ESAF SFB IPO review (Apply)

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Review By Dilip Davda on October 31, 2023

•    ESAF SFB is a south centric SFB and enjoys its niche play.
•    The company has reported steady growth in its earnings for the reported periods. 
•    Based on FY24 annualized earnings, the issue is attractively priced. 
•    Investors may consider investment for the medium to long-term rewards.

ABOUT COMPANY:
ESAF Small Finance Bank Ltd. (ESFBL) is a small finance bank with a focus on unbanked and under-banked customer segments, especially in rural and semi urban centres. As at June 30, 2023, its gross advances to customers in rural and semi-urban centres (combined) accounted for 62.97% of gross advances and 71.71% of banking outlets were located in rural and semi-urban centres (combined). 

ESFBL's primary products are advances (asset products) and deposits (liability products). Its advances comprise: (a) Micro Loans, which comprises Microfinance Loans and Other Micro Loans; (b) retail loans, which includes gold loans, mortgages, personal loans, and vehicle loans; (c) MSME loans; (d) loans to financial institutions; and (e) agricultural loans, while its liability products comprise current accounts, savings accounts, term deposits and recurring deposits. 

ESFBL's AUM grew from Rs. 8425.93 cr. to Rs. 16331.27 cr. as at March 31, 2021 and 2023, respectively, registering a CAGR of 39.22%, and increased to Rs. 17203.97 cr. as at June 30, 2023, an increase of 5.34%. Its deposits grew from Rs.  8999.43 cr. to Rs. 14665.63 cr. as at March 31, 2021 and 2023, respectively, registering a CAGR of 27.66%, and increased to Rs. 15655.85 cr. as at June 30. 2023, an increase of 6.75%. Its services include safety deposit lockers, foreign currency exchange, giving customers access to the Bharat Bill Payment System, money transfer services and Aadhaar Seva Kendra services. It also distributes third-party life and general insurance policies and Government pension products.

ESFBL has a network of 700 banking outlets (including 59 business correspondent-operated banking outlets), 767 customer service centres (which are operated by its business correspondents), 22 business correspondents, 2,116 banking agents, 525 business facilitators and 559 ATMs spread across 21 states and two union territories, serving 7.15 million customers as at June 30, 2023. While its operations are spread out across India, business is concentrated in South India, particularly in the states of Kerala and Tamil Nadu. As at June 30, 2023, 62.43% of its banking outlets are located in South India (including 43.43% in Kerala and 13.86% in Tamil Nadu), 73.09% of its gross advances are from customers in South India (including 43.45% from Kerala and 22.14% from Tamil Nadu) and 86.90% of deposits are from banking outlets in South India (including 80.04% from Kerala and 3.36% from Tamil Nadu). As of June 30, 2023, it had 5160 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden combo book building route IPO to mobilize Rs. 463.00 cr. including a fresh equity share issue worth Rs. 390.70 cr. and an OFS (Offer for Sale) of Rs. 72.30 cr. It has announced a price band of Rs. 57 - Rs. 60 per share of Rs. 10 each. At the upper band the company will issue overall 77166750 shares including approx. 65116750 fresh equity shares and 12050000 shares by way of OFS. The issue opens for subscription on November 03, 2023, and will close on November 07, 2023. The minimum application to be made is for 250 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 15% of post-IPO paid-up capital of the company. From the net proceeds of the fresh equity shares issue, it will utilize the entire fund for augmenting its Tier-I capital base.

After reserving equity shares worth Rs. 12.50 cr. (approx. 2083250 shares) for the eligible employees, the company has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. The company is offering a discount of Rs. 5 per share to employees. 

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

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 10.15 - Rs. 75.00 between March 2017 - March 2021. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 10.11, Rs. 10.16, and Rs. 40.07 per share. 

Post-IPO, ESFBL's current paid-up equity capital of Rs. 449.47 cr. will stand enhanced to Rs. 514.59 cr. Based on the upper band of IPO price, the company is looking for a market cap of Rs. 3087.54 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, ESFBL has posted a total income/net profit of Rs. 1768.42 cr. / Rs. 105.40 cr. (FY21), Rs. 2147.51 cr. / Rs. 54.73 cr. (FY22), and Rs. 3141.57 cr. / Rs. 302.33 cr. (FY23). For Q1 of FY24 ended on June 30, 2023, it earned a net profit of Rs. 129.96 cr. on a total income of Rs. 991.78 cr. 

For the last three fiscals, it has reported an average EPS of Rs. 4.17 and an average RoNW of 11.44%. The issue is priced at a P/BV of 1.47 based on its NAV of Rs. 40.92 as of June 30, 2023, and at a P/BV of 1.39 based on its post-IPO NAV of Rs. 43.32 per share (at the upper cap). 

If we attribute FY24 annualized earnings on post-IPO fully diluted equity capital of the company, then the asking price is at a P/E of 5.94. Thus the issue is attractively priced. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Suryoday SFB, CreditAccess Grameen, Spandana Sphoorty Fin., Bandhan Bank, Ujjivan SFB, and Equitas SFB as their listed peers. They are trading at a P/E of 14.02, 21.47, 18.69, 13.61, 7.92, and 13.62 (As of October 31, 2023). 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 70 public issues in the past three years, out of which 26 issues closed below the offer price on listing date.

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