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New issue (IPO) Analysis:
Really Built for the Long haul!
RBL Bank is entering the primary market on Friday 19th August 2016, to raise Rs. 833 crore, via a fresh issue of equity shares of Rs. 10 each and an offer for sale (OFS) of upto 1.69 crore equity shares, both in the price band of Rs. 224 to Rs. 225 per share. The issue size aggregates to Rs. 1,213 crore at the upper end of the price band, of which, OFS portion is Rs. 380 crore. Representing 14.90% of the post issue paid up equity share capital at the upper end, issue closes on Tuesday 23rd August, 2016.
Formerly known as Ratnakar Bank, RBL Bank is a new-generation private sector lender with a balance sheet size of over Rs. 39,000 crore and a network of 197 branches and 362 ATMs (31-3-16) across 16 Indian states, serving 19 lakh customers. Since FY12, post induction of new professional management, the bank has demonstrated an enviable growth rate of over 40%, on all counts, such as total business, earnings and profitability, which no other Indian bank can boast of (Yes Bank, Indusind and Kotak have all posted growth in twenties). RBL Bank’s balance sheet size swelled at 56% CAGR during FY12-16, total business by 51%, net interest income (NII) grew at 4 year CAGR of 44%, while net profit increased at 46% CAGR!
For FY16, bank’s total income grew 37% YoY to Rs. 3,235 crore, led by 41% YoY rise in interest income to Rs. 2,744 crore and 47% YoY growth in advances to Rs. 21,229 crore. Thanks to the declining cost of funds and 44% annual jump in low cost CASA (current account and savings account) deposits, RBL Bank’s net interest income (NII) jumped 47% in FY16 to Rs. 819 crore, leading to PAT of Rs. 292 crore. This resulted in FY16 EPS of Rs. 9.43, on equity of Rs. 324.73 crore, as of 31-3-16. Current equity (20-7-16) has expanded to Rs. 332.81 crore, post exercise of ESOPs. To attract and retain talent, bank has generously issued ESOPs, which covers nearly 67% of the total strength of 3,871 employees.
Despite such aggressive and industry-leading growth, bank’s asset quality has not been compromised. As of 31-3-16, net NPAs as a % to net advances stood at 0.59% and CAR (as per Basel III) stood at 12.94% (versus requirement of 9.63%). Its credit deposit ratio of 87% is also very healthy, when total business increased 44% during the year. Of the total 197 branches, 48% is in Maharashtra, which is considered to be a liability rich geography. On some parameters, although the bank’s current position is healthy, there does remains room for improvement such as FY16 net interest margin (NIM) was sub 3%, at 2.96%. CASA ratio of 18.6% of total deposits of Rs. 24.349 crore can move further north. Return ratios (1% RoA and 11.3% RoE) also lag some of the private sector peers.
The bank does not have any identifiable promoter. It counts marquee investors such as HDFC, HDFC Bank, International Finance Corp (IFC), Norwest Partners, Faering Cap, Samara Capital, TVS Capital, Aditya Birla PE, IDFC Investments among its shareholders. During Oct-Dec 2015, it raised Rs. 488 crore via pre IPO placement of 2.5 crore shares at Rs. 195 each, from Asian Development Bank, CDC among others. PE firm Beacon (holding 2.86% currently) is making a full exit via the OFS, while Gaja Capital (3.13%) and Burman family’s Elephant Cap are making part exit. Fresh issue proceeds will augment the capital base to not only help the bank lend further, but will also comply with Basel III norms (to be fully implement on 31-1-18).
As of 31-3-16, networth stood at Rs. 2,988 crore, indicating BVPS of Rs. 92. Assuming the historical 40% growth in topline, which the bank has consistently posted for the past 5 years, aided by fresh capital infusion of over Rs. 1,300 crore (Rs. 488 crore pre IPO placement and fresh issue proceeds of Rs. 833 crore), FY17 expected EPS is about Rs. 13.50 per share, on expanded equity of Rs. 370 crore. This leads to BVPS of Rs. 117, as of 31-3-17.
At Rs. 225 per share, bank’s market cap will be Rs. 8,321 crore. Based on the above estimates for the current year, PBV multiple works out to 1.9x, while PE multiple works out to 16.7 times, both of which are attractive, given the tremendous growth the bank has demonstrated, with sound balance sheet position. Bigger peers like Yes and Indusind are ruling at PBV multiples of 3 and above. Also, take the case of City Union Bank, with 525 branches, clocks total income of Rs. 3,350 crore annually and commands PBV multiple of 2.2x. On the other hand, RBL achieved that kind of total income with less than half the branches, at 197 and is being offered at PBV multiple of less than 2x. This highlights RBL’s efficiency and productivity.
Led by Vishwavir Ahuja, the bank has a strong management team in place, which has been instrumental for its growth. We have countless examples of what wonders professional and top quality management can do to a business, particularly so in the financial services space. Just in the Indian context, names like Aditya Puri (HDFC Bank), Rana Kapoor (Yes Bank), Romesh Sobti (Indusind Bank), V Vaidyanathan (Capital First) immediately come to the mind, who have shaped companies to becoming highly profitable and efficient.
To conclude, RBL Bank is a very attractive investment opportunity. Industry leading and consistent growth being demonstrated for the past 5 fiscals, despite challenging macros, coupled with strong management team at the helm, make this issue very unique, in the financials space. The pricing is also right, both from listing gains and medium term points of view. The issue is a subscribe.
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