IPO Analysis: Capital Small Finance Bank Ltd

IPO Rating: Apply for listing gains

About the Issue  

Capital Small Finance Bank is launching its initial public offering (IPO) for equity shares valued at Rs 10 each. The IPO price range is set between Rs 445 and Rs 468 per equity share, resulting in a total issue size of Rs 523.07 crore at the upper price band.  

The IPO is scheduled to commence on February 07, 2024, and will conclude on February 09, 2024. The market lot size for the IPO is 32 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 416 shares or a total investment of Rs 1,94,688 assuming the upper price band.   

Objects of the Issue  

The offer encompasses both the fresh issue and the offer for sale. It's important to note that the bank will not accrue any proceeds from the offer for sale. The bank intends to use the net proceeds from the fresh issue to strengthen its Tier-1 capital base, addressing the bank's future capital requirements.

Promoter holding  

Sarvjit Singh Samra, Amarjit Singh Samra, Navneet Kaur Samra, Surinder Kaur Samra and Dinesh Gupta are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of 22.39 per cent in the company.   

Company profile  

Capital Small Finance Bank initiated its operations in 2016, becoming the first small finance bank in India following approval from the Reserve Bank of India (RBI). It provides a variety of banking products on both the asset and liability sides in the states where it operates, namely Punjab, Haryana, Delhi, Rajasthan, Himachal Pradesh, and the Union Territory of Chandigarh.

The bank's asset products mainly encompass agriculture loans, loans for micro, small, and medium enterprises (MSMEs), trading loans such as working capital and machinery loans, and mortgage options including housing loans and loans against property. The fundamental approach of the bank is to enhance its retail-focused banking franchise by providing access to cost-effective credit in the states where the company operates.

It concentrates on a well-defined niche, catering specifically to the middle-income group segment, with a special emphasis on rural and semi-urban areas. Currently operating 173 branches and 175 ATMs as of September 30, 2023, the bank has over 75 per cent of its branches in rural and semi-urban areas, encompassing 24 districts, and 75 per cent of its total customer base is found in these areas.

Financials  

The small finance bank, reflecting the overall resilience of banks and financial services companies, has effectively showcased steady and robust growth in its interest income, total income, and net profit. Likewise, the H1FY24 figures were remarkably impressive, indicating a promising growth path for the fiscal year 2024. The bank boasts a return on equity (RoE) and return on assets (RoA) of 16 per cent and 1 per cent, respectively. At 2.1 per cent, its gross non-performing assets (NPA) percentage is the lowest of all small financing banks in India for bad loans.

Valuation and outlook  

The issue is priced with a P/BV ratio of 2.32 times, calculated using its Net Asset Value (NAV) of Rs 201.34 as of September 30, 2023. When we calculate the PE ratio for the company by considering the annualized FY24 earnings relative to the fully diluted paid-up equity capital, the resulting PE ratio stands at 15. Even though the company's performance is comparable to that of its listed peers, there are currently businesses that provide higher returns and more appealing valuations for investment. 

Hence, we advise investors to consider a cautious, moderate subscription to the offering, with a focus on a listing gain.