Vakrangee sts up and manages a robust framework of ultra small branches across India according to a government plan of "financial inclusion". Branded as Vakrangee Marts, these outlets provide banking and BFSI services to the under-served population of India with an objective of inclusive growth. Through their partnership with 31 public sector banks and an outsourced model, Vakrangee provides end-to-end banking services in India. In addition, these Brick & Mortar branches offer a host of G2C and B2C services, becoming a one-stop shop for India’s under-served population.
As of March 31st, the company had 11820 branches in rural areas, and 1288 in urban areas. They have grown their urban segment from scratch (15 branches) to hundreds in only one year. Under Common BC and National BC agreements with various public sector & private banks, they are allowed to open up to 35 000 rural and 15 000 urban branches, offering also insurance or G2C (government to consumer) services. Their urban segment will be probably most lucrative, as people in cities have higher disposable income and will generate much higher demand for banking and financial services.
There still seems to be a big opportunity for this business model in India, according to their annual report:
- India is still largely under-banked, with only 35.2% of population having bank accounts.
- There are only 11.4 bank branches per 100k population in India, of which only 30% are located in rural areas.
- Around 70% of population lives in rural areas, of which 46% does not have banking access.
- Further, even in urban areas ~32% population does not have banking access.
As of March 31st, the company had 11820 branches in rural areas, and 1288 in urban areas. They have grown their urban segment from scratch (15 branches) to hundreds in only one year. Under Common BC and National BC agreements with various public sector & private banks, they are allowed to open up to 35 000 rural and 15 000 urban branches, offering also insurance or G2C (government to consumer) services. Their urban segment will be probably most lucrative, as people in cities have higher disposable income and will generate much higher demand for banking and financial services.
There still seems to be a big opportunity for this business model in India, according to their annual report:
- India is still largely under-banked, with only 35.2% of population having bank accounts.
- There are only 11.4 bank branches per 100k population in India, of which only 30% are located in rural areas.
- Around 70% of population lives in rural areas, of which 46% does not have banking access.
- Further, even in urban areas ~32% population does not have banking access.
ATM penetration in India. Source: Vakrangee annual report
Let's look at financials:
Let's look at financials:
Vakrangee has grown revenues more than threefold, while net income grew by 600%. Also, looking at 12-month trailing sales we can see that growth is actually accelerating vs. last year (41% vs. 26%). What's even better is that the company has 3-times more current assets than total liabilities, so they should be able to cover expansion costs without raising additional capital.
There are 2 red flags: receivables seem to be growing faster than sales, which is strange given their contractors are well capitalized banks and the Indian government. Second one is that Vakrangee does not generate free cash flow. This might be a problem for heavily indepted companies with limited growth, but shouldn't pose a big problem for Vakrangee, the company is just putting all money back into the business to create more value for shareholders.
Valuation
Indian stocks trade at significant discounts compared to their western peers. It might be because country risk is a bit higher, same like the risk free rate. As such, investors demand higher returns, thus higher discount rates. I used growth of 30% for next 3 years (half the average of past 4), 10% growth for next 5 years:
There are 2 red flags: receivables seem to be growing faster than sales, which is strange given their contractors are well capitalized banks and the Indian government. Second one is that Vakrangee does not generate free cash flow. This might be a problem for heavily indepted companies with limited growth, but shouldn't pose a big problem for Vakrangee, the company is just putting all money back into the business to create more value for shareholders.
Valuation
Indian stocks trade at significant discounts compared to their western peers. It might be because country risk is a bit higher, same like the risk free rate. As such, investors demand higher returns, thus higher discount rates. I used growth of 30% for next 3 years (half the average of past 4), 10% growth for next 5 years:
I have used capital asset pricing model to determine the discount rate, growth rates are quite conservative. At 148 Rs. per share, investors expect very strong growth from Vakrangee, although at PE 23 and P/S 2,6 it doesn't look that expensive. Shares might go higher, but the risk reward ratio is not so favorable.
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