Northern Arc Capital, a prominent non-banking financial company (NBFC), launched its initial public offering (IPO) in September 2023, aiming to raise Rs 777 crore. The IPO, which consists of a fresh issue and an offer-for-sale (OFS), garnered substantial attention from investors, both retail and institutional. As of the third day of bidding on September 18, the issue was subscribed 20.18 times, reflecting strong investor interest in this unique lending platform.
Northern Arc’s IPO includes a fresh issue worth Rs 500 crore and an offer-for-sale worth Rs 277 crore. The price band for the IPO has been set at Rs 249-263 per share. The proceeds from the fresh issue will primarily be used to strengthen the company’s capital base and fund growth in its lending portfolio.
In this comprehensive blog, we’ll explore the details of Northern Arc’s IPO, the company’s business model, investor response, and what the future might hold for both the company and its investors.
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Northern Arc Capital: Company Overview
Northern Arc Capital, formerly known as IFMR Capital, was established in 2008. The company plays a crucial role in providing debt finance to under-served households and businesses in India. It operates in sectors such as Micro, Small, and Medium Enterprises (MSME), Microfinance Institutions (MFI), consumer finance, and vehicle finance. The company’s objective is to bridge the gap between borrowers in under-served sectors and institutional lenders like banks, mutual funds, and insurance companies.
Northern Arc’s innovative approach to financial inclusion involves connecting institutional investors with high-quality, underserved borrowers, allowing businesses and households with limited access to credit to meet their financial needs. Over the years, Northern Arc has built a strong track record of profitability, efficient risk management, and a diversified loan book that spans across various segments.
One of the company’s key strengths is its ability to assess credit risk efficiently and to lend to segments of the population that are otherwise overlooked by traditional banking institutions. The sectors served by Northern Arc are often considered riskier by traditional lenders due to factors such as inconsistent income patterns and a lack of formal credit histories. However, Northern Arc has developed systems and processes to accurately evaluate the creditworthiness of these borrowers.
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Purpose of the IPO
The Northern Arc Capital IPO is designed to serve two primary purposes:
Raising Fresh Capital: The company aims to raise Rs 500 crore through the fresh issue of shares. This capital will be used to bolster the company’s balance sheet, allowing it to increase its lending capacity, especially in the MSME and MFI segments, where demand for credit is rising. By enhancing its capital base, Northern Arc will be able to expand its reach, penetrate deeper into underserved sectors, and ultimately improve its market share.
Offer for Sale (OFS): The Rs 277 crore raised through the OFS will go to existing shareholders who are offloading part of their stake in the company. The OFS provides these shareholders with an exit opportunity and helps increase liquidity in the company’s stock once it is listed.
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Investor Response to the IPO
The Northern Arc Capital IPO received an overwhelming response from investors, reflecting the high demand for shares in the company. By the third day of bidding, the IPO was subscribed 20.18 times. A detailed breakdown of investor participation reveals some key trends:
Non-Institutional Investors Lead the Charge
Non-institutional investors (NIIs) showed the highest level of interest in the Northern Arc IPO, subscribing to 50.8 times the portion reserved for them. This is a clear indication that high-net-worth individuals (HNIs) and other non-institutional entities view Northern Arc as a strong investment opportunity. The robust demand from NIIs suggests confidence in the company’s growth potential and its unique business model focused on financial inclusion.
Retail Investors Show Strong Interest
Retail investors also played a significant role in the success of the IPO, subscribing to 18.97 times the shares reserved for them. The retail segment’s enthusiastic participation reflects a growing appetite for NBFCs that focus on underserved sectors of the economy. Retail investors have been particularly drawn to Northern Arc’s proven track record in lending to the MSME and MFI sectors, which have demonstrated resilience and growth potential despite economic challenges.
Qualified Institutional Buyers (QIBs):
A Lukewarm Response Interestingly, qualified institutional buyers (QIBs) showed relatively low interest in the IPO, subscribing to only 0.31 times their reserved portion. This lukewarm response from QIBs may be attributed to their cautious approach in a highly competitive financial services sector. However, it’s important to note that institutional investors had already shown significant interest during the anchor book phase of the IPO, which could explain the lower demand during the public bidding process.
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Anchor Book: A Boost from Leading Investors
Ahead of the public issue, Northern Arc Capital successfully raised Rs 228.86 crore through its anchor book on September 13, 2023. This portion of the IPO saw participation from several prominent institutional investors, including:
Quant Mutual Fund
Abakkus Diversified Alpha Fund
Kotak Mahindra Life Insurance
Goldman Sachs
Anchorage Capital Fund
Volrado Venture Partners Fund
SBI Life Insurance Company
The presence of such high-profile investors in the anchor book provides a vote of confidence in Northern Arc’s business model and future growth prospects. Anchor investors are typically long-term players, and their participation indicates that they believe in the company’s ability to generate sustainable returns.
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Employee Participation in the IPO
Northern Arc Capital also reserved 5.9 lakh shares for its employees, who showed strong interest by subscribing to 4.32 times the reserved portion. Employees are set to receive these shares at a discount of Rs 24 per share to the final issue price, making it an attractive investment for those who are already closely aligned with the company’s mission and growth trajectory.
Employee participation in an IPO is often a positive sign, as it indicates that those with intimate knowledge of the company’s operations and strategy are confident in its future performance. It also helps foster a sense of ownership and alignment between the company’s workforce and its shareholders.
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Use of IPO Proceeds
The Rs 500 crore raised through the fresh issue component of the IPO will primarily be used to augment Northern Arc’s capital base. With a stronger balance sheet, the company will be able to expand its lending activities in sectors such as MSME, MFI, and consumer finance, where demand for credit is rising.
Additionally, Northern Arc’s focus on financial inclusion positions it well to capitalize on the growing need for credit in underserved segments of the economy. By providing loans to businesses and households that have limited access to traditional banking channels, Northern Arc helps foster economic growth and entrepreneurship in rural and semi-urban areas.
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Valuation and Pricing
The price band for the Northern Arc IPO was set at Rs 249-263 per share. At the upper end of this range, the company’s market valuation will be approximately Rs 4,350 crore. While some investors may view this valuation as steep given the competitive nature of the NBFC sector, others see it as justified due to Northern Arc’s unique positioning in the market and its track record of profitability and risk management.
One of the key factors supporting Northern Arc’s valuation is its strong risk assessment capabilities. The company has developed sophisticated credit evaluation systems that allow it to lend to high-risk sectors while maintaining low levels of non-performing assets (NPAs). This ability to manage risk effectively sets Northern Arc apart from many of its peers in the NBFC space.
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Growth Potential and Future Outlook
Northern Arc’s growth potential lies in its ability to continue expanding its loan book while maintaining strong asset quality. The company’s focus on under-served sectors such as MSME, MFI, and consumer finance gives it a significant advantage in tapping into the unmet demand for credit in these segments.
As India’s economy continues to recover from the disruptions caused by the COVID-19 pandemic, demand for credit in sectors such as MSME and consumer finance is expected to rise. Northern Arc’s established presence in these sectors positions it well to benefit from this trend.
Moreover, the company’s partnerships with institutional lenders, including banks, mutual funds, and insurance companies, provide a steady source of funding, allowing it to grow its lending operations without relying heavily on external borrowing.
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Conclusion: A Unique Opportunity for Investors
Northern Arc Capital’s IPO offers investors a unique opportunity to participate in the growth of one of India’s leading NBFCs focused on financial inclusion. The strong demand from non-institutional and retail investors reflects confidence in the company’s business model, while the participation of prominent institutional investors in the anchor book provides additional validation.
With a proven track record, robust risk management systems, and a clear focus on serving under-served sectors of the economy, Northern Arc is well-positioned for future growth. The funds raised through the IPO will enable the company to strengthen its capital base and expand its lending operations, making it an attractive long-term investment.
For investors looking for exposure to India’s growing financial services sector, Northern Arc Capital’s IPO presents a compelling opportunity to support a company that is not only profitable but also plays a vital role in promoting financial inclusion across the country.
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