Mumbai-based non-banking finance company NeoGrowth is scouting for a potential buyer to either get acquired or sell a significant stake to a strategic investor, said two people in the know.
The company is also open to a major funding round, as it got back to black in the last fiscal after two years of losses, induced by Covid-19.
“Multiple conversations are happening at the board level about the next path. All the options are on the table, strategic partnership or a large private equity round or a big transaction. We are trying to finalise our investment banker currently,” said Arun Kumar Nayyar, managing director, NeoGrowth Credit.
Nayyar added that he has not met any potential suitors as of now, but on a pre-deal basis some conversations might have happened.
A senior fintech executive on the condition of anonymity said that having turned profits in the last financial year, NeoGrowth is hoping to attract a suitor from the financial services world.
“Given the cash flow-based lending NeoGrowth does, a payment company which is looking to scale up credit capabilities can bring good complementarity to the business,” the executive added.
But finding a good deal at a suitable valuation might be challenging in these times, when venture money is hard to come by. Also with the likes of Paytm, BharatPe and even PhonePe scaling up their credit offerings to small retailers, there is tremendous competition being faced by someone like NeoGrowth.
“The problem is that it has sizeable scale, and is profitable, which might eliminate several fintechs (looking for an NBFC now) due to the price point. It is just a bad market to scout for a buyer,” said another person in the know.
Founded in 2013 by Dhruv Khaitan and Piyush Khaitan, NeoGrowth counts LeapFrog Investments, Omidyar Network, IIFL Wealth and Accion among its major investors. Data from Tracxn shows that in 2022, the lender raised around $42 million in equity money.
Cash flow-based lending
A decade back when NeoGrowth had started, the idea was to offer credit to small retailers on the basis of their overall cash flow. To assess the overall cash flow, the lender would look at the bank statements of the shop owners, which would show only the digital transactions at these outlets, thereby giving only a snapshot of the business.
NeoGrowth still managed to build an asset base of around Rs 1,400 crore, but Covid had a deep impact on the business as its primary customer segment faced several shut downs to curb the growing menace of the pandemic.
Nayyar said that during each of the two pandemic years, the company reported a net loss of Rs 30-35 crore. But post pandemic things started looking up. Rapid adoption of digital payments through unified payments interface (UPI) or cards and open architecture ecosystems like NBFC-account aggregators have helped NeoGrowth take bigger exposure to its clients.
“Today, we have an AUM (assets under management) of around Rs 2,200 crore, we have grown the business by 70% in the last two-and-a-half years. The product proposition has helped us and, secondly, the ecosystem has gone through a lot of changes,” Nayyar said. “Today, 85-90% of our loans are decided in less than two days from five days previously.”
The lender goes after merchants who can hold inventory between Rs 15 lakh and Rs 30 lakh, and have an annual turnover of Rs 50 to Rs 60 lakh. Hardware shops, small eateries and retailers are mostly its clients. The average ticket size of its loans is around Rs 10 lakh.
Nayyar believes their target segment is merchants who are bigger in size compared to the ones catered to by Paytm or PhonePe.
Post Covid recovery
The NBFC had a tough couple of years in FY21 and FY22. It ended up with a restructured book of around Rs 408 crore, or 31% of its overall AUM. After around Rs 416 crore of write offs and collections of bad loans, the restructured book came down to Rs 2 crore, or 0.1% of the loan book, data from credit ratings agency ICRA shows.
Overall with the macro conditions improving, NeoGrowth also came back to growth terms.
“ICRA expects the profitability to improve, going forward, supported by the growth in the loan book, thereby driving higher operating efficiency and lower credit costs,” the credit ratings agency said in a note published on June 21.
To shore up its reserves, NeoGrowth raised Rs 1,149 crore in debt in FY23 from 17 lenders at a rate of interest of 12 to 13%.
“While the borrowings are long term in nature, the loans are of a relatively shorter tenure, thereby resulting in adequate liquidity surplus in the shorter term,” the ICRA note observed.
Nayyar believes that the coming year will show a 50% growth in business. This year, the target is to create an AUM of Rs 2,800 crore. It reported a net profit of Rs 17.26 crore and is hoping to close fiscal 2024 with a profit of Rs 85 to Rs 90 crore.
Between FY23 and FY22 operating revenues grew marginally to Rs 381 crore from Rs 362 crore.
While for NeoGrowth business opportunity is opening up, severe competition from large fintechs and challenges in the funding environment might make its way forward tough. But an acquisition in the current environment might be difficult given large fintechs have gone cautious on their expenses. In this midst, it will be interesting to track what pathway NeoGrowth manages to chart.
