Utkarsh SFB IPO review (May apply)

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Review By Dilip Davda on July 8, 2023

•    USFB is one of the leading Small Finance banks having a Pan-India presence.
•    It marked growth in its top lines for the last three fiscals. 
•    It suffered a minor setback for FY22 following the Pandemic impact.
•    Based on FY23 earnings, the issue is lucratively priced. 
•    Well-informed investors may consider parking funds for medium to long-term rewards. 

PREFACE:
USFB has been under SEBI lenses on account of inadvertent delays in making certain disclosures and regulatory filings for their NCD listing with BSE, alleged non-compliance with provisions of the Companies Act 2013 and any penal action in this regard may impact its credentials. It is also having a concentration risk as its significant portion of advances are towards customers located in the states of Bihar, and Uttar Pradesh.

ABOUT COMPANY:
Utkarsh Small Finance Bank Ltd. (USFB) is a small finance bank with operations across 26 states and Union Territories in India as of March 31, 2023. It is offering asset products such as Microbanking loans, retail loans, wholesale lending, housing loans, commercial vehicle/construction equipment loans, and gold loans. It is also offering savings accounts, current accounts, term/recurring deposit accounts, non-credit offerings comprising ATM-cum-debit cards, bill payment systems, distribute third-party point-of-sales terminals, mutual funds and insurance products. 

As of March 31, 2023, it had 830 banking outlets, 15424 employees and 3.59 million customers. As of the same date, it had 13 Business Correspondents (BC) and 321 Direct Selling Agents (DSA). 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming with its maiden book-building route IPO for equity shares worth Rs. 500 cr. (approx. 217391304/200000000 equity shares at the lower/upper cap). It has announced a price band of Rs. 23 - Rs.25 per share. The issue opens for subscription on July 12, 2023, and will close on July 14, 2023. The minimum application to be made is for 600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 18.25% of the post-IPO paid-up capital of the company. 

From the net proceeds of the IPO funds, it will utilize the full amount for augmenting its Tier-I capital base to meet its future capital requirements. UDFB has reserved 2000000 equity shares for its eligible employees and from the rest, it has allocated not less than 75% for QIBs, not more than 15% for HNIs and not more than 10% for Retail investors.

ICICI Securities 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/converted initial equity shares at par value, the company issued further equity shares in the price range of Rs. 14.01 to Rs. 31.80 between September 2019 and March 2023. The average cost of acquisition of shares by the promoters is Rs. 10.50 per share. 

Post-IPO, USFB's current paid-up equity capital of Rs. 895.91 cr. will stand enhanced to Rs. 1095.91 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 2739.76 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, USFB has posted a total income/net profit of Rs. 1705.84 cr. / Rs. 111.82 cr. (FY21), Rs. 2033.65 cr. / Rs. 61.46 cr. (FY22), and Rs. 2804.29 cr. / Rs. 404.50 cr. (FY23). Though it posted steady growth in its top lines, it suffered a minor setback for FY22 in bottom lines following general market trends post the Pandemic. For all these years, its other income marked a rise from Rs. 124.85 for FY21 to Rs. 184.83cr. for FY22, and Rs. 299.31 cr. for FY23. 

Its Net NPAs for these three years were 1.33%, 2.31%, and 0.39% respectively, while its net interest margins were 8.20%, 8.75% and 9.57% respectively.

For the last three fiscals, it has reported an average EPS of Rs. 2.73 and an average RoNW of 12.78%.  The issue is priced at a P/BV of 1.12 based on its NAV of Rs. 22.23 as of March 31, 2023, and at a P/BV of 1.10 based on its post-IPO NAV of Rs. 22.82 (at the upper cap).

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 6.78. Thus the IPO is lucratively priced. 

DIVIDEND POLICY:
The company has not paid any dividend for the reported periods of the offer document. It has already adopted a dividend policy in February 2016 and amended it in July 2022. The policy will be based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, USFB has shown Equitas SFB, Ujjivan SFB, Credit Access Grameen, Spandana Sphoorty, Bandhan Bank, AU SFB, Suryoday SFB and Fusion Micro Finance as their listed peers. They are currently trading at a P/E of 18.19, 7.40, 25.50, 410.73, 16.91, 35.54, 23.48, and 15.19 (as of July 07, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The two BRLMs associated with the issue have handled 68 public issues in the past three fiscals, out of which 24 issues closed below the IPO price on the listing date. 

Utkarsh Small Finance Bank IPO FAQs