Fellow investors, I will like to know your opinion on analyzing micro-cap NBFC’s.
A micro-cap NBFC in secured lending business which is currently in an expansion phase usually has a high OPEX/AUM due to which the RoA is subdued and subsequently the RoE is subdued as well. It takes several years before operating leverage kicks in. Since they are a micro-cap, the cost of funds is also high thereby impacting NIM’s & limiting leverage.
During this expansion phase, the micro-cap NBFC is growing its AUM at a break neck speed of +50% with RoE of about 10% (3x – 4x leverage). If they leverage more then the cost of funds might go up as their operations will be seen more risky, therefore, the most sustainable way for them to keep growing their AUM with a reasonable RoE at this pace is by raising fresh capital & diluting equity from time to time and gradually increase their leverage as they become bigger in size.
In such a scenario, an early investor will see continuous dilution of his/her equity, then how will such a stock truly become a multi bagger for an early investor? Have your experienced such a scenario with any company in the past?
Would it be safe to assume that the only reason why one should hold such a stock is that the management of such a NBFC is diluting its equity at a high price to book multiple every time?
Your thoughts and opinions on this subject will be highly appreciated as it will give a good understanding of how to analyze mircro-cap NBFC’s.
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