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Equitas Small Finance Bank IPO opens: Should you subscribe?

Comparing with peers like AU Small Finance Bank and Ujjivan Small Finance Bank which are trading 5.1(x) and 1.8(x) QQFY21 P/BVPS respectively, LKP Securities believes that Equitas Small Finance Bank is lucrative.
Oct 20, 2020 / 10:17 AM IST

The Rs 518-crore initial public offering of Equitas Small Finance Bank has opened for subscription with a price band at Rs 32-33 per share on October 20.

The issue, which will close on October 22, consists a fresh issue of Rs 280 crore and an offer for sale of 7.2 crore equity shares by promoter Equitas Holdings.

Majority of brokerage houses advised subscribing the public issue with a long term perspective given bank's strong capital ratio, good management, strong advances growth along with maintaining asset quality, adequate liquidity position and vast opportunity for business as it serves unserved and underserved customers.

"Equitas Small Finance Bank had strong advances growth along with maintaining asset quality. Unserved and underserved customers as target offer a vast opportunity for business growth," said ICICI Direct which has a subscribe recommendation on the stock.

At Rs 33, the stock is available at around 1.2x Q1FY21 P/BV (post fresh issue) and at around 16.3x P/E at Q1FY21 PAT (annualised basis), the brokerage feels.

Hem Securities also said the bank being customer centric organization with a deep understanding of the unserved and underserved customer segments is among the largest SFBs in India with a well-diversified asset portfolio. Also, bank has strong retail liability portfolio with a strategic distribution network & customized credit assessment procedures for effective credit risk management.

However looking after current market volatility, the brokerage recommended subscribe for long term.

Equitas Small Finance Bank IPO: 10 key things to know about the issue

Equitas Small Finance Bank is a mass market focused small finance bank (SFB), providing banking products and services to unserved and underserved segment. It is the largest SFB in India in terms of number of banking outlets and second largest SFB in India in terms of AUM and total deposits as on FY19.

It is a wholly owned subsidiary of Equitas Holdings (EHL) launched in September 2016, as promoters had received RBI in-principle approval to establish a Small Finance Bank (SFB). It has a diversified business across small business loans, microfinance, vehicle finance & MSE Finance & NBFCs while having strong retail deposits (CASA + Term deposits). It also offers third party products like insurance, FASTag for toll plazas and asset management in mutual funds and PMS.

As of June 2020, the bank had 856 banking outlets and 322 ATMs spread across 17 states and union territories in India.

"Strong fundamental performance and adequate liquidity position provides an opportunity to grow business in future. The bank is being issued at valuation of around 1.23x P/BV at upper price band of Rs 33 as on Q1FY21. We have a long term positive view on the stock and recommend subscribe for the issue," KR Choksey said.

This would be third small finance bank to come out with maiden public offer, after AU Small Finance Bank and Ujjivan Small Finance Bank.

Comparing with peers like AU Small Finance Bank and Ujjivan Small Finance Bank which are trading 5.1(x) and 1.8(x) QQFY21 P/BVPS respectively, LKP Securities believes that Equitas Small Finance Bank is lucrative. "We recommend subscribe only for long term."

Equitas Small Finance Bank has a diversified portfolio with advances growing at 34 percent CAGR from FY18-20 to Rs 13,747 crore (Rs 14,389 crore as on June 2020). During the same period, deposits grew at 39 percent CAGR to Rs 10,788 crore (Rs 11,787 crore as on June 2020).

Retail deposits to total deposits in Q1FY21 were at 46.4 pecent. With a substantial network of banking outlets and focus on technology, Equitas Small Finance Bank is placed to keep growth trajectory in deposits abated, said ICICI Direct.

As per CRISIL, the small finance bank industry is expected to grow advances at 25 percent CAGR in FY19-22 to touch Rs 1.4 lakh crore.

Its asset quality has remained steady with gross non-performing assets (NPA) ratio at 2.68 percent and net NPA ratio at 1.48 percent as on June 2020. Operationally, conversion into Small Finance Bank SFB led to rise in cost to income ratio (67.2 percent in FY20), ICICI Direct said, adding the cost to income ratio remains high led by conversion into Small Finance Bank wherein focus on efficient utilization of resources would lead to improvement in earnings.

Provision coverage ratio for Q1FY21 was at 48.8 percent. Moratorium book reduced from 51.17 percent in June 2020 to 36.24 percent by August 2020. Earnings came in at Rs 243.6 crore in FY20 and Rs 57.7 crore in Q1FY21.

Emkay Global has a coverage on Equitas Holdings with a buy rating and a target of Rs 64 for its superior asset diversification, reasonable liability profile, better management pedigree, healthy return ratios and reasonable valuations.

"The current target for Equitas Holdings implies a per share value of Rs 40 for Equitas Small Finance Bank (assuming a 40 percent holding company discount), implying a decent upside to the issue price. Thus, we recommend subscribe to SFB IPO," said the brokerage.

Equitas SFB is well capitalized with capital adequacy ratio at around 21.6 percent (against 15 percent required), including CET 1 at 20.6 percent.

After the fresh capital infusion, it will improve to around 24 percent (including CET 1 at 23 percent), Emkay said.

The objects of the public issue are to augment bank's Tier – 1 capital base to meet future capital requirements such as organic growth and expansion and to comply with the regulatory requirements for enhanced capital base, as may be prescribed in the future.

But the bank will not receive any proceeds from the offer for sale as OFS money will go to Equitas Holdings.

Post the IPO, promoter (Equitas Holdings) stake will potentially fall to around 82 percent, which (as per the mandate from RBI) will have to be pruned further to 40 percent by September 2021, 30 percent by September 2026 and to 26 percent by September 2028, calling for continued dilution.

However, management has indicated that it would seek permission to do away with the holdco structure on completion of 5 years as a bank or may look at offer for sale/merger & acquisition as the options to reduce promoter stake to 40 percent and below, and also apply for a universal banking license at an appropriate time, Emkay said.

However, brokerages pointed some key risks - higher geographic presence in Tamil Nadu, promoter stake dilution, continuing impact of pandemic may affect business negatively, deposit base dependent on limited number of customers and higher-than-expected NPA formation - which investors need to consider before subscribing the issue.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Oct 20, 2020 10:17 am
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