Equitas SFB IPO Review (May apply)

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Review By Dilip Davda on October 15, 2020

• ESFB is in the diverse financial services since 2016.
• It has reduced the offer size by nearly 50% as it does not need more capital at this juncture.
• It has fared well till Q1 of FY21, but ongoing unrest for interest waiver raises concern.
• Based on the current financial data, issue is fully priced.

PREFACE

Originally ESFB IPO for around Rs. 1000 cr. was to be completed before September 2019 end as per RBI directives. Due to some technical issues, it could not get through SEBI nod and hence it was rescheduled for March 2020. Unfortunately pandemic issue derails this plan too but now finally it is tapping the market with lower size of the IPO.

Pursuant to relaxation permitted by SEBI, the company had filed an addendum to its DRHP revising its Offer Size for the proposed IPO of its equity shares as below:

• The size of the Fresh Issue has been reduced from up to 550 cr. to up to Rs. 280 cr.;
• The number of Equity Shares offered through the Offer for Sale by the Company has been reduced from up to 80,000,000 Equity Shares to up to 72,000,000 Equity Shares;
• The Employee Reservation Portion for Eligible Employees has been reduced from up to 5 cr. to up to Rs. 1 cr.; and
• The EHL Shareholder Reservation Portion for Eligible EHL Shareholders has been reduced from up to 100 cr. to up to Rs. 51 cr.

According to management, as the bank is having comfortable adequacy ratio and capital base, it has decided to prune the IPO size by nearly 50%.

ESFB is eligible for conversion into a full-fledged bank after September 2021 and the management is keeping all options open for such opportunity at an appropriate time.

ABOUT COMPANY

Equitas Small Finance Bank Ltd. (ESFB) is one of the largest SFB in India in terms of number of banking outlets, and the second largest SFB in India in terms of assets under management and total deposits in Fiscal 2019. (Source: CRISIL Report). It has been able to successfully diversify loan portfolio and significantly reduce its dependence on microfinance business as compared to other microfinance companies that have converted to SFBs (Source: CRISIL Report).

ESFB offers a range of banking products and services to customers with a focus on serving the financially unserved and underserved customer segments in India. Its strength lies in promoting financial inclusion within these segments, with the group beginning operations in 2007 as an NBFC providing microfinance loans through EMFL. The company has been providing housing finance since 2011 through EHFL, and also been providing vehicle finance and MSE finance through the Erstwhile NBFC that received its asset finance license in 2012, primarily to economically disadvantaged households. While company's business model has transitioned over the years, the provision of sustainable credit to unserved and underserved segments has remained its core focus.

As of June 30, 2020, ESFB's distribution channels comprised 856 Banking Outlets and 322 ATMs across 17 states and union territories in India. Total employees counts were 15843 and the number of customers were 3581828 and debt-equity ratio stood at 6.18 on the said date. It also distributes products through digital channels, and leverage technology to identify opportunities to better serve target customer segment. To this end, it has introduced facial recognition features for transaction authentication in its mobile banking application.

ISSUE DETAILS/CAPITAL HISTORY

To finance its Tier-I capital augmenting (Rs. xx cr.), ESFB is coming out with a maiden IPO of combo offer of fresh equity issue (Rs. 280.00 cr.) and offer for sale (Rs. 237.60 cr.). It consist fresh equity issue of approx 84848485 shares of Rs. 10 each (at the upper price band) and offer for sale of 72000000 shares. Thus the overall issue will be for approx. 156848485 equity shares. The issue opens for subscription on October 20, 2020 and will close on October 22, 2020. The company has fixed the price band of Rs. 32 - Rs. 33 per share. Minimum application is to be made for 450 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. ESFB mulls mobilizing around Rs. 517.60 cr. (based on upper price band) through this IPO. The issue constitutes 13.78% of the post issue paid up capital of the company.

The company has reserved shares worth Rs. 51 cr. for the shareholders of EHL (holding shares as on the RHP filing date of October 11, 2020) and Rs. 1 cr. for eligible employees. From the residual portion, it has reserved 50% for QIBs, 15% for HNIs and 35% for Retail Investors.

Having issued initial equity at par, the company raised further equity in the price range of Rs. 11.00 to Rs. 52.68 between October 2012 and December 2019.

Average cost of acquisition of shares by the promoters/ selling stakeholders is Rs. 14.38 per share. Post issue, ESFB's current paid up equity capital of Rs. 1053.40 cr. will stand enhanced to Rs. 1138.25 cr. With this issue, the company is looking for a market cap of Rs. 3756.23 cr.

Issue is jointly lead managed by JM Financial Ltd., Edelweiss Financial Services Ltd., and IIFL Securities Ltd., while KFin Technologies Pvt. Ltd. is the registrar to the issue.

FINANCIAL PERFORMANCE

On financial performance front, on a consolidated basis ESFB has posted total income/net profits of Rs. 1772.90 cr. / Rs. 31.83 cr. (FY18), Rs. 2394.83 cr. / Rs. 210.57 cr. (FY19) and Rs. 2927.80 cr. / Rs. 243.64 cr. (FY20). For Q1 of FY21, it has posted net profit of Rs. 57.67 cr. on a total income of Rs. 750.97 cr.

For the last three fiscals, ESFB has posted an average EPS of Rs. 1.94 and an average RoNW of 7.85%. According to management, lower RONW is due to special provisioning for COVID-19 of Rs. 100 cr. for March 2020 period and Rs. 45 cr. for June 2020 period. The issue is priced at a P/BV of 1.25 based on its NAV of Rs. 26.47 as on June 30, 2020 (based on upper price band).

For the last three fiscals, ESFB has not distributed any dividend payouts. (Refer page 191 of RHP).

ESFB has reported net NPAs of 1.46%, 1.44% and 1.66% respectively for the last three fiscals. For the Q1 of FY21, its net NPAs stood at 1.48%.

If we attribute latest earnings on fully diluted equity post issue, then asking price is at a P/E of around 16.25 against industry average P/E of 16.26. Thus prima facie issue is fully priced.

According to market scenario, first quarter performance is unlikely to continue as many women and weaker section has started agitation for waiver of interest and reschedule of repayments amidst ongoing pandemic that has stopped their earnings. All SFB, MFI segment companies are likely to face the heat of this in near term.

BRLM's TRACK RECORD

The three Book Running Lead Managers associated with this issue have handled 18 public issues in the past three years, out of which 6 issues closed below the issue price on listing date.

COMPARISION WITH LISTED PEERS

As per offer documents, ESFB has shown AU SFB, Ujjivan SFB, DCB Bank, City Union Bank, Bandhan Bank, Shriram City Union Fin., Shriram Transport Fin., Cholamandalam Inv., Mah & Mah Financial Services, Sundaram Finance, CreditAccess Gramin and Spandana Sphoorty Fin. as its listed peers. They are currently quoting at a P/Es of around 33.07, 24.8, 6.99, 23.56, 18.65, 6.02, 7.71, 17.51, 16.17, 19.82, 35.91 and 11.99 (as of October 15, 2020 closing). However, they are not strictly comparable on an apple to apple basis.

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