Northern Arc Capital IPO – Key things to know before you subscribe

The IPO of Northern Arc Capital Ltd (NACL), a systemically important non-deposit taking NBFC, is open for subscription from September 16 to 19. The issue size is ₹777 crore, with a fresh issue of ₹500 crore. NACL is a professionally-run company with no identifiable promoters. A few institutional investors are set to pare their stake. The company proposes to utilise the fresh issue proceeds to meet future capital requirements towards onward lending.

NACL has a diversified business portfolio catering to the retail credit needs of these six under-served sectors – MSMEs, micro finance (MFI), consumer finance, vehicle finance, affordable housing and agricultural finance. Its domain expertise stems from 15 years of experience having facilitated financing of over ₹1.73-lakh crore. A robust proprietary tech stack underpins the business. Its business and tech stack are explained in detail later.

The Indian retail credit market is expected to grow at a quick CAGR of 17-18 per cent between FY24 and FY26 to reach ₹100.9-lakh crore. Outstanding AUM (assets under management) of NBFCs in the sectors that NACL operates in is expected to grow at a blended CAGR of about 16 per cent to ₹26.2-lakh crore by FY26. NACL with a healthy credit rating (ICRA AA- (Stable)), solid financials and asset quality (see table) is well poised to capitalise on this market opportunity.

The issue is valued at 1.5 times FY24 book value on a post-issue basis. NACL’s peers identified in the prospectus are valued at anywhere between 1 and 7 times, with median at 3.5 times. At this valuation, the rewards outweigh the inherent risks of the business such as credit risk and cyclicality, making the issue attractive.

Business

NACL broadly has three business verticals – lending, placements and fund management. The gross transacted volume (GTV) is a metric that measures the value of these three businesses done over a financial year. Simply put, it is the summation of the value of loans disbursed (₹14,885 crore in FY24), value of loans placed (₹11,756 crore in FY24), and the value of AUM of AIFs and PMS schemes managed by the company (₹2,683 crore in FY24). Total GTV in FY24 was ₹29,324 crore.

Over 15 years, it has forged partnerships with 328 originator partners (OPs) and 1,158 investor partners (IPs). OPs are entities such as NBFCs, NBFC-MFIs, housing finance companies, fintech platforms and other corporates that have a lending exposure to the six sectors, as said above. IPs include entities such as banks, NBFCs, DFIs, mutual funds, private wealth and FIIs.

Lending: In this vertical, NACL caters to the retail credit market through two channels – direct to customer (D2C) lending and intermediate retail lending (IRL).

In D2C lending, loans are disbursed directly to borrowers through the company’s branches and retail lending partners (select OPs who enable NACL to lend directly to borrowers and from whom NACL avails services such as loan origination, KYC verification, primary borrower interface, collection and recoveries).

In IRL, the company advances loans to OPs or invests in the debt securities of OPs. With these funds, the OPs disburse loans to borrowers from the six sectors as seen earlier. This way, NACL has indirect exposure to such loans.

Income from the lending vertical includes interest on loans advanced and from debt securities of OPs, changes in fair value and realised gains on sale of such securities. This accounts for 96 per cent of the revenue from operations. D2C loans, IRL loans and IRL investments in the debt securities of OPs make the AUM of NACL. D2C and IRL channels have equal weightage in the AUM.

Placements: In this vertical, NACL acts as a facilitator between OPs looking for funds and IPs looking for opportunities to invest in the six under-served sectors. On the completion of a successful transaction, it earns a fee. In FY24, NACL made a fee income of 0.28 per cent on the value of placement transactions during the year.

Here’s a simplified illustration to understand a typical placement transaction. Let’s say X, an NBFC (OP here), is looking for funds to disburse ₹100 crore in MFI loans. NACL knows Y, a DFI (IP), which is looking to invest ₹100 crore in the MFI sector. NACL undertakes the due diligence of X on behalf of Y and facilitates the fund raise for X.

NACL also co-invests with IPs in certain transactions and continuously monitors the financial health of the OP to provide comfort to the IP. Such value-added services differentiate NACL from other facilitators.

All such transactions are greatly enabled by the company’s in-house tech stack, a brief on which is given later.

Fund management: In this vertical, the company’s subsidiary NAIM (Northern Arc Investment Managers) manages AIFs and PMS schemes, and earns a fund management fee. As of FY24-end, NAIM was managing eight live AIFs and two PMS funds worth an AUM of ₹2,858 crore. Such AIFs and PMS funds invest in the debt securities of OPs and mid-market companies operating in the six sectors as seen earlier.

The placement and fund management verticals account for the rest of the revenue from operations (4 per cent of FY24 revenue).

Proprietary tech stack

Over 15 years of operations and having facilitated financing of over ₹1.73-lakh crore, the company has built partnerships with many OPs and IPs and a repository of 35.2 million data points, which includes secondary data from external data sources such as credit bureaus. This has enabled the company to build robust models that are used for analysing pincode-level borrower characteristics such as indebtedness and collection efficiencies. There are three components to this tech stack.

Nimbus: It is a curated debt platform that enables flow of credit to OPs either through NACL’s balance sheet or through investments by IPs. It enables end-to-end processing of debt transactions, from loan application, credit evaluation, generation of legal documentation to transaction execution and closure, leading to efficiency in turnaround time. It further supports post-transaction monitoring, enabling IPs to review the underlying company’s performance, so that they can be assured of the safety of their investments. NACL has enabled credit of ₹99,716 crore through Nimbus so far.

nPOS: It is a cloud-based API-enabled market infrastructure platform to streamline the loan process for co-lending by connecting banks and other financial institutions. It provides a streamlined process for partnership-based loan origination, underwriting, disbursement and collection reconciliation.

Nu Score: It is a customised machine-learning based analytical module designed to assist OPs in the loan underwriting process. It offers real-time data-backed risk assessment for evaluating a borrower. There are 30 risk models in all, trained on the massive repository of data, as said earlier.

This apart, the company operates an online platform called AltiFi, where the company lists a small portion of its exposure to debt securities of OPs for retail investors to invest in. Retail investors enjoy the benefits of due diligence and continuous monitoring of OPs done by NACL as a by-product of investing on AltiFi.