SBFC Finance IPO review (May apply)

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Review By Dilip Davda on July 30, 2023

•    SFL is engaged in providing financial services to MSMEs with a targeted ticket size. 
•    Though it marked steady growth in its top line, it suffered a setback in the bottom line for FY22.
•    For the last three fiscals, it has posted declining trends in its NIM. 
•    It is operating in a highly competitive segment.
•    Only well-informed/cash surplus/risk seeker investors may park funds for the medium to long term.

PREFACE: 
SFL filed its draft prospectus in March 2023 for an IPO worth Rs. 1200 cr. including Rs. 750 cr. fresh equity issue and Rs. 450 cr. Offer for Sale (OFS). As the company did a pre-IPO placement worth Rs. 150 cr. its fresh issue quantum for IPO stands reduced by the said amount. However, it has also pruned its OFS size by Rs. 25 cr. SBFC stands for Small Business Finance Co. The company will continue its benchmarks of ticket size to a maximum of up to Rs. 30 lakhs and plans to create a niche place in the small ticket financing segment. Recent media reports on MSME turning NPAs post the Pandemic raise caution. 

ABOUT COMPANY:
SBFC Finance Ltd. (SFL) is a systemically important, non-deposit taking non-banking financial company offering loans including secured Micro, Small and Medium Enterprises loans and loans against gold, with a focus on ticket size in the range of Rs. 5 lakhs to Rs. 30 lakhs. As of March 31, 2023, it has a footprint in 120 cities, spanning 16 Indian States and two Union Territories, with 152 branches. 

Among MSME-focused NBFCs in India, SFL has one of the highest assets under management ("AUM") growth, at a CAGR of 44% in the period from Fiscal 2019 to Fiscal 2023. (Source: CRISIL Report). It has also witnessed healthy disbursement growth, at a CAGR of 40% between Fiscal 2021 and Fiscal 2023. (Source: CRISIL Report). As of June 20, 2023, approximately only 16.9 million MSMEs have registered on UDYAM, of the estimated 70 million MSMEs in India (Source: CRISIL Report), leaving a large number of MSMEs without access to organized finance owing to their unregistered status.

SFL serve customers in tier II and tier III cities and as of March 31, 2023, it served 102722 customers. Its average cost of borrowing was 8.11%, 7.65% and 8.22% for Fiscal 2021, 2022 and 2023, respectively. It enjoyed a net interest margin (NIM) of 11.73% (FY21), 9.39% (FY22), and 9.32% (FY23). Thus NIM has marked declining trends, that raise concern. As of March 31, 2023, it had 2822 employees including 1911 sales staff. As of the said date, it had 40872 live MSME loan accounts and 34738 MSME borrowers. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo book-building route IPO of fresh equity shares worth Rs. 600 cr. (approx. 105263080 shares at the upper cap) and an OFS worth Rs. 425 cr. (approx. 74561500 shares at the upper cap). Thus the overall IPO size will be worth Rs. 1025 cr. (approx. 179824580 shares at the upper cap). It has announced a price band of Rs. 54 - Rs. 57 per share of Rs. 10 each. The issue opens for subscription on August 03, 2023, and will close on August 07, 2023. The minimum application to be made is for 260 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 16.90% of the post-IPO paid-up capital of the company. 

The company has reserved shares worth Rs. 10.25 cr. for its eligible employees and offering them a discount of Rs. 2 per share. From the rest quantity, it has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. 

The company will utilize the net proceeds from the fresh equity issue to augment its capital base. For the interim period, these funds will be temporarily parked in deposits in one or more scheduled commercial banks included in the Second Schedule of RBI Act 1934.

ICICI Securities Ltd., Axis Capital Ltd., and Kotak Mahindra Capital Co. Ltd. are the joint Book Running Lead Managers (BRLMs) and KFin Technologies 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. 12.50 to Rs. 55.00 between September 2017 and July 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 12.69, Rs. 12.73, Rs. 15.98 and Rs. 16.08 per share. 

Post-IPO, SFL's current paid-up equity capital of Rs. 958.91 cr. will stand enhanced to Rs. 1064.17 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 6065.78 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SFL has posted a total income/net profit of Rs. 511.53 cr. / Rs. 85.01 cr. (FY21), Rs. 530.70 cr. / Rs. 64.52 cr. (FY22), and Rs. 732.81 cr. / Rs. 149.74 cr. (FY23). It marked a setback in its bottom line for FY22 following the pandemic. 

For the last three fiscals, SFL has reported an average EPS of Rs. 1.25 and an average RoNW of 7.97%. The issue is priced at a P/BV of 2.96 based on its NAV of Rs. 19.26 as of March 31, 2023, and at a P/BV of 2.45 based on its post-IPO NAV of Rs. 23.22 per share (at the upper cap).

SFL' s net NPAs marked declining trends from 1.95% (FY21) to 1.63% (FY22) and to 1.41% (FY23).

If we attribute FY23 earnings to the post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 40.42. Thus the IPO appears aggressively priced compared to its peers. 

DIVIDEND POLICY:
The company has not paid any dividend for the reported periods of the offer document. It has a formal dividend policy approved by its Board of Directors on July 12, 2023.

COMPARISON WITH LISTED PEERS:
As per the offer document, SFL has shown Aavas Financiers, Home First Fin, Aptus Value Housing, AU SFB, and Five Star Business Fin. as their listed peers. They are currently trading at a P/E of 29.56, 30.59, 32.32, 31.25, and 34.99 (as of July 28, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The three BRLMs associated with the offer have handled 88 public issues in the past three fiscal years, out of which 30 issues closed below the offer price on the listing date. 

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