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PE firms increasing focus on revenue and profitability in funding evaluations: KreditBee’s Madhusudan Ekambaram

In a candid interview with Moneycontrol, KreditBee co-founder and CEO Madhusudan Ekambaram said that he intends to take the company public in three years. He also shared the rationale behind raising funds and provided an overview of the company's revenue and profit numbers.

Bengaluru / January 10, 2023 / 12:06 PM IST

KreditBee, a digital-first lending platform for salaried and self-employed individuals, raised one of the largest funding rounds in recent times last week, kicking off 2023 on a high note for fintech startups.

The company raised $100 million in its extended Series D funding round, bringing the total round amount to $200 million at an undisclosed valuation. Advent International, one of the world's largest PE (private equity) funds, invested about $100 million as part of the round, which also included participation from Japan's largest bank, MUFG Bank.

In a candid interview with Moneycontrol, KreditBee co-founder and CEO Madhusudan Ekambaram stated that he intends to take the company public in three years. He also shared the rationale behind raising funds and provided an overview of the company's revenue and profit numbers. Edited excerpts:

What was the objective behind the fundraise and how do you plan to use the funds?

So, for us, the equity fundraise was inevitable. We borrow from banks and do onward lending and as per the RBI (Reserve Bank of India) guidelines, for every dollar of equity, we can raise seven dollars of debt. So the AUM (assets under management) can be $8. But this isn’t practical. For secured lending, you can leverage up to 6x, but for unsecured lending, a category which we cater to, generally, it is 3-3.5x. This is what even the market appreciates.

As a result, every growing lending business faces the issue of equity-to-debt leverage. We hit the thresholds we had set for ourselves, we were almost at a 4x leverage on our equity and what we wanted to maintain was a 3-3.5x leverage, so we had to go for the equity fundraising.

So that's the technical reason we went with equity fundraise. We also wanted to add a larger pedigree of investors to our cap table. While we had local private equity funds with great brand value, such as Motilal Oswal and Azim Premji, we were also looking for international brand value, which is when we came across Advent International. We also got MUFG or Mitsubishi UFG, the largest Japanese bank. We also wanted to enter Japanese markets to raise debt.

Additionally, we are looking to diversify into different products. We are eager to introduce our product to both the secured and unsecured SME (small and medium-sized enterprise) markets. When we have to do that, we will look for acquisitions or acquihiring to help us launch that particular product, and equity funding comes in handy for such diversification.

Initially, we only catered to salaried and self-employed individuals, but we will now also offer loans to small and medium-sized businesses (SMBs).

You have raised a large round in an environment like this. Can you help us understand how different were the funding conversations? Were investors more cautious? Were there different parameters at which investors looked at?

The conversations were fairly different. First, conversations with VCs (venture capital firms) and PEs differ. When VC funds take calls, they are much faster and look at various metrics such as revenue multiples, growth, number of customers, transactions, and so on. So there are many other parameters besides the top line, bottom line, profitability numbers, and so on. However, VCs have gone cold on large ticket deals, while PEs have become very active.

When it comes to raising funds from PEs, they are more strict than VCs by nature of the funds. What I saw was that they had become twice as strict as when I had raised funds from Premji Invest or Motilal Oswal. When Advent was looking at us or when MUFG was looking at us, the evaluation had strengthened at least by twice. There was a greater emphasis on revenue and profitability. We are a profitable entity, but it wasn't just about profit; it was about the quality of profit.

What I mean by quality of profit is the accounting treatment, whether the profit is sustainable or was it one-off, etc., so the discussions centred on quality of profit.

Also, I noticed that the time frame for the transaction was a little too long. In a large deal like this, you can expect the diligence to take three to four months. But it took us a little longer. We closed the deal in four to five and a half months, so the timeline was a little stretched.

Can you give us a sense of your revenue and profit numbers for the last two years? How do you see it growing this year and for years to come?

We became profitable in FY19. On a group level, we were profitable by close to Rs 48 crore in FY19. In FY20, this amounted to about Rs 120 crore of PAT (profit after tax). In FY21, we incurred losses, but by September 2021, we were once again profitable.

To give you some sense, monthly, we disburse close to about Rs 1,400 crore and on a monthly basis, we have a PAT margin of about Rs 12 to 13 crore. We plan to grow by about 5 percent on a month-on-month basis, in terms of disbursements. We also want to achieve AUM (assets under management) of $1 billion by June or July. Also, launching SME product is one of our key priorities so we will be concentrating on that.

Could you tell us about your disbursement portfolio?

More than 75 percent of our customers are from non-metro cities. These borrowers are mostly middle-class, with an annual income of around Rs 6 lakh (average income). For us, the average age of our customers is around 28. In terms of bureau score (credit bureau), we have 93 percent of these customers with bureau scores greater than 700.

We have a 50 percent split of salaried and self-employed customers. However, in terms of loan exposure, 70 percent of our loan exposure is to salaried workers and only 30% to self-employed. This means that an average salaried guy gets a higher credit line compared to a self-employed man.

Competition in the digital lending segment is heating up. How do you look at the competition?

Unlike other segments, lending is not a winner-takes-all segment. The market is pretty large for more than one player. I think there are hardly five players—Paytm, Cred, Navi, Money View, and us—doing business at our scale, which is around Rs 1,000 crore per month. And Rs 1,000 crore on a monthly basis in India is a drop in the ocean.

Also, the markets to which these top five players cater to are different. For example, Cred caters to credit card holders, which means these are prime, metro, and salaried customers. Navi is similar. Paytm and we do for everybody, but our focus is mid-India. Even among these five players, the segment does not overlap, so there are a lot of gaps, so there is a lot of scope.

You have just raised a large round. Do you have any plans for an IPO (initial public offering) yet?

So, I have set a target of three years to hit the markets. It is not a definitive plan or I have not kind of promised those things to anyone but it's an integral plan for us to kind of at least hit the market in the next three years.

What are your key expectations from the upcoming Union Budget 2023?

There are a couple of things that matter to us. We are looking forward to some initiatives and policies that will arrest the devaluation of the rupee. Most of our equity investors are from the international market and it is a disadvantage for them when the rupee is devalued. Return expectations get tougher when the rupee is depreciating. Secondly, we all know that the repo rates have been going up. Somewhere that also needs to be arrested. I understand the inflation is high and will have to come down for the repo rates to correct but we feel it should not go any further.
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