Arman Financial 23/12/2023
A deep dive into strategy and performance
Promoter Aalok Patel
Image source: https://www.dsij.in/dsij-learning-articledetail/in-conversation-with-aalok-patil-joint-md-of-arman-financial-services-31068
A Closer Look at Arman's Business Model
Arman, a financial lender focusing on unsecured loans, particularly through their Joint Liability Group (JLG) business. This I believe is a unique approach in the lending sector. By enabling groups of individuals, often women, to access funds for income-generating activities like dairy farming, Arman has tapped into a very important niche. Their strategy revolves around lending for the purchase of milch cows, a sustainable and profitable venture given India's high demand for milk and its status as a key protein source in a predominantly vegetarian population. Just think about it, what is the source of protein which goes with a vegetarian diet. Milk. And milk is such a cultural thing. It’s ingrained in the Indian psyche that you need to consume milk and milk products to get protein. And therefore demand for milk is not a problem at all. We can absorb a lot more supply of milk even now.
Expanding Horizons: Diversification and Risk Management
Image source: https://yourstory.com/socialstory/2020/11/stellapps-ranjith-mukundan-dairy-sector-farmers-milk
Arman's recent diversification into MSME loans for more established dairy entrepreneurs demonstrates great understanding of their clients' growing needs. Usually they start out with micro finance loans to women for buying a cow or two. But after some time as the business grows, the same milk farmer might now want to develop a cow shed which can house 5 cows. So how do they arrange the money needed? They become a part of 3-4 JLGs and then borrow from multiple lenders and then need to separately manage the relationship with all these people. Arman already has contextual knowledge about these borrowers. And therefore it makes sense for both Arman and the borrower to just do a larger loan with Arman itself.
But notice their risk management. They continue to focus on unsecured, cash flow-based lending. This strategy not only differentiates them from competitors but also showcases their commitment to a more inclusive financial system (since not everyone has collateral to give). But to give someone money and then hope that they will pay back sounds foolish. But Arman still manages to do this day in and day out. To mitigate this huge risk staring them in the face they diversify. And they diversify everything. They diversify loan types (JLG, MSME, Individual business loan), their operating geographies (10 states now), and funding sources (banks, NBFCs, debentures, HNIs).
Digital Transformation and Operating Leverage
As India progresses towards a more digitized economy, Arman's move towards cashless collections could significantly enhance their operating leverage. I admit that most of their collections would be in cash today. But think about five years from now. How many more borrowers would be comfortable paying via apps? How much would this reduce the cost of cash collections? Maybe Arman would tie up with someone like Paytm so that the collection of the loan can happen via the Paytm app. Whenever physical world transactions start getting digitised, so much operating leverage kicks in.
Another way for Arman to build operating leverage would be figuring out more micro—niches which are adjacent to the lives of their existing borrowers. Think about electric two wheelers when they start penetrating rural areas. Who would finance them? This is purely speculation at this point. But I want to establish that it is so much more difficult to get an engaged unsecured borrower. Once you have him you would definitely try to penetrate deeper into his life.
Leadership and Growth Trajectory
The current leadership, with deep roots in the company’s history, seems poised for acceleration and expansion. Their conservative yet effective growth strategies, especially during times of economic uncertainty (think covid and demonetisation), underscore a keen understanding of the borrower. Aalok Patel joined the business that his family started. Aalok has been learning for about 13 years now. I think he is finally getting a good grip on the intricacies of the business and I am speculating that this will give him the confidence to now start pushing the growth pedal.
One big question, however, remains: why hasn't the management increased its stake in the company? I am still scratching my head over it. Wouldn’t you want to own the maximum percentage of a business which has so much going for itself?
Market Perception and Future Outlook
Despite its robust business model and clear growth trajectory, Arman's market valuation raises questions. Their approach to risk, prioritizing conservative growth over aggressive expansion, might contribute to this conservative market assessment. Let me explain. During covid Arman sharply reduced the size of their book. Now it was a good decision from the conservative standpoint. But it completely screwed up their growth for a while. So may be the marker thinks that the management is not comfortable with hyper growth and rather want to grow slowly and steadily?
Also another point which struck me was what would the borrower think. Maybe some borrowers who were depending on Arman during the covid pandemic would have been disappointed. They would have felt that Arman was not available to them when they most needed the money. How can a borrower expect to depend on a lender who may not always be available? I am sure that older borrowers were not treated the same way by Arman. I am trying to figure out what is the threshold which Arman uses to figure out who is an older borrower who would then always have their credit line open. This can help determine their growth in an economic downturn.
Concluding Thoughts
In essence, Arman's journey in the unsecured lending segment paints a picture of a company with a very deep understanding of its niche, a prudent approach to risk, and a clear vision for the future. While its valuation might not reflect its potential yet, its strategies and performance indicate a promising path ahead (again speculation from me).
Disclaimer:The views expressed in this blog are personal. I may or may not hold investments in the stocks mentioned.