IPO Analysis: Equitas Small Finance Bank

IPO Rating - Invest with limited exposure

About the Issue

Promoted by Equitas Holdings Limited (EHL), Equitas Small Finance Bank (ESFB) is entering the capital market with its initial public offering (IPO). The IPO consists of a fresh issue aggregating up to Rs 280 crore and an offer for sale of 7,20,00,000 equity shares by EHL. The closing date for the bid will be on October 22, 2020. Bids can be made for a minimum lot of 450 equity shares and in multiples of 450 equity shares thereafter. The issue price band has been fixed at Rs 32 – Rs 33 per equity share of Rs 10 each. The total offer size is around Rs 510 – Rs 518 crore at the lower price band and the upper price band, respectively.  After the public issue, the stake of Equitas Holdings Limited in Equitas Small Finance Bank would be reduced to about 82 per cent.

Investors, who hold EHL shares as of October 11, 2020, are eligible to apply under the shareholder's category of Equitas Small Finance Bank IPO. The company reserved 10 per cent of the offer for shareholders. Permanent employees of EHL can apply in the employee's category of Equitas Small Finance Bank IPO. The company has reserved around 0.2 per cent of the offer for its eligible employees.  

The equity shares are proposed to be listed on BSE as well as NSE. The net proceeds from the offer are proposed to be utilised to augment the Tier-I capital base to meet the bank’s future capital requirements and general corporate purpose.  

*At the upper price band

About the Bank

Equitas Small Finance Bank Ltd is the largest small finance bank (SFB) in India in terms of the number of banking outlets and the second-largest in India in terms of assets under management and total deposits in the fiscal year 2019.

The bank offers a wide range of banking products and services to customers with a focus to serve the financially unserved and underserved customer segments in India. As of June 30, 2020, the bank’s distribution channels comprise of 856 banking outlets and 322 ATMs across 17 states and union territories of India. The promoter of the bank is Equitas Holdings Limited, which is a listed entity.

Equitas Small Finance Bank’s asset products include the 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, the bank’s target customers comprise of mass and mass-affluent individuals to whom they offer current accounts, salary accounts, savings accounts, and a variety of deposit accounts. Additionally, they also provide non-credit offerings comprising ATM-cum-debit cards, third party insurance, mutual fund products, and issuance of FASTags.  

Bank’s financials

The gross advances (including IBPC issued) of the bank have grown from Rs 7,937.06 crore as of March 31, 2018, to Rs 11,702.85 crore as of March 31, 2019, and was Rs 15,366.94 crore as of March 31, 2020, and Rs 15,572.91 crore as of June 30, 2020. Out of these, secured advances constituted 66.33 per cent as of March 31, 2018, 70.72 per cent as of March 31, 2019, and increased to 75.39 per cent as of March 31, 2020, and further increased to 75.75 per cent as of June 30, 2020.

In fiscal 2019, ESFB recorded the fourth-lowest yields indicating their diversification away from microfinance. They also witnessed the second-fastest growth in deposits from FY18 to FY19. Their deposit has grown at a CAGR of 38.75 per cent from Rs 5,603.97 crore as of March 31, 2018, to Rs 10,788.41 crore as of March 31, 2020. As of March 31, 2019, the CASA ratio of the bank stood at the second-highest among SFBs in India. As of June 30, 2020, the CASA ratio and retail deposits to total deposits ratio were 19.97 per cent and 37.13 per cent, respectively.

The net interest income of the bank has grown from Rs 860.06 crore as of March 31, 2018, to Rs 1,151.73 crore as of March 31, 2019, and was Rs 1,495.31 crore as of March 31, 2020, and Rs 404.28 crore as of June 30, 2020. The cost-to-income ratio of the bank has declined from 79.97 per cent at the end of FY18 to 67.27 per cent at the end of Q1FY21. In terms of asset quality, for Q1FY21, the bank’s gross NPA as a percentage of gross advances stood at 2.86 per cent higher by 11 basis points on a yearly basis. Net NPA in the same period declined by 8 basis points and was at 1.48 per cent.

Net profit for FY20 stood at Rs 243.64 crore compared to Rs 31.83 crore in FY18. For Q1FY21, net profit stood at Rs 57.67 crore compared to Rs 57.06 crore in Q1FY20.

Valuation and Recommendation

With the IPO price band of Rs 32-Rs 33, the stock is available at a price-to-book value (Q1FY21) of around 1.24 times its upper price band. Nonetheless, if we adjust for the issue, the book value comes at Rs 27.1. So the offer is available at a price-to-book value of 1.21 times. If we adjust it for the non-performing assets, the issue is available at 1.31 times of its adjusted book value. This is slightly cheaper than its peers, which are available at around twice the price to adjusted book value.

Hence, readers with a long-term investment horizon can apply with limited exposure. The listing gains will very much depend upon the market condition. Due to the second wave of COVID-19 worldwide and election in the USA, the market is likely to remain volatile for a while and hence, may not give you listing gains.