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VERITAS FINANCE LIMITED

Veritas Finance Limited - Related Party Transactions

Introduction


Based on the DRHP (Draft Red Herring Prospectus) dated January 18, 2025, and subsequent filings, here are the “Related Party Transactions” (RPT) details of Veritas Finance Limited.

Business Model Operations

Business Model: Veritas is a retail-focused NBFC providing credit to MSMEs and self-employed individuals in rural and semi-urban areas who lack access to formal financing. It operates through 424 branches and handles sourcing and collections primarily in-house.


Comparable Peers: Listed peers include Five-Star Business Finance, SBFC Finance, Aavas Financiers, Aptus Value Housing Finance, and Cholamandalam Investment.


Key Factors Affecting Business: These include credit demand in the MSME and housing sectors, volatility in interest rates affecting net interest margins, and the ability to maintain asset quality through effective collections.


Competitive & Regulatory Landscape: The Company operates in a highly regulated environment governed by the RBI's Scale-Based Regulations. It competes with other NBFCs, small finance banks, and traditional banks.


Total Addressable Market (TAM): The small ticket size secured MSME lending market potential is estimated at â‚ą22 trillion.


Order Book: Not applicable. The equivalent metric is Loans (AUM), which stood at â‚ą65,172.17 million as of September 30, 2024.


Customer Concentration: The Company has a granular portfolio; the top 20 borrowers account for only 0.15% of total advances.


Revenue Mix: 100% domestic (India).


Growth Plans: Plans include augmenting the capital base for onward lending, expanding the branch network into new geographies, and growing relatively new business lines like home loans and used commercial vehicle loans.

Financial Performance Health

Analysis of conversion trend: The conversion % became more negative from FY 2022 to FY 2024, indicating that cash used in operating activities (primarily for loan disbursements) grew faster than EBITDA. This is typical for a rapidly expanding NBFC.


Financial Trends:

  1. Sales (Total Income): Increasing (â‚ą4,422.27M in FY22 to â‚ą11,174.93M in FY24).
  2. EBITDA: Increasing (â‚ą2,440.04M in FY22 to â‚ą6,609.43M in FY24).
  3. PAT: Increasing (â‚ą754.04M in FY22 to â‚ą2,450.52M in FY24).
  4. Margins: EBITDA margin was 59.15% and Net Profit margin was 21.93% in FY 2024. Margins decreased slightly from FY 2023 due to expansion costs and reset of MCLR-linked borrowings.


Balance Sheet Health: Strong capitalization with a CRAR of 40.87% as of September 30, 2024, well above the 15% regulatory requirement. Total borrowings reached â‚ą48,894.18 million by H1 FY 2025.


Asset Turnover: Remained stable at approximately 0.20 to 0.21 times over the last three years (Total Income / Average Total Assets).


Return on Capital (RoE): Increased from 6.91% in FY 2022 to 12.27% in FY 2024.

Risks Management Outlook

Legal Cases:

  1. By the Company: 3,227 criminal proceedings (mostly NI Act cases for collections) involving â‚ą491.90 million.
  2. Against the Company: 5 criminal proceedings.


Key Business Risks:

  1. Exposure to high credit risk, first-time borrowers.
  2. Potential for increased NPA levels (Stage 3) affecting results.
  3. Heavy reliance on banks for 72% of borrowings.
  4. Exposure to unsecured working capital loans (8.83% of AUM).


Red Flags:

  1. Negative Operating Cash Flows: Consistently negative and increasing (â‚ą19,365.63M outflow in FY24), which requires continuous external funding.
  2. Geographic Concentration: 42% of AUM is concentrated in a single state, Tamil Nadu.
  3. Collection Intensity: High volume of criminal cases filed by the company suggests a challenging collection environment.

Disclaimer

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