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.

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Western Carriers (India) Limited, a prominent player in the logistics sector, is set to launch its Initial Public Offering (IPO) from September 13, 2024, to September 18, 2024. This IPO presents an opportunity to invest in a rail-focused, asset-light logistics company with a strong presence across various industries. Here’s everything you need to know about this upcoming IPO.

IPO Overview

• Total Size: ₹492.88 crores
• Fresh Issue: ₹400 crores (2.33 crore shares)
• Offer for Sale: ₹92.88 crores (0.54 crore shares)
• Price Band: ₹163 – ₹172 per share
• Market Cap Post-IPO: ₹1,753.63 crores
• Listing On: BSE and NSE (Tentative Listing Date: September 23, 2024)

Risk Factors to Consider

1. Customer Concentration: The company’s dependency on a few key clients in the metals and FMCG industries could impact its stability. A downturn in these sectors might affect operational efficiency.
2. Technological and ESG Pressures: Rapid technological advancements and rising Environmental, Social, and Governance (ESG) expectations may increase operational costs.
3. Legal Proceedings: Ongoing legal issues, including a case against a promoter, could negatively affect the company’s reputation and operations.
4. Working Capital Needs: Western Carriers faces potential cash flow issues due to delayed payments from customers and tight payment terms from service providers. High credit risk and working capital pressure could strain financial stability. The company is also exposed to credit risk from customers and vendors who may delay payments or fail to meet contractual obligations. The gap between trade payables and receivables further increases the working capital pressure, potentially affecting the company’s cash flow cycle and financial stability.
5. Debt Obligations: With significant debt of ₹3,527.31 million as of July 31, 2024, high leverage could affect growth, cash flow, and financial stability.
6. Promoter Issues: Western Carriers’ Promoters, Rajendra Sethia (Chairman and Managing Director) and Kanishka Sethia (Whole-time Director and CEO), were directors of Western Conglomerate Limited, a listed company. During their tenure, the company’s shares were suspended from trading on the Calcutta Stock Exchange.
7. Western Carriers’ Promoter Group includes Narendra Sethia, the brother of Promoter Rajendra Sethia, but the company was unable to obtain necessary disclosures or confirmations from him or related entities. SEBI denied an exemption request, so the company disclosed the NS Promoter Group based on publicly available information. Ongoing legal proceedings and complaints involving Narendra Sethia and other entities are also noted.

IPO Details

• Lot Size:
  • Retail: Minimum 87 shares (₹14,964)
  • sNII: Minimum 14 lots (₹209,496)
  • bNII: Minimum 67 lots (₹1,002,588)
• Key Dates:
  • Allotment Finalization: September 19, 2024
  • Listing Date: September 23, 2024

Company Overview

Incorporated in 2011, Western Carriers (India) Limited is a leading 4PL logistics company specializing in rail-based, multi-modal logistics solutions. Serving major industries like FMCG, pharmaceuticals, and chemicals, the company boasts clients such as Tata Steel, Hindustan Unilever, and Vedanta Limited.

Financial Metrics (as of March 31, 2024)

• ROE: 22.41%
• ROCE: 29.23%
• Debt/Equity Ratio: 0.67
• EPS (Pre-IPO): ₹10.21 | Post-IPO: ₹7.88
• P/E Ratio (Pre-IPO): 16.85x | Post-IPO: 21.83x
• P/BV: 3.4x

Utilization of Proceeds

• Repayment of Borrowings: ₹163.5 Crore
• Capital Expenditure for Vehicles and Containers: ₹151.7 Crore
• General Corporate Purposes

Grey Market Premium (GMP)

Currently, the Grey Market Premium stands at ₹57 per share, indicating a positive investor sentiment towards the IPO.

Conclusion

Investors should carefully consider the risk factors and the company’s financial health before investing in Western Carriers (India) Limited’s IPO. With significant growth potential and robust industry presence, this IPO could be a notable addition to your investment portfolio but there is serious doubts about authenticity of promoters.

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