Chennai based Equitas Small Finance Bank Ltd is going to debut the security market through its ₹ 517.60 Crore IPO. This is the 12th mainstream IPO after COVID - 19 unlock process started in the country and 13th IPO of the year 2020 so far. After the SBI Cards & Payment System IPO launched in the first week of March 2020, the IPO market went into doom due to COVID - 19 outbreak across the globe. The country, in fact, the world had come to stand still. However, the moment lockdown was lifted in May -20 in a phased manner, the companies queued up to launch their IPOs. The opener Rossari Biotech launched its IPO in the second week of July - 20 got a tremendous response and ended up oversubscribing by 79 times. The bumper listing further enticed the IPO market. At the non-striker end was the bleeding Yes Bank which did not even manage to fully subscribe. The obvious reason of its failure is not unknown. There were no IPOs in August, 20, however, in September, 20, eight IPOs were launched viz. Happiest Mind, Route Mobile, Chemcon Specialty, CAMS, Angle Broking, UTI AMC, Mazagon Dock and Likhita Infrastructure. Barring two (UTI AMC & Angel Broking), all did well both in terms of subscription figures and returns on listing day.
Now, its time for Equitas SFB to register its success or failure. The US elections are fast approaching, and tension between India and China is all time high. The economy is doomed due to Covid effect and sinking GDP is no secret. No matter how good fundamentals are or sound track records, certain events have ugly impact on IPO performance. The highly appreciated giant SBI Cards & Payments System IPO failed to impress investors due to certain ugly events during that time.
The issue is opening on October 20, 2020 and closing on October 22,2020. The expected dates of allotment and listing are October 27, 2020 and November 2, 2020 respectively. The IPO is for ₹ 517.60 Crore bifurcating into ₹ 280 Crore Fresh Issue and ₹ 237.60 Crore Offer For Sale. It's promoter shareholder EHL is planning to shell out its 720,000,000 shares under this arrangement. Price per share is set between ₹ 32 - ₹ 33 and a single lot consist of 450 Shares. 510,000,000 Shares are reserved for EHL Shareholders and 10,000,000 Shares are reserved for Employees.
Overview :
Equitas SFB was originally incorporated as ‘V.A.P. Finance Private Limited’ in June 1993 at Madras, Tamil Nadu, as a private limited company under the Companies Act, 1956. In August 2011, the name of the company was changed from V.A.P Finance Private Limited to Equitas Finance Private Limited in order to identify Equitas Finance Private Limited as a subsidiary of Equitas Micro Finance India Private Limited. In September 2015, the name was changed from Equitas Finance Private Limited to Equitas Finance Limited pursuant to conversion to a public limited company from a private limited company. The promoter, EHL was granted the RBI In-principle Approval and RBI Final Approval in October 2015 and June 2016 respectively, to establish an SFB. Subsequently, the bank was converted into an SFB and it commenced operations in September 2016 as an SFB. In September 2016, again the name was changed to Equitas Small Finance Bank Limited.
The company is the largest SFB in India in terms of number of banking outlets, and the second largest SFB in India in terms of assets
under management and total deposits in Fiscal 2019. (Source: CRISIL Report). The company has been able to successfully diversify its loan portfolio and significantly reduce its dependence on its microfinance business as compared to other microfinance
companies that have converted to SFBs (Source: CRISIL Report). It offers a range of banking products and services to
customers with a focus on serving the financially unserved and underserved customer segments in India. Its strength lies in
promoting financial inclusion within these segments, with its group beginning operations in 2007 as an NBFC providing
microfinance loans through EMFL. It has been providing housing finance since 2011 through EHFL. It has also been
providing vehicle finance and MSE finance through the Erstwhile NBFC that received its asset finance license in 2012,
primarily to economically disadvantaged households. While its business model has transitioned over the years, the provision
of sustainable credit to unserved and underserved segments has remained its core focus.
The company's focus customer segments include individuals with limited access to formal financing channels on account of their informal,
variable and cash-based income profile. It offers a range of financial products and services that address the specific
requirements of these customer segments by taking into account their income profile, nature of business and type of security
available. Its asset products are suited to a range of customers with varying profiles. These include provision of small business
loans comprising LAPs, housing loans, and agriculture loans to micro-entrepreneurs, microfinance to JLGs predominantly
comprising women, used and new commercial vehicle loans to drivers and micro-entrepreneurs typically engaged in logistics,
MSE loans to proprietorships, and corporate loans. On the liability side, its target customers comprise mass and mass-affluent
individuals to whom it offers current accounts, salary accounts, savings accounts, and a variety of deposit accounts. In addition,
it also provides non-credit offerings comprising ATM-cum-debit cards, third party insurance, mutual fund products, and
issuance of FASTags.
Object of the issue:
Fresh Issue : The bank proposes to utilize the Net Proceeds from the offer towards augmenting the bank's Tier I capital base to meet the bank's future capital requirement.
Offer For Sale : The bank will not receive any proceeds from the Offer For Sale. The selling shareholder shall be entitled to the proceeds from the Offer For Sale.
Pricing of the share:
The company has set the price range between ₹ 32 - ₹ 33. The EPS (Basic & Diluted) as on March 31, 2020 was ₹ 2.39 per share. At the higher and lower price band, PE ranges between 13.39 - 13.81 times of its earning. The industry highest PE is 32.26 (AU Small Finance Bank Ltd), and lowest is 5.89 (Shri Ram City Union Finance Ltd).
The NAV (Net Asset Value) as on June 30, 2020 was ₹ 26.47. At the higher and lower price bad, PB between 1.21 to 1.25 times.
The company has RoNW (Return on Networth) @8.92% which seems low in its segment. Its peer Bandhan Bank's RoNW is 20.64%, followed by AU Small Finance Bank at 15.45%. I am not finding anything extra-ordinary about this IPO. It's business model is common, no imperative uniqueness. AU Small, Bandhan Bank, Ujjivan, DCB, CreditAccess, all have similar business models. Tapping the unprivileged market.
There are a lot of shares available at a cheap rate in this segment. For example, Shriram City Union Finance which is trading at 5.89 PE and its PB is below 1. Shriram Transport Finance Limited which is trading at 5.91 PE and PB is below 1. The RoNW are 13.92% & 13.87% respectively. No doubt, both companies are giant in terms of volume and customer reach and are not SFBs, however, by and large in the similar line of business of financing. Both companies are in the list of peer comparison as well.
Dividend :
The bank has not declared dividends on the Equity Shares during the current Fiscal and the last three Fiscal. The company seems to be very conservative in payment of dividend. This Fiscal, dividend declaration by banks is restricted by RBI.
NPAs (Non- Performing Assets):
The Bank’s percentage of Gross NPAs to Total Advances decreased from 2.73% as of March 31, 2018 to 2.53% as of March
31, 2019 and subsequently increased to 3.00% as of March 31, 2020 and was 2.86% as of June 30, 2020. The Bank’s net NPA
to net Advances (%) decreased from 1.46% as of March 31, 2018 to 1.44% as of March 31, 2019 and subsequently increased
to 1.66% as of March 31, 2020 and was 1.48% as of June 30, 2020.
Debt/Equity Ratio:
The debt/equity ratio as on June 30, 2020 was 6.18. And if I take reserves and surplus into account, DE Ratio comes to 1.97. Higher DE Ratio means higher borrowings by the bank, and higher borrowing means higher interest cost. The high interest cost impacts on profitability. The fresh issue can reduce DE Ratio to some extent.
Deposits & Advances:
The bank has witnessed significant growth in its business, and in Fiscal 2019 had a market share of 16% in terms of assets under
management in India (Source: CRISIL Report). Its Gross Advances (including IBPC issued) have grown from ₹ 7937.06 Crore as of March 31, 2018 to ₹ 11702.85 Crore as of March 31, 2019 and was ₹ 15,366.94 Crore as of March 31, 2020,
and ₹ 15572.91 Crore as of June 30, 2020. Of its Gross Advances (including IBPC issued), secured advances constituted
66.33% as of March 31, 2018, 70.72% as of March 31, 2019, and increased to 75.39% as of March 31, 2020 and further
increased to 75.75% as of June 30, 2020.
In Fiscal 2019, the bank recorded the fourth lowest yields indicating its diversification away from microfinance (Source: CRISIL
Report). It also witnessed the second fastest growth in deposits from Fiscal 2018 to Fiscal 2019 (Source: CRISIL Report). Its deposits have grown at a CAGR of 38.75% from ₹ 5603.97 Crore as of March 31, 2018 to ₹10,788.41 Crore as of
March 31, 2020. As of March 31, 2019 its CASA (Current Account and Saving Account) ratio was the second highest among SFBs in India, and its retail deposits to
total deposits ratio was the third highest among SFBs in India (Source: CRISIL Report). As of June 30, 2020, its CASA ratio
and retail deposits to total deposits ratio was 19.97% and 37.13%, respectively. It believes its widespread and stable retail deposit base enables it to access
121
low cost funding, as reflected in its cost of funds (calculated as interest expense divided by average interest-bearing liabilities),
which was 8.36%, 8.13%, 7.97% and 7.63% (annualized)/ 1.91% (unannualized) as of March 31, 2018, 2019, 2020 and June
30, 2020, respectively.
Revenue & Profitability:
The bank has performed extremely well since Fiscal 2018. Its profit jumped from ₹ 31.83 Crore in Fiscal 2018 to ₹ 243.64 Crore in Fiscal 2020. As of
June 30, 2020, its distribution channels comprised 856 Banking Outlets and 322 ATMs across 17 states and union territories
in India. As on June 30, 2020, its staff strength 15,843.
Conclusion:
NEUTRAL. Overall, the bank has limited history as an SFB. Earlier, it was an NBFC. It has Professional management, experienced leadership and trained employee base. The company is growing. The pricing also seems reasonable. However, there is nothing new to attract the attention of the investors. In the past, all SFBs which came with its IPO did well. This also has potential to subscribe fully. I would better see the list of anchor investors and the first two days response. Then, subscribe on the last day.
Thank you for reading...Jai Hind
(Note: I write reviews based on my knowledge and understanding. The reader of this article should do his/her own research before taking any investment decision)
Comments
Post a Comment