Navi’s IPO: Can The Business Model, Outlook Save The Day?

Flipkart founder Sachin Bansal is all set to write a new chapter in India’s startup history with the upcoming IPO of his fintech venture Navi Technologies. But unlike other listed startup behemoths like Nykaa, Paytm (One97 Communications) or Zomato, Navi is betting on one of the oldest and most popular business segments – lending, to be precise.

For Navi, it has been a proven business model for years.

In contrast to other fintech startups like Paytm, BharatPe, Razorpay and PhonePe, which started as payment startups and later expanded into lending to achieve profitability, Navi Technologies was in the business of lending since the beginning and later entered other BFSI segments, including insurance and mutual fund, wealth management. However, lending remains the group’s core business.

Navi plans to raise INR 4,020 Cr through its IPO (and Pre-IPO placement), expected to hit the market later this year. The proceeds will be used to fund its growth initiatives and enhance the brand’s visibility and credibility in the public domain.

But will it be a cakewalk for Sachin Bansal?

The IPO comes at a time when Mamaearth, a D2C mammoth in the beauty and personal care space, is reportedly contemplating a delay in its public market listing. Moreover, storied retail brand FabIndia and southern jewellery chain Joyalukkas have already withdrawn their INR 4,000 Cr and INR 2,300 Cr IPOs, respectively.

Again, Fincare Small Finance Bank, which got an IPO go-ahead from SEBI in August 2021, postponed its listing and refiled the DRHP in August 2022. The market regulator has now returned the DRHP.

Worse still, most unlisted/pre-IPO shares traded in the grey market slumped by more than 50% due to uncertain market outlook and the underperformance of many newly listed or well-established companies. So, several IPO aspirants have kept their listing plans on hold.

Although the market condition is not favourable to push an IPO, there is clearly a sense of urgency to take the company public. Navi’s founder-promoter Sachin Bansal has been eyeing it for a year now, and the company will need to hit the primary market before the validity period of SEBI’s approval (which is 12 months from the date of approval) expires.

Also, for Navi, the IPO seems to be the only way to raise capital amid a harsh funding winter. It is worth mentioning that Navi has so far failed to raise capital from VCs. It also didn’t succeed in getting the universal banking license from the RBI.

Those who want to deep-dive further, please read our previous story on Navi: Decoding Navi And Sachin Bansal’s $100 Bn Ambition.

Before we explore the nitty-gritty of this IPO, its value proposition and viability, let us look at Navi’s IPO statistics currently available in its DRHP.

What’s The IPO Valuation Navi Is Targeting

Navi has not disclosed its IPO valuation yet, but the company is looking at $2-2.5 Bn, sources close to the developments have told Inc42.

“There are even possibilities that the company may touch the magical INR 20K Cr valuation in the RHP/final offer document while going for the IPO,” they added.

It is worth noting that Navi has submitted the DRHP for the holding company Navi Technologies, which runs the platform Navi.com. None of its subsidiaries, such as Navi Finserv (NBFC), Chaitanya Fin Credit (NBFC/microfinance institution) or Navi General Insurance, is going for the listing.

Santosh N, the managing partner, D&P Advisory India and a valuation expert, explained the methodology for valuing different types of companies. “If it is an NBFC, the valuation multiple on P/B (share price-to-book value ratio) typically ranges between 2-4x. But for technology platforms, the multiple could go higher as the expected growth is much higher.”

Then there are other factors like the promotor’s profile, total addressable market size (TAM) and more.

In such a scenario, an IPO valuation of $2 Bn will not be perceived as overvalued. In fact, it is moderately valued, given the whole gamut of BFSI solutions that Navi currently offers and plans to add, including all types of loans, insurance, trading, and so on.

“As the company wants to raise INR 670 Cr in pre-IPO placement, Sachin Bansal may dilute over 5% of Navi’s stake in the process,” sources told Inc42.

However, if the GMP (grey market premium) during pre-IPO fundraising does not go as expected, the valuation can be as low as $1.5 Bn, believe experts.

When Business Outlook Is The Biggest USP

Considering that most Indians still have limited access to credit, India’s digital lending is a goldmine for fintech companies to make money. According to Dublin-headquartered data analytics and consumer credit reporting firm Experian, India’s digital lending market, worth $270 Bn in 2022, is estimated to reach $350 Bn by the end of 2023.

In fact, the country has witnessed the digital lending segment grow at a CAGR of 39.5% in 10 years.

As Navi focuses on retail lending, a quick look at the retail lending data and market growth won’t be out of context here. In recent years, legacy banks across India witnessed a sizable buildup in retail loans, with their assets under management (AUM) growing at a CAGR of 15% between FY16 and FY21.

While personal loans and credit cards had the fastest growth rates during this period, home/housing loans emerged as the largest segment under retail lending.

According to a RedSeer report, the total size of the Indian retail loan outstanding (retail lending AUM) for banks stood at $407 Bn in FY21, more than double the amount recorded in FY16.

The RBI in its Monetary Policy Report, 2023 observed, “Retail loans remained the prime contributor to overall credit increase (y-o-y) in 2022-23. While credit to the housing sector recorded consistent expansion, vehicle loan growth strengthened further.”

In its lending survey, the central bank observed that bankers remain upbeat on loan demand during the second and third quarter of 2023-24 across the major categories of borrowers.

Fintech firms have helped transformed the lending landscape to cater to the financial needs of consumers. The NBFC retail lending AUM in India has grown at a CAGR of 25% during Financial Years 2016 to 2021 to reach approximately $100 Bn. One of the major contributors to this growth was the personal loans portfolio showing a CAGR of approximately 27%.

According to a report by Inc42 Plus, with India’s internet users set grow by 44% from 932 Mn in 2022 to 1.3 Bn in 2030, digital lending has immense potential.

If Navi Technologies keeps the basics such as unit economics and revenue intact which they have been despite the Covid-event of two years in their total life span of four years, the outcome would be favourable.

How Navi Sailed Through Regulatory Tides

Fintech startups in India have seen exponential growth, raising about $26 Bn across segments since 2014. Interestingly, the momentum continued even in 2021 and 2022 in spite of the pandemic, when more than $12 Bn of fintech funding flowed in, with the addition of 13 fintech unicorns.

But with unprecedented growth came a more stringent regulatory environment, especially in the digital lending space. To protect consumer interests, safeguard data, ensure cost transparency and further streamline digital lending operations, the government and the central bank introduced new digital lending guidelines (DLG), which landed several fintech players in a regulatory quagmire.

Take, for instance, the RBI directives prohibiting credit lines from being loaded into non-bank prepaid payment instruments (PPIs) like prepaid cards and digital wallets. Such measures regulated unbridled consumer lending and paved the path for fintechs to operate on a par with traditionally regulated businesses like banking and insurance.

Navi has played it safe all along. Unlike Slice or Uni Cards, which were in a hurry to launch co-branded credit cards, credit lines and other fintech products now requiring compliance tweaks, Bansal did not launch anything which was not time-tested.

Simply put, his company has primarily focussed on essential products which are legally compliant and always in demand. These include personal and home loans, microfinancing, insurance, mutual funds and more.

The startup has also managed non-performing assets (NPA) better than the national average. In its DRHP, the company stated that on December 31, 2021, the gross NPA to total AUM ratio for its personal loan business was 1.12%, while on March 31, 2021, the ratio stood at 4.96%. For its home loan business, the ratio was 0.00% as on March 31, 2021. For FY20 and FY21, this ratio for its microfinance business was 4.10% and 0.81%, respectively.

For context, the gross NPA-total AUM ratio of public sector banks is estimated to go down from 6.5% in September 2022 to 9.4% in September 2023.  This is despite the fact that in 2019, 10 public sector banks were merged to four which helped reduce the overall NPA ratio.

As for private banks, this is expected to rise from 3.3% to 5.8%, while foreign banks may see an increase from 2.5% to 4.1% under a severe stress scenario, according to the RBI.

“Navi’s listing I hope will be different from the other tech startups’ [Paytm, Nykaa ] IPOs we have seen so far,” said Sreedhar Prasad, Advisor and Investor.

According to him, NBFCs in India always performed well in the long run due to the country’s middle-class market with a high demand for loan products and a limited supply. “So, from the perspective of retail investors, a business model well linked to the country’s fabric should do well.”

There are other ways to measure Navi’s popularity. For instance, the fintech app has more than 10 Mn users and enjoys a rating of 4.1 out of 5 by 380K+ users on Google Play Store.

Inside Sachin Bansal’s BFSI Empire

Navi’s promising business model will continue to address the requirements of credit-starved Indians and extend financial inclusivity through a bouquet of products and services. But does the parent company (and its many subsidiaries) perform well enough to sail through the IPO? Let us explore Navi’s businesses for a better understanding.

Since its inception in December 2018, Navi Technologies (formerly BAC Acquisitions) has been actively acquiring several companies. Among these were Anmol Como Broking, Chaitanya Rural Intermediation Development Services or CRIDS (an NBFC), Essel MF Trustee and tech consulting firm MavenHive, which helped the parent firm obtain all essential licences in the fintech space and access consumer pools.

The company has not acquired ‘big’ names to save money and also to promote ‘Navi’ as the flagship brand built from scratch.

“Navi derives the brand value and credibility from Sachin Bansal, who built the biggest Indian startup and sold it at $16 Bn in the largest e-commerce deal ever struck anywhere in the world,” observed Sunil Bansal, founder and CEO of DCB Advisory, a Delhi-based firm helping corporate houses with investments, M&A and more.

Navi Technologies currently operates as a holding company with 10 subsidiaries, but its flagship has been Navi Finserv since the group introduced digital personal loans in June 2020. While Navi Finserv primarily focuses on loan products such as personal, vehicle and home loans, CRIDS (rebranded as Chaitanya India Fin Credit) is also registered as an NBFC with the RBI and specialises in microfinance.

Will Navi’s NBFC Businesses Pass Muster?

Under the RBI guidelines, NBFCs are required to maintain a minimum capital adequacy ratio (CAR) consisting of Tier I and Tier II capital. This must not be less than 15.00% of their aggregate risk-weighted assets on balance sheets and the risk-adjusted value of off-balance sheet items. As per the DRHP filed, Navi Finserv increased its CAR from 20.8% in 2020 to 38% in 2021. But in FY22, it dropped to 30%.

However, the CAR of Chaitanya Fin Credit could be a potential concern for the group. It steadily declined in the past three years and stood at 17.38% in FY2022, just above the cut-off mark.

Although both NBFCs saw a manifold rise in assets under management (AUM), Navi Finserv, the group’s flagship, reported a loss of INR 67 Cr in FY22. The company’s annual report attributed the loss to a rise in expenses, which escalated by 167%.

Here is another point to ponder. When it comes to auto loans, the fintech platform has not been able to build deep partnerships with OEMs like its competition Bajaj Finance.

Navi General Insurance, yet another key business, also failed to impress. The company had three different CEOs in the past four years, but its numbers remained stagnant.

The parent company also incurred a loss of INR 362 Cr in FY22 due to the lacklustre performance of its insurance business and Navi Finserv. The turnover of other subsidiaries was too small to impact Navi Technologies’ consolidated results.

Is Navi Technologies Racing Against Time?

According to the experts with whom we have spoken for this analysis, this may not be the ideal time for Navi to go public. But then, Navi could be compelled to proceed with the IPO as the only option to secure crucial funding.

Both Santosh N of D&P India and Prasad concurred, adding that even globally, it would not be a good time for tech companies to get listed.

While expressing concerns over the company’s recent losses, Prasad said, “However the unit economics for lending businesses need to be strong and predictable and not supposed to make losses. Losses in the initial days due to marketing should not be the way forward.”

However, Navi stated that it was on track to achieve positive unit economics.

“During the nine months ended December 31, 2021, 71.69% of all home loan customers and 52.67% of all retail health insurance customers were from our personal loan-interested user base. As a result, we are on track to achieve positive unit economics by improving customer lifetime value and reducing customer acquisition costs,” said the company in its DRHP.

Unit economics is not the only issue, though. Onboarding credible VCs is another area where Navi has struggled. Despite funding announcements, both IFC and Gaja Capital-backed out, and talks with late stage VCs like SoftBank did not materialise.

“Sachin has already burnt his fingers regarding the VCs. It’s not that investors did not want to invest in Navi. But they did not agree when Bansal tried to overrule certain terms and conditions of the term sheet,” a person close to one of the funding developments told Inc42.

“It would have been better if Navi had raised some funding from the VCs first. It would have brought more credibility to the company,” said Sunil Bansal of DCB Advisory.

Currently, Navi is all about Sachin Bansal. It is a one-man show. But it may not augur well for the company as Bansal has already been dragged into several court cases like the one involving alleged FEMA violations.

There are more areas of concern.

For instance, the fintech platform leans heavily on its mobile app, while competitors have adopted an omnichannel (more convenient and inclusive) approach. In spite of a dedicated web page, Navi forces users to download the app before accessing the loan services. In contrast, businesses like OTO Capital allow people to use web interfaces to avail of their services despite having dedicated apps.

Then again, its app logins have a sinusoidal pattern instead of showing a steady upward trajectory. Consider this. While 1.36 Mn people logged into the Navi app in November 2021, the number dropped to 1.34 Mn the following month. Likewise, the number of people who used the app in January 2022 was 1.45 Mn, but in February, it was down to 1.22 Mn.

According to mobile data analytics firm AppAnnie, among India’s top fintech apps, Navi’s ranking oscillated between 6 and 15 for the last one year, not exactly a sign of rock-solid customer trust.

Moreover, the platform uses traditional marketing tools like SMS and telemarketing to attract new users in a digital-first environment where people seek convenience and customisation.

Clearly, the house is not in order. But given its need for capital to maintain CAR and increase AUM, Navi is under pressure to act quickly and mitigate short-term risks.

Whether the IPO succeeds or not, we should wait for at least three years post-IPO, suggested Santosh N. As going for IPO is indeed the company’s long-term strategy and therefore, an overnight verdict on this must be avoided, he suggested.

As far as unlisted stocks are concerned, the ripple effect is not there. The demand queries are low. Manish Khanna, founder of Unlisted Assets said, “After the RBI declined Navi’s universal banking license, the confusion remains — whether the company wants to remain an NBFC primarily or would try to acquire a banking license again. Investors need more clarity.”

Thus, a lot would depend on how Navi performs in pre-IPO placement.

[Edited by Sanghamitra Mandal]