Gold Loan Expansion And Secured Book Mix Will Drive Earnings Quality Ahead

Catalysts

About Fedbank Financial Services

Fedbank Financial Services is a diversified non bank lender focused on secured gold loans and mortgage backed LAP products for retail and MSME customers across India.

What are the underlying business or industry changes driving this perspective?

• Rapid expansion of gold loan branches into new locations, combined with co location of LAP teams, positions the company to capture rising formal credit demand against household gold holdings. This should support higher disbursements and fee income, lifting revenue growth.
• Ongoing shift in the loan book toward fully secured gold and mortgage products, with unsecured MSME exposure already below 1%, structurally reduces loss given default. This should keep credit costs contained and support net margins and earnings stability.
• Growing use of direct assignments and co lending in medium ticket LAP, along with a strong capital adequacy ratio and lower leverage, enables capital light balance sheet growth that can enhance return on equity without immediate equity dilution. This can boost earnings per share.
• Improving funding profile via larger low cost ECB borrowings and diversified floating rate bank lines is driving down the cost of borrowing. Coupled with yields normalizing around 17%, this should sustain wide spreads and healthy net interest margins.
• Investments in a verticalized in house collections infrastructure and tighter, system driven underwriting in small ticket LAP are expected to improve early bucket behavior and reduce slippages over time. This should support lower steady state credit costs and more predictable earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Fedbank Financial Services's revenue will grow by 32.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.1% today to 28.5% in 3 years time.
• Analysts expect earnings to reach ₹7.0 billion (and earnings per share of ₹15.37) by about December 2028, up from ₹2.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, down from 22.0x today. This future PE is lower than the current PE for the IN Consumer Finance industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 0.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.74%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged slowdown or stagnation in income growth for the self employed and semi formal borrowers that Fedbank Financial Services serves in small ticket LAP could keep early bucket delinquencies and cure rates weaker than peers. This could force higher collection intensity and constrain loan growth, which would weigh on revenue and net margins over time.
• If the structural issues in the existing small ticket LAP book and collections infrastructure take longer than management expects to normalize, the company may need to keep credit cost guidance around 1% or higher for multiple years. This could limit operating leverage and cap improvements in earnings despite a secured loan mix.
• Heavy strategic dependence on gold loans and mortgage backed LAP in a market with rising competition and regulatory changes to loan to value norms could pressure yields or slow disbursements. This risk would be more pronounced if festive season withdrawals and flat tonnage become more structural than seasonal, which would moderate revenue growth and compress net interest margins.
• A business model that increasingly relies on branch led expansion, co location and in house collections requires sustained upfront spending on infrastructure and people. If AUM per branch and tonnage ramp up more slowly than planned, the cost to income ratio could remain elevated longer than FY 2027, dampening operating profit and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹172.75 for Fedbank Financial Services based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹190.0, and the most bearish reporting a price target of just ₹153.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹24.5 billion, earnings will come to ₹7.0 billion, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 20.7%.
  
• Given the current share price of ₹144.53, the analyst price target of ₹172.75 is 16.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.