Saturday, March 4, 2017

Arman Financial Services Ltd.


Arman Financials Services Ltd. (AFSL) and its wholly owned subsidiary Namra-Microfinance Ltd.  offer vehicle finance and JLG (Joint Liability Group) micro-finance loans. Namra is wholly owned subsidiary of Arman. Arman was originally incorporated in 1992 as Arman Lease & Finance Ltd. & made its Initial Public Offering (IPO) on August 21, 1995. 

Micro- finance business has presence in four states through ~78 branches and vehicle finance business has presence in two states with six branches and 50 dealer locations. 

Business Performance:

AFSL delivered CAGR of 27%in profit after tax and number of clients since 2012. AUM has grown by CAGR of 35%, primarily led by growth in micro-finance book. Micro-finance is now around 70% of the AUM and is expected to grow further with slowdown in vehicle finance business. 

Micro-finance growth looks impressive, however many other MFIs have grown at faster pace. Here is YoY growth of MFIs in Q3-2016: 

1. Asirvad: 137%
2. GK: 71%
3. ESAF: 69%
4. Ujjivan: 61%
5. Janalaxmi: 53%
6. BFIL: 38%

Namra was among bottom 20% MFIs covered by M-Fin in terms of YoY growth in Q3-2016. 

Dividend growth has been decent but lower than PAT growth. It’s important for a fledgling business to re-invest retained earnings for future growth; hence an investor may accept lower dividend income for future capital gains generated from retained earnings. 

Asset quality has remained strong over last few years with gross NPAs below 1%. Return of Equity has been consistently improving. 

MFI business: 

Arman started its MFI business with branches in Vadaj & Kalol in FY2009. Total MFI disbursement was Rs. 7 cr to 32 groups in 2010 which has increased to AUM of Rs. 200 cr and 1.25 lakh customer base by end of Q3-2016. Arman’s micro-lending strategy is based on calibrated growth. 

1. Arman follows centralised model in which all lending proposals are routed to head office by field officer (FO) for credit appraisals. Centralized model increases the financing TAT but enforces company's lending policies across branches.  

2. Arman doesn’t venture as first MFI in a new district. It enters in a district once 4 or 5 MFI’s have set up their shops.

3. Arman sets up branches in rural areas where there is limited or no competition. MFIs exposure to rural areas is 40% while Arman’s exposure is at 80%. This strategy ensures less competition from other MFIs.

4. Management is of the belief that fast-pace growth may lead to instability specifically during the difficult times. Arman has grown its AUM at moderate rates as compared to other MFIs.

5. Average size of loan is smaller than other MFIs. The Company lends higher amounts (two-year loans) only to customers who have completed three loan cycles. Most of the MFI loans are for 14 month tenor; less than 10% MFI loans are for 2 year tenor.  

Operational process:

AFSL follows a centralised model for processing loans in which credit process is carried out at head office level. 

1. A JLG is formed and credit information of all group members is extracted from Highmark, a Credit Information Company.

2. Executive conducts Lifestyle Assessment by visiting house at the branch level. 
3. Cash flow analysis is done by the field officer. 

4. Results are forwarded to the Head Office. Branch staff needs to upload the data in system. Electricity and weak internet connection are the challenges faced by branch employees. In such scenario, employees can use their handphones to share data or courier the documents to head office. 

5. Credit department evaluates the reports and calls customers for information verification before loan sanction. 

6. This centralized credit process increases TAT by one day compared to competitors, but ensures good quality of loan book. 

7. Branch Manager’s incentive is linked to the quality of portfolio and Field Officer’s incentive is based on the numbers of clients acquired and not AUM. 

8. Incentive structure and central credit processing also avoid possible conflict of interests for branch managers and field offices.

Region-wise expansion:

Management is focusing on consolidating it’s position in 4 states - Gujarat, Maharashtra, Uttar Pradesh and Madhya Pradesh. 

Arman extended deeper into North Gujarat (Kutch) and South Gujarat in FY2016.

Arman plans to open 12 branches in Maharashtra in FY2017 from 2 branches in FY2016. Management’s decision to enter Maharashtra is validated by the fact that there is at least a 43% gap between potential micro-finance clients and actual MFI clients.

Arman plans to open 12 branches in UP in FY2017 from 2 branches in FY2016. Management’s decision to enter UP is validated by the fact that here is at least a 74% gap between potential micro-finance clients and actual MFI clients.

Vehicle Financing:

Arman entered in two- and three-wheeler financing business from Ahmedabad. Over the years, the Company established its competence through a growing presence in a number of towns and cities in Gujarat (Gandhinagar, Kalol, Kadi, Mehsana, Sabarkantha, Palanpur, Vadodara, Kheda, Anand, Sevalia, and Tarapur). Arman discontinued three-wheeler finance due to asset quality concerns in 2014. 

Two-wheeler financing remains a business in auto-mode with professional management in place. However, due to slow down in two-wheeler sales over last few years and increased competition has restricted the growth. This portfolio is also affected since management's attention was diverted towards growing micro-finance. Two-wheeler business, however, provides stability to Arman's portfolio. 

SME finance: 

AFSL launched MSME financing product from its Godhra and Indore branches. MSME unsecured financing product will lend Rs 50,000-150,000 for customers having an established small business and a good credit track record. Management expects higher credit losses (~3%), hence they have prices this loan at higher interest rate of 28- 30% (~25% for micro-finance). 

SME financing model is based on Fullerton model wherein the disbursement is cash-less but repayments are collected in cash. 

Capital Raising:

Equity is the basic raw material to a financing business. Arman has been judicious over last few years by keeping sufficient capital buffer. Despite growth in AUM, debt to equity has remained below 3. Arman plans to raise capital of ~Rs. 50-60 cr in FY2018 by diluting around 25% equity. Demonetisation exercise has delayed this plan due to slowdown in micro-finance lending.  

Impact of Demonetisation: 

Demonetisation impacted the MFI business significantly. Major challenges include collection of EMIs and further disbursements. Fortunately, banks credit has not dried up for MFIs unlike 2010 Andhra Pradesh crisis. Arman is present in 4 states which are highly impacted due to demonetisation exercise. 

UP with highest portfolio at risk 30 (atleast one EMI is outstanding for 30 days). Maharashthra is distant third in the list. Arman had limited exposure to these states. MP and Gujarat got significantly impacted as well. Namra extended Rs. 26 cr micro-finance loans in Oct 2016. This number was just 1 cr in subsequent months due to demonetisation exercise. 

Namra's MFI portfolio was around Rs. 150 cr in Q2-2016 which came down to Rs. 130 cr in Q3-2017. Arman was expecting AUM growth of 60% in FY2017. Management has now re-caliberated it's AUM growth expectation at ~20%.

Arman did extra provisioning of Rs. 1.6 cr on Standard Loans in Q3-2017 to create buffer for any contingencies of higher credit losses on account of demonetization exercise. This is a direct hit on bottom line (included in other expenses) and reflects management’s conservative approach. 

Arman's collections are at around 94-95%; management believes it may take around a year for bringing back discipline in borrower to pay EMIs on regular basis. It is expected that there could be spike in the gross NPA’s. 


Jayendra B. Patel is the Managing Director and C.E.O. His son Aalok Patel is the Executive Director & C.F.O. Aalok Patel spent around 8 years in USA before joining Arman in 2010. Aalok experienced the mortgage credit meltdown from close quarters in USA which shaped his conservative epoxies towards credit lending. 

Management renumeration is quite low. Management, however compensates the same by extending to the company at higher rates ~15-18% p.a.. While this may be a cause of concern for certain investors, the amount of loan is just around Rs. 1 cr. 


Lets value Arman basis standard tools - Price to Book and Price to Earning.

1. Price to Book: Arman’s book value is 76 which implies a Price to Book value of 3.

2. Price to Earning: Arman is expected to achieve earning per share of Rs. 12 in FY2017. At current share price of INR 225, Arman is available at price to earning of ~18. 

Arman is available at valuations where investors have little margin of safety. 


Management expects to achieve Rs. 800 cr AUM by 2020, CAGR of ~40%. Financing is a business where there is no dearth of borrowers so this growth is certainly possible. However, management should be wary of possible political and social fallouts which is inherent in micro-finance business. 

This growth will come from micro-finance business and new business areas like SME financing and small ticket housing finance. Management is yet to draw up a plan for housing finance but may seriously consider once Arman's consolidated AUM crosses Rs. 500 cr. 

Management has shown intent of sustainable growth instead of sky-rocket growth. Bringing complete halt to disbursements and focus on collections after demonetisation indicated this intent. 


All data has been taken from public sources and discussion with management. I own shares of Arman Financial at the time of writing this article. This has not been disclosed as part of portfolio disclosure since the holding is very small (less than 4% of portfolio). This may have led to biases in my analysis. An investor should do her own analysis before making an investment decision. The views expressed are personal and doesn't represent that of my employer’s.

This article is just a collection of my thoughts about the company.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations.

Please refer to 'Disclaimer' page for further details.


  1. Hi Vikrant,

    Any views on the recent results? Their employees cost and finance costs have gone up substantially.


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