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Arman Financial Services Ltd

BSE: 531179 | NSE: ISIN: INE109C01017
Market Cap: [Rs.Cr.] 128.11 Face Value: [Rs.] 10
Industry: Finance & Investments

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Management Discussions

Economic overview

The full-year GDP growth for the fiscal year ending March 2015 settled at 7.3%, up from6.9% in 2013-14, lower than an official estimate of 7.4% (figures calculated as per thenew series of national accounts with base year of 2011-12). This growth was due to animprovement in the performance of the country's services and manufacturing sectors.

The economy was relatively independent of factors associated with an economic slowdown-inflation, fiscal deficit, weak demand, external account imbalances and an oscillatingrupee, which had choked growth during 2011-12 and 2012-13.

One of the redeeming features was the emergence of India as a large economy with apromising outlook, amidst the mood of pessimism and uncertainties that continue to persistin a number of advanced and emerging economies.

The Gross Value Added (GVA), a new concept introduced by CSO to measure the economicactivity, rose by 7.2% in 2014-15 compared to 6.6% in the previous fiscal. Financial, realestate and professional services showed an improvement by registering a growth of 11.5% asagainst 7.9% in previous fiscal.

According to the Economic Survey, India's GDP could expand by 8.1-8.5% in 201516. TheReserve Bank of India has projected India's GDP growth for 2015-16 at 7.6%. TheInternational Monetary Fund forecast India's growth to strengthen from 7.2% in 2014 to7.5% in both 2015 and 2016.

Indian financial sector

India has a diversified financial sector, undergoing rapid expansion. The sectorcomprises commercial banks, insurance companies, non-banking financial companies,cooperatives, pension funds, mutual funds and other smaller financial entities. Thefinancial sector in India is predominantly a banking sector with commercial banksaccounting for more than 60% of the total assets held by the financial system.

India's services sector has always served the country's economy well, accounting formore than 50% of the gross domestic product (GDP). In this regard, the financial servicessector has been an important contributor.

The under-banked and unbanked Indian segment

Only about 35% of India's almost 1.27 billion people have any access to bank accounts,compared with a global average of 50% (Source: 2011 World Bank).

Of the 24.67 crore households in the country, 10.19 crore do not have access to bankingservices. Some 44% rural households and 33% urban households still do not have a bankaccount (Source: Business Line, August 25, 2014).

2015, a watershed moment for financial inclusion

The year 2015 could be a watershed moment in India's quest to provide access to a rangeof financial services to all its citizens.

• RBI announced that 2nd February, 2015 was the last date to submitapplications for small finance banks and payment banks, the first opportunity to financialintermediaries to offer a complete range of financial services that banks offer.

• In September 2015, Bandhan Financial Services, a non-banking finance company -microfinance institution (NBFC-MFI), will commence operations as a bank.

• In August, 2014, the Indian Prime Minister launched the Pradhan Mantri Jan- DhanYojana (PMJDY), a national mission for financial inclusion to ensure access to financialservices (banking/ savings and deposit accounts, remittance, credit, insurance andpension) in an affordable manner.

• Prime Minister launched the MUDRA Yojana that will offer loans to the unfunded,self-employed as well as Rural indebtedness

A National Sample Survey report on indebtedness and asset holdings of 62,000 ruralhouseholds across 4,529 villages and blocks revealed that between 2002 and 2012, thenumber of rural households with bank accounts more than doubled. Yet, rural householdsincreased their borrowings in a significant way from private moneylenders and not from theorganised financial sector.


microfinance focus

As mainstream microfinance (targeting the poorest) has matured, focus has turned to thecountry's chronically underserved MSMEs, where, according to an IFC estimate, there is adebt gap of over US$60 billion. Already, innovative companies have been servicing thissector by building specialised acquisition and underwriting approaches. These changes arebeing accelerated by various government schemes:

• In 2014, the RBI announced a new category of ‘small' bank focusing onfinancially weaker customers.

• In 2015, the government proposed the creation of an MSME bank (MUDRA) with a Rs20,000 crore capital allocation for the sector.

MUDRA Bank catalyses financial inclusion

The emergence of Micro Units Development Refinance Agency (MUDRA) Bank, with arefinance corpus of Rs 20,000 crore and credit guarantee corpus of Rs 3,000 crore is alandmark in India's financial sector, expected to benefit 5.8 crore small businesses.

The principal product

of MUDRA Bank will be providing security free financial aid up to Rs 10 lac to LastMile Financiers of the micro businesses/ units under the aegis of the Pradhan Mantri MUDRAYojana but this funding will be based on the stage of growth of the business enterprises.The loan amount will be provided as follows:

Shishu: The maximum loan amount under Shishu category will be up to Rs 50,000.

Kishor: The loan amount under Kishor category will be from Rs 50,000 and upto Rs 5 lac.

Tarun: The loan amount

under Tarun category will be between Rs 5 lac and Rs 10 lac

MUDRA Bank has emerged as a refinancing agency for all NBFCs, addressing a long-awaitedneed. The recent eligibility criteria for availing refinancing by banks, MFIs and NBFCsmakes all RBI-registered NBFCs eligible. Moreover, small NBFCs without an external creditrating but possessing satisfactory borrowing arrangements with a scheduled commercial bankfor a minimum 2 years and net PA not higher than 3% are eligible. This frees small NBFCsfrom the need to seek credit ratings.

Business highlights, 2014-15

• Revenue from the business grew 132%.

• Disbursements grew 34.4%.

• Established a presence in Madhya Pradesh; opened eight microfinance branches andadded 4700 customers.

• Average ticket size per microfinance customer increased 3.2% - from Rs 13,600 in2013-14 to Rs 14,038 in 2014-15. Much of the growth was derived from new client additionand not increasing loan amounts.

• Opened four branches in Gujarat.


Arman conducts its microfinance business through its 100% NBFC- MFI subsidiary, NamraFinance.

The beneficiaries of the organisation included micro-entrepreneurs and micro-businessowners in urban, semi-urban and rural India, largely comprising economically poor andsocially neglected communities (scheduled castes, scheduled tribes, other backward classesand religious minorities).

The Company provides loans exclusively for income-generating activities comprisinglivestock rearing (especially milch animals), shopkeeping, hawking and working capitalloans for micro-enterprises, among others.

Namra (presence in Gujarat and Madhya Pradesh through 39 branches) has assets undermanagement worth Rs 66 crore and an active customer base comprising 85,000 individuals,translating into an average of Rs 8,000 outstanding loan per borrower.

The branches are responsible for disbursing, collecting and monitoring loans in theirrespective hinterlands. Credit decision-making, accounting and MIS-related activities werecentralised to accelerate expansion and enhance business control. The branch managers wereresponsible for maintaining portfolio quality and driving growth.

Despite the significant growth opportunity, Namra has responded with a conservativelending approach backed by a robust support system.

The Company increases lending ticket sizes in line with the customer's repaymentability. Consequently, the Company refrained from lending amounts in excess of Rs 15,000to first-time customers. It lent higher amounts (two-year loans) only to customers whocompleted at least three cycles with the Company. This rigorous approach translated into astrong loan book and quality portfolio.

Business optimism

Considering that ~90% of Indian households still do not have access to formal credit,microfinance is expected to play a crucial role in bridging the gap.

The Andhra Pradesh crisis of CY10 and subsequent contraction in the sector resulted ina high latent demand for microfinance. The regulatory environment

stabilised following RBI intervention, while the funding environment improved overFY13-15.

The NBFC-microfinance institutions sector witnessed strong loan book growth in the lasttwo years. The average ticket size disbursed per borrower remained largely constant overFY10-14 due to funding constraints faced by microfinance institutions and RBI regulatoryguidelines.

The global average for outstanding loans per borrower was at 18% of GDP, compared with11% in India. This strengthens the conviction that there is a large scope for an increasein ticket sizes per borrower without affecting repayment. Based on this insight, India'spotential microfinance market size is 3-4x its outstanding loan portfolio.

Even as the RBI directive states that ‘not more than two microfinance companiescan lend to the same borrower', making it difficult for new entrants to grab market sharefrom incumbents, there still exist a number of pockets untouched by the microfinancesector, inspiring growth and optimism.


Arman intends to grow its business and liquidity through the following initiatives:

• Expand branch network in Madhya Pradesh and possibly extend into a third statein HY2 2016-17

• Analyse options to mobilise funds to reach the target microfinance segmentdisbursement of Rs 180 crore during 2015-16

Microfinance - Potential market size
Total households 20 crore
Households with little access to credit 18 crore
Average loan per household, as per global averages, at a percentage of per capital GDP Rs 17,360
Size of market outstanding Rs 2,18,700 core
Current microfinance outstanding Rs 60,000 crore

Why Madhya Pradesh?

As per Census 2011, 72% of Madhya Pradesh resides in rural areas.

Yet the literacy rate in the state is about 70%, close to the national average.

The state has a growth rate of about 20%, above the national average of about 17% andhigher than neighbouring Gujarat (19.3%), Maharashtra (16%) and Uttar Pradesh (20.2%).

Business highlights, 2014-15

• Revenue from the Asset Finance segment was Rs 15.25 crore

• Asset finance disbursements grew 9%

• Average loan outstanding per asset finance customer was Rs 23,055 (Rs 23,435 in2013-14)


Arman commenced its asset finance business in 1998 when it selected to finance two- andthree- wheelers in Ahmedabad (now largely in Gujarat). Although Ahmedabad remains itsstrongest branch, the Company enjoys a significant presence across Gandhinagar, Kalol,Kadi, Mehsana, Sabarkantha,

Palanpur, Vadodara, Kheda, Anand, Sevalia, and Tarapur.

Arman created one of the most flexible two- and threewheeler finance products in termsof tenure, down payment, instalment and fees.

The Company reported 100% collections through cheque/ ECS, despite addressingunder-banked customers; it entered into tie-ups with banks to open bank accounts forunbanked customers, strengthening financial inclusion.

The Company invested in processes to report one of the fastest customer servicingturnaround times in Gujarat, wherein a loan can now be processed within six hours ofcustomer engagement.

Business performance

Growth in the Company's two- and three-wheeler financing business slackened in twoyears on account of a national slowdown in two-wheeler sales. The market is reportingincreased competition from manufacturing finance companies like Hero Fin Corp, BajajFinance, Honda Finance, TVS Finance, etc.

The management will stagger its three-wheeler financing in view of the onslaught ofmobile app- based taxis and increased three-wheeler competition.

In view of this, Aiman's new business in the threewheeler segment could largely bederived from replacement demand.


The Company is strengthening its business, limiting its exposure to sectoralcontingencies while remaining profitable. The two-wheeler business will continue to expandat a reasonable 10-15% across the foreseeable future.

The management is considering limited bulk financing like dealer channel partnering,and securitisation, among others. It is also considering refinancing with MUDRA Bank forSME financing of sums between Rs 50,000 and Rs 5 lac. During FY16, Company is alsoexpanding out of Gujarat for its two-wheeler division and opening branches in Indore (MP)and Ajmer (Rajasthan).

Analysis of financial statements

(Based on Consolidated Financial Statements)

Despite the subdued economic environment for the financial sector, Arman posted healthybusiness growth and improved profitability. So even as the income from operations grew by20.96% over the previous year, net profit accelerated faster by 35.96% over 2013-14. Thiswas mostly due to the cost savings achieved due to economies of scale.

Statement of Profit and Loss

Income from operations:

It grew by 20.96% from Rs 24.47 crore in 2013-14 to Rs 29.60 crore in 2014-15. Althoughoverall interest rates declined, this growth was primarily owing to the strong increase inthe microfinance vertical where business volumes increase due to the following:

• A strong growth in the existing business from Gujarat

• A geographic expansion into Madhya Pradesh contributed to business growth

Due to increased competition in the assetfinancing business, the Company strategicallycurtailed its resources towards that business.

Net Profit: This grew by 35.96%, from Rs 4.53 crore to Rs 6.16 crore. This growth wasprimarily due to an increased asset and income base, a strong growth in the Microfinancesegment of the business, especially the expansion into Madhya Pradesh.

Employee benefits:

Employee related expenses grew by 14.51% from Rs 4.55 crore in 2013-14 to Rs 5.21 crorein 201415 - primarily due to an increase in the team size to manage the fast expandingmicrofinance business - the Arman team increased from 317 members as on March 31, 2014 to375 members as on March 31, 2015. But the productivity of the team (reflecting itsefficiency) outweighed the expanded employee bill - average revenue (income fromoperation) and net profit per employee stood at Rs 7,89,638 and Rs 1,64,193 respectivelyin 2014-15 against Rs 7,72,027 and Rs 1,42,864 respectively in 2013-14.

Finance cost: Interest expense increased by 17.65% from Rs 9.12 crore in 2013-14 to RS10.73 crore in 2014-15 consequent to increased disbursements and assets under managementin the microfinance vertical. Assets under management increased 27% from the previousyear, which was mostly financed with debt. Going ahead, this coupon rate is likely toreduce due to the overall softening interest rates in the country and an improved creditrating for the Company.

This should facilitate in improving the Company's profitability.

Margins: Growing business volumes resulting in optimising costs and streamlining ofbusiness process facilitated in growth in business profitability - profit before taxincreased by 38.83% from Rs 6.67 crore to Rs 9.26 crore in 2014-15. The net profit marginimproved from 18.51% in 2013-14 to 20.80% in 2014-15.

Balance Sheet

Shareholders' fund: The balance under this head increased from Rs 33.71 crore as onMarch 31, 2014 to Rs 39.25 crore as on March 31, 2015 due to an increase in reserves andsurplus. Reserves increased as the Company ploughed business profits into business.

Debt portfolio: The outstanding debt (longterm, short-term, and working-capital)increased in relation to the increase in Loan Assets Under Management - from Rs 74.87crore as on March 31, 2014 to Rs 92.66 crore as on March 31, 2015. As a result, thedebt-equity ratio stood at 2.36x as on March 31, 2015 against 2.22x as on March 31, 2014.Of the total loans, the Company has a repayment liability of Rs 28.69 crore in the currentyear.

Interestingly, the Company's debt portfolio shifted in favour of longterm debt - 24% ofthe total debt as on March 31, 2015 against 14% as on March 31, 2014. This strategicdirection improved the asset-liability match and reduced the average interest cost ofdebt. As the corporate rating by CARE improved to investment grade, the Company couldsecure additional funds at lower interest rates and longer tenure.

Loans and advances:

This represents the loans receivable by the Company from its customers - hence is thecore of its business. The total under asset- backed loans increased from Rs 42.79 crore ason March 31, 2014 to Rs 46.32 crore as on March 31, 2015. The microfinance loans balanceincreased from Rs 45.56 crore as on March 31, 2014 to Rs 66.48 crore as on March 31, 2015.

Asset-backed loans: The 1balance under asset-backed Asset-backed loans

loans receivable was a mix between long-term and short-term in nature, shortterm beingthe portion of loans payable within the next fiscal year.

Microfinance loans:

The balance under Microfinance-backed loans is largely short-term in nature to berecovered in a year.

Trade receivables: The balance under this head increased from Rs 0.81 crore as on March31, 2014 to Rs 1.23 crore as on March 2015. This head represents EMIs due but not receivedfrom customers for its asset-backed loans and microfinance customers.

Receivables outstanding for more than six months increased from Rs 0.42 crore as onMarch 31, 2014 to Rs 0.68 crore as on March 31, 2015.

(Rs crore)

As on March 31, 2015 As on March 31, 2014
Long-term 33.01 33.22
Short-term 13.32 9.57
Microfinance loans (Rs crore)
As on March 31, 2015 As on March 31, 2014
Long-term 0.12 -
Short-term 66.36 45.56

Managing business uncertainties

Risk is the face of business uncertainty, affecting corporate performance andprospects.

Arman has always had a systematic approach to risk management. Its risk mitigationframework comprises studying emerging trends, conservative growth targets, framingpolicies and structured reporting, and most importantly, systems and controls. Adisciplined approach, coupled with timely execution of proactive counter-measures, hasstrengthened the Company's viability across verticals, products, geographies and marketcycles. Some key risks envisaged by the management are addressed below.

The Company's microfinance space may not be able to grow at a fast pace.

The microfinance space offers a huge growth opportunity. Consider this: The primarytarget of MFIs comprises 134.7 million ‘deprived' households with an annual householdincome of less than Rs 112,000 and lacking access to essential financial services likecredit, insurance and savings facilities. These households comprise 56.13% of the totalhouseholds in India. Based on an average loan size of Rs 15,000,the total microcreditdemand is estimated somewhere between Rs 202,050 crore and Rs 673,500 crore (Source:National Survey of Household Income & Expenditure (2011), NCAER- CMCR).

From a geographic perspective, of the 6 crore + population in Gujarat (as per the 2011Census), around 57.40% live in rural areas; in Madhya Pradesh, about 72.37% of the 7crore+ population live in rural areas - a sizeable opportunity for microfinance players.

Consequently, the Company has put in place the necessary infrastructure and resourcesfor registering a strong growth over the next two years. The Company has established ahealthy presence in Madhya Pradesh in 2014-15 and will continue to expand its footprint inother states over the coming years.

The Company's business growth could be impacted due to business concentration in onestate and growing competition in that geography.

The Company has established a strong presence in Gujarat with a network of 35 branchesmajority of which are in locations completely untouched by banks and other financialinstitutions. The Company has planned to strengthen its presence in that state. Further,to de-risk the Company from an overt dependence on a particular geography, the Companyestablished a meaningful presence in Madhya Pradesh with 8 branches and 18 branches areall set to be established during the current year. The Company is also consideringentering a new state for strengthening business growth during FY 2016-17.

The Company,s customers may not repay loans on time.The Company'smicrofinance business is based on the joint group liability concept where the inability ofa loanee to pay the instalment is shared by other members of the group. This practicecushions the Company from the risk of non-payment. Moreover, the Company consciouslyabstains from providing a top-up or an emergency loan to its customers. This ensures thereis no over-leveraging by customer. This is reflected in the Company's significantly low

NPA of 0.11% and a Portfolio-at-Risk of 0.16% (as of March 31, 2015).

The Asset Finance business is equally secure with the security of the hypothecatedasset, post-dated cheques, security cheques, and very conservative underwritingprinciples. The NPA level is one of the lowest in the industry at 1.54% in this businessvertical.

The Company's business may be impacted due to people attrition.

The Company's unique value proposition for its employees - free housing, frequentpromotions, attractive bonuses and the responsibility to set corporate targets bottom-up -have ensured minimal attrition. The effectiveness of the Company's strategy is reflectedin the following:

• Average microfinance division disbursement per field officer increased from Rs89 lac in 2013-14 to Rs 96 lac in 2014-15.

• The Company implemented training and promotions from within; more than 90% ofthe middle management positions were filled through internal promotions.

• Attrition of people with the Company for more than a year was less than 12%.

• Average employee tenure in the Asset Finance business of those with the Companyfor more than a year was greater than five years.

As the Company is on the verge of its outstanding microfinance portfolio surpassing theRs 1 billion- mark, it has to maintain the margin cap of 10% so its profitability could beaffected.

The Company currently has a margin cap of 12% which has resulted in significantly highRoAs.

The Company is looking to increase its loan ticket size which will partially offset thedrop in RoAs. Economies-of-scale will also help the Company increase efficiency andmaintain RoAs.


Futures & Options Quote
Future Data Not present
Key Information

Key Executives:

Chinubhai R Shah , Chairman

Jayendra B Patel , Vice Chairman & MD & CEO

Kaushikbhai D Shah , Director

Ritaben J Patel , Director

Company Head Office / Quarters:

502-503 Sakar III,
Off Ashram Road Opp Old High S,
Phone : Gujarat-91-079-27541989/30005000 / Gujarat-
Fax : Gujarat-91-079-27543666 / Gujarat-
E-mail : finance@armanindia.com
Web : http://www.armanindia.com


Sharepro Services India Pvt Lt
Devnandan Mega Mall ,Office No 416-420 ,4th Floor Ashram Rd ,Ahmedabad-380006

Fund Holding
Scheme Name No. of Shares
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