Capital SFB IPO review (May apply)

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Review By Dilip Davda on February 3, 2024

•    CSFB is a northern region financial service provider.
•    It posted steady growth in its top and bottom lines for the reported periods.
•    Based on FY24 annualized earnings, the issue appears aggressively priced.
•    Well-informed investors may park funds for the long term rewards.
 
ABOUT COMPANY:
Capital Small Finance Bank (CSFB) commenced operations as India's first small finance bank in 2016 pursuant to RBI's approval dated March 4, 2016. It offers a range of banking products on the asset and liability side, in all the states it operates in, i.e., Punjab, Haryana, Delhi, Rajasthan, Himachal Pradesh and Union Territory of Chandigarh. CSFB's asset products primarily include agriculture loans, MSME and trading loans (working capital, machinery loans etc.) and mortgages (housing loans and loans against property)

Its core strategy is to strengthen retail focused banking franchise by enabling access to affordable credit in the states the company operates in its well defined niche catering to middle income group segment with special emphasis on rural and semi-urban areas. As of date, it does not have any subsidiaries.

It focuses primarily on the middle-income customer segments i.e., customers with an average annual income of Rs.  0.4 million to Rs. 5 million in semi-urban and rural areas with 41.62% of its branches in rural areas, 34.68% branches in semi-urban areas and 23.70% of branches in urban areas as on September 30, 2023. 

Over the years, it has expanded operations strategically in the north Indian states of Punjab, Haryana, Rajasthan, Delhi, Himachal Pradesh and Union Territory, Chandigarh. As of September 30, 2023, CSFB is present in five States and one Union Territory with 173 branches and 175 ATMs with 76.30% of its branches located in rural and semi-urban areas covering 24 districts and 75.75% of total customers (both credit and deposit). The company plans to continue to expand its business.

As on September 30, 2023 and March 31, 2023 respectively, 99.85% and 99.82% of its loan book was secured with 84.26% and 85.16% of the loans secured by immovable properties. Further, it has strategically focused on building a granular loan book. Since Fiscal 2021, its loans with ticket size of up to Rs. 2.5 million have increased from 62.88% of its total loan book to 67.80% in Fiscal 2023 and stood at 67.44% as on September 30, 2023. As of the said date, it had 1838 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden combo book building route IPO of fresh equity issue worth Rs. 450 cr. (approx. 9615392 shares at the upper cap) and an Offer for Sale (OFS) of 1561329 shares (worth Rs. 73.07 cr. at the upper cap). Thus the overall IPO size will be 11176721 shares worth Rs. 523.07 cr. The company has announced a price band of Rs. 445 - Rs. 468 per share of Rs. 10 each and minimum application to be made is for 32 shares. The issue opens for subscription on February 07, 2024, and will close on February 09, 2024. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 24.81% of the post-IPO paid-up capital of the company. The net proceeds of the fresh equity issue will be utilized for onward lending, augmenting Tier-I capital base and increasing the branch network.

The joint Book Running Lead Managers to this issue are Nuvama Wealth Management Ltd., DAM Capital Advisors Ltd., and Equirus Capital Pvt. Ltd., while Link Intime India Pvt. Ltd. is the registrar of the issue. 

Having issued/converted initial equity shares at par value, the company issued/converted further equity shares in the price range of Rs. 13 - Rs. 468 between May 2004 and June 2023 It has also issued bonus shares in the ratio of 1 for 5 in April 2004, and 1 for 10 in October 2014. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 15.00, Rs. 15.91, Rs. 18.45, Rs. 21.14, Rs. 21.15, Rs. 23.80, Rs. 24.95, Rs. 25.68, Rs. 28.67, Rs. 30.00, Rs. 41.39, Rs. 150.00, and Rs. 252.00 per share.  

Post-IPO, company's current paid-up equity capital of Rs. 35.43 cr. will stand enhanced to Rs. 45.04 cr. Based on the upper cap of IPO price band, the company is looking for a market cap of Rs. 2107.99 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, as per restated financials, the company has posted a total income/net profit of Rs. 557.27 cr. / Rs. 40.78 cr. (FY21), Rs. 632.40 cr. / Rs. 62.57 cr. (FY22), Rs. 725.48 cr. / Rs. 93.60 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earned a net profit of Rs. 54.39 cr. on a total income of Rs. 415.22 cr. The company has posted steady growth in its top and bottom lines for the reported periods. 

For the last three fiscals, the company has reported an average EPS of Rs. 21.68 and an average RoNW of 13.22%. The issue is priced at a P/BV of 2.32 based on its NAV of Rs. 201.34 as of September 30, 2023, and at a P/BV of 1.82 based on its post-IPO NAV of Rs. 257.92 per share (at the upper cap).

If we attribute FY24 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 19.38. Thus the issue appears aggressively priced.

For the reported periods, it posted PAT margins of 3.36% (FY21), 3.74% (FY22), 4.19% (FY23), 2.02% (H1-FY24), and RoCE margins of 9.51%, 12.95%, 16.62%, 8.23% respectively for the referred periods.

DIVIDEND POLICY:
The company has paid a dividend of 8% (FY21), 10% (FY22), and 12% (FY23). It will adopt a prudent dividend policy based on its financial performance and future prospects as per RBI guidelines.

COMPARISON WITH LISTED PEERS:
As per offer document, the company has shown IDFC First Bank, AU SFB, Equitas SFB, Suryoday SFB, and Ujjivan SFB, as their listed peers. They are currently trading at a P/E of 19.3, 26.5, 15.1, 11.2, and 8.64 (as of February 02, 2024). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The three BRLMs associated with the offer have handled 58 public issues in the last three fiscals, out of which 15 issues closed below the offer price on listing date. 

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