moreover, the company has a high exposure to borrowers with lower credit ratings, which increases the risk of defaults.

Financial Indicator

1. Gross Stage 3 Loans and Investments: 3.54% for 2024, indicating the percentage of loans and investments at significant risk of default​.
2. Provision Coverage Ratio (Stage 3 Assets): 34.46% for 2024, reflecting the company’s strategy to cover potential losses on Stage 3 assets​.
3. Debt/Equity Ratio: Stands at 3.9, suggesting a relatively high level of debt compared to equity​.
4. Return on Net Worth (RoNW): 13.32%, reflecting the profitability relative to shareholders’ equity​.
5. Price to Book Value (P/BV): 1.49, indicating the market’s valuation relative to its book value​.

IPO Considerations

• Valuation Metrics:
  • Post-IPO Price to Earnings (P/E) Ratio: Expected to be 13.36, which suggests a moderate valuation.
  • Earnings Per Share (EPS): Projected to decrease from Rs. 22.32 to Rs. 19.69 post-IPO due to dilution effects.

Operational Insights

• Technology Integration:
  The company uses advanced digital tools, such as Nimbus, nPOS, Nu Score, and AltiFi, to streamline its operations and reach more customers. This technology integration helps improve efficiency and expand its customer base.
• Business Diversification:
  Northern Arc Capital’s diversified portfolio across various sectors reduces the concentration risk but exposes it to specific sector-related challenges.

Conclusion

Investment Decision Consideration: Northern Arc Capital Limited presents an opportunity for growth with its diversified portfolio and technological capabilities. However, potential investors should carefully consider the following risks:

• Absence of a Promoter: Lack of a defined promoter may raise governance and stability concerns.
• Audit and Regulatory Issues: Modifications in audit reports and past regulatory non-compliance could affect financial transparency and operations.
• Negative Cash Flows: Persistent negative cash flows may challenge the company’s growth plans.
• High Sector and Credit Risks: Significant exposure to high-risk sectors and borrowers increases vulnerability.

Final Verdict: While the IPO might offer short-term gains (estimated at 60.08%), long-term investors need to evaluate these risks carefully. A balanced decision should consider the investor’s risk tolerance, investment goals, and market conditions.