Suryoday Small Finance IPO review (May apply)

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Review By Dilip Davda on March 13, 2021

•    SSFBL is one of the leading SFBs in India.
•    It gives a major thrust to the 'priority sector' for its lending business.
•    As of December 31, 2020, its customer base was 1.44 million and 4770 employees.
•    The issue is aggressively priced compared to listed peers.

ABOUT COMPANY:
Suryoday Small Finance Bank Ltd. (SSFBL) is among the leading SFBs in India in terms of net interest margins, return on assets, yields and deposit growth and had the lowest cost-to-income ratio among SFBs in India in Fiscal 2020. (Source: CRISIL Report).

It has for over a decade been serving customers in the unbanked and underbanked segments in India and promoting financial inclusion. Pursuant to receipt of the RBI Final Approval, it started operations as an SFB on January 23, 2017.  SSFBL were included in the second schedule to the RBI Act, as a scheduled bank pursuant to a notification dated July 24, 2017, issued by the RBI and published in the Gazette of India dated September 2, 2017.

Prior to the commencement of operations as an SFB, it operated as an NBFC - MFI carrying out microfinance operations and operated the joint liability group lending model for providing collateral free, small ticket-size loans to economically active women belonging to weaker sections. SSFBL's average 'priority sector' loans, as a percentage of average ANBC for Fiscal 2018, 2019 and 2020 and nine months ended December 31, 2020, was 99.08%, 112.10%, 103.67% and 114.09%, respectively. Over the years, it has diversified its loan portfolio to include non-micro banking loans thereby reducing its dependence on the micro banking business.  

As of December 31, 2020, its customer base was 1.44 million and employee base comprised 4,770 employees and it operated 554 Banking Outlets including 153 Unbanked Rural Centres ('URCs'). It has set up 661 customer service points ('CSPs') as additional service or touchpoints during April 1, 2020, and January 31, 2021, and intend to continue to expand its reach through the CSP model.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for augmenting Tier-I capital of the bank and achieve listing benefits, SSFBL is coming out with a maiden IPO of 19093070 equity share of Rs. 10 each with a price band of Rs. 303 - Rs. 305 This composite issue has 8150000 fresh equity issue and an offer for sale (OFS) of 10943070 shares. At the upper price band, the bank mulls raising Rs. 582.34 cr. The issue opens for subscription on March 17, 2021, and will close on March 19, 2021. Minimum application is to be made for 49 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 18% of the post issue paid-up capital of the company.

The Book Running Lead Managers (BRLMs) to this issue are Axis Capital Ltd., ICICI Securities Ltd., IIFL Securities Ltd., and SBI Capital Markets Ltd., while KFin Technologies Pvt. Ltd. Is the registrar to the issue.

Having issued initial equity at par, SSFBL has issued further equity in the price range of Rs. 15.00 to Rs. 291.75 between May 2009 and March 2021. The average cost of acquisition of shares by the promoters/ selling shareholders is Rs. 58.77, Rs. 81.01, Rs. 83.13, Rs. 84.40, Rs. 96.25, Rs. 97.12, Rs. 107.00, Rs. 120.73, Rs. 122.30, Rs. 169.22, Rs. 172.79 and Rs. 200.57 per share.

Post issue, SSFBL's current paid-up equity of Rs. 97.98 cr. Will stand enhanced to Rs.106.13 cr. Based on the higher price band of the issue; the bank is looking for a market cap of Rs. 3237 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, SSFBL has posted a total income/net profit of Rs. 324.93 cr. / Rs. 11.49 cr. (FY18), Rs. 597.03 cr. / Rs. 90.40 cr. (FY19) and Rs. 854.14 cr. / Rs. 111.20 cr. (FY20). For the first nine months ended on December 31, 2020, of FY21, it has earned a net profit of Rs. 54.87 cr., on a total income of Rs. 689.27 cr. SSFBL posted growth in its business fromFY18 to FY20, but due to pandemic, it suffered a setback for FY21-9M.

For the last three fiscals, SSFBL has posted an average EPS of Rs. 11.33 and an average RoNW of 8.99%. The issue is priced at a P/BV of 2.28 based on its NAV of Rs. 133.54 as of December 31, 2020, and at a P/BV of 1.96 based on its post-issue NAV of Rs. 155.98. (at the upper price band).

With fully diluted post IPO equity, based on FY20 earnings, the asking price is at a P/E of around 29.10 whereas on the basis of annualized FY21-9M working it is at a P/E of 44.27 against the industry average of 25.15 (based on FY20 workings as per offer documents). Thus, on both counts, the issue is aggressively priced.  

DIVIDEND POLICY:
The bank has not declared any dividend so far, however, it will devise a post listing a prudent dividend policy based on its working and future prospects.

COMPARISION WITH LISTED PEERS:
As per offer documents, SSFBL has shown Ujjivan SFB, CreditAccess Grameen, Spandana Sphoorty, Bandhan Bank and AU SFB as its listed peers. They are currently trading at a P/Es of around 00, 118.90, 24.2, 21.44 and 34.31 (As of March 12, 2021). However, they are not truly comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORDS:
The four BRLMs associated with the issue have handled 33 public issues in the past three years out of which 11 issues closed below the issue price on the listing date.

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