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Equitas Small Finance Bank IPO: Near-term risks may limit listing gains

The book-building IPO will include fresh issue of shares aggregating up to Rs 280 crore | Illustration: Ajay Mohanty
After two hiatuses, the initial public offer (IPO) of Equitas Small Finance Bank is set to open on Tuesday, October 20 with a price band of Rs 32-33 per share. At the upper price limit, the bank intends to raise up to Rs 517.6 crore to augment its tier-I capital base to meet the future capital requirement.

Equitas SFB had earlier planned to raise Rs 1,000 crore through the IPO, but later reduced the size due to its “comfortable capital adequacy ratio” and “in view of the current market condition”.

The book-building IPO will include fresh issue of shares aggregating up to Rs 280 crore and offer for sale (OFS) of 72 million shares aggregating up to Rs 237.6 crore. The shares will be available in the lots of 450 and the price band has been fixed between Rs 32 - 33 per share.

Post the IPO, promoter (Equitas Holdco) stake will potentially fall to 82 per cent, which will have to be pruned further to 40 per cent by September 2021, 30 per cent by September 2026 and to 26 per cent by September 2028, calling for continued dilution.

Looking for listing gains?

Given the headwinds in terms of slowdown in loan growth and potential rise in NPAs due to Covid-19, change in regulatory norms, and the interest waiver issue, listing gains look difficult, say analysts. That said, the long-term prospects of the bank remain strong.

First, the bank has done well on the liability front among small finance banks (SFBs), with the share of deposits/AUM at 76 per cent and CASA ratio at 20 per cent, given its early stage focus on open market customers.

According to an analysis by Quantum Securities, deposits at the bank have reached Rs 11,790 crore, of which retail deposits comorise nearly 57 per cent. The bank offers higher rates on its deposit products as compared to large private banks, supporting its double-digit CASA ratio.

“Average ticket size of the entire loan book is Rs 4 lakh. About 96 per cent of the market in this ticket size is unorganized, indicating huge untapped potential,” analysts at the brokerage said.

Those at Emkay Global Financial Services further note that the bank has reduced its portfolio concentration in micro-finance (MFI) to 23 per cent from 46 per cent in FY17, given the risks and volatility associated with this business, while it has well-diversified into non-MFI loans encompassing vehicle, housing and SME segments being the key drivers of growth.

 “In addition to expanding their product portfolio, ESFB intends to strengthen their alternate delivery channels and increase their adoption by encouraging customers to move from less cash to a cashless environment. They intend to achieve this by focusing on their existing internet banking system and mobile banking platform,” said an IPO note by Axis Capital.

The third important strategic focus for ESFB is to diversify their fee and non-fund based revenues. They intend to achieve this by further cross-selling existing fee income products like distribution of mutual funds and insurance products, and introducing newer products and services, according to the draft prospectus shared by the bank.

Among key initiatives, Equitas SFB intends to generate income via issuance of ‘FASTags’; fees payment on debit cards and bill payment; and fees on health insurance, life insurance, general insurance and also introduce micro-insurance products.

Strong fundamentals such as income growth of 29 per cent; deposits and disbursements growth of 39 per cent and 31 per cent CAGR over FY18-20; healthy asset quality with gross NPA and Net NPA at 2.72 per cent and 1.66 per cent; strong retail liability portfolio, customized credit assessment procedures, strategic distribution network and customer centric approach are some of the factors that augur well for the business, analysts say.

“We believe the growth momentum can continue to remain healthy for the company led by positive industry growth prospects coupled with its strong focus on leveraging its existing network and deepening penetration, strong liability franchise and drive operational efficiencies by leveraging data for analytics and focus on digital products,” says Rohit Khatri, research analyst at Religare Broking.

What brokerages say

Emkay Global has coverage on Equitas (Holdco) with a Buy rating. Therefore, their current target price for Equitas Holdco implies a per share value of Rs 40 for Equitas SFB (assuming a 40 per cent holdco discount), implying a decent upside to the issue price. Thus, they recommend subscribe to SFB IPO

Those at Quantum Securities assign Equitas SFB a P/ABV multiple of 1.5x its FY22E ABV as it has a lower FY22E ROE of 9.8 per cent (after considering capital raising). Consequently, they value Equitas SFB at Rs 42 per share. “At our target price, Equitas Holdings Ltd should trade at 0.8x FY22E ABV. We have a ‘Buy’ rating on EHL. So based on expectation of improvement in performance from FY22E onwards, we recommend investors to ‘Subscribe’ to the issue from a long-term perspective,” they say.

Jaikishan Parmar, a senior equity research analyst at Angel Broking, meanwhile, says that though the bank has a diversified loan book and the best CASA ratio among SFBs, the return ratios are subdued with GNPA above 2.5 per cent for the last 3 years.  

"Our concern for Equitas SFB is fresh formation of bad loans from the moratorium book that would keep provisions high and return ratios compressed. We believe investors should wait for price discovery before making any investment decision. Considering the above factors, we recommend a NEUTRAL rating for the IPO," he says.

Analysts at Choice Broking have 'Avoid' rating for the IPO as they feel the outloof for the financial sector is cautious and lending institutions except some larger ones are currently trading at historically low valuation include IndusInd Bank at P/BV 1.1x and RBL Bank P/BV 0.8x. "At higher price band of Rs 33, ESFB stock is valued at P/BV of 1.2x, which is aggressively priced given the cautious business outlook," they note. 



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