Will Fedbank Financial make a healthy market debut in financial services space?

Fedbank Financial Services to debut on the bourses on November 30

Non-banking finance company Fedbank Financial Services is going to list on the BSE and NSE on November 30, i.e. in the T+3 timeline. Despite strong growth potential in the NBFC industry going ahead, experts do not seem to be enthusiastic about its listing given the tepid IPO subscription numbers and most of positives priced in at upper price band, which means leaving no uptick on the table for participants.

Even the grey market investors seem to be less interested in the Fedbank IPO as shares are not getting any premium, but other four IPOs, launched last week, attracted solid interest from investors, quoting at 25-75 percent premium over their issue price, analysts on anonymity said.

The initial public offering of Mumbai-based NBFC was subscribed 2.2 times during November 22-24, with qualified institutional investors buying 3.51 times the allotted quota. Non-institutional investors picked shares 1.45 times the portion set aside for them, and the part reserved for retail investors was booked 1.82 times.

The subsidiary of private sector lender Federal Bank has raised Rs 1,092.26 crore via public issue which comprised a fresh issue of Rs 600.77 crore worth shares and an offer-for-sale (OFS) of shares worth Rs 492.26 crore. Federal Bank and private equity fund True North Fund VI LLP were the selling shareholders in the OFS.

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The price band for the offer was Rs 133-140 per share.

"With the Fedbank Financial IPO receiving a relatively muted response compared to other IPOs floating in the same week, we expect the IPO to open marginally up to the issue price of Rs 140 per share," Shreyansh Shah, research analyst at StoxBox said.

With NBFCs showing remarkable resilience and gaining importance in the financial sector ecosystem by growing from less than Rs 2 trillion AUM (assets under management) at the turn of the century to Rs 34 trillion at the end of FY23, there is a lot of interest amongst investors in the listed NBFC space, he believes.

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Though Fedbank Financial Services has logged the third-fastest AUM growth amongst its peer set in India and has an edge over its peers due to access to capital from its promoter Federal Bank, most of the positives are seemingly priced in at a P/BV of 3.3x on the upper price band based on FY23 book value, she feels.

Canara Bank Securities also feels the issue appears fully priced with peers, though the MSME industry has huge untapped potential along with increasing competition.

Its cost of borrowing is the lowest among the peers being Federal Bank subsidiary. The NBFC has witnessed robust loan book growth of 33 percent CAGR for FY21-23. The net interest margin has improved from 8 percent in FY21 to 8.99 percent in FY23 despite of increasing interest rate cycle.

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With present in 17 states and union territories across India, and with strong presence in Southern and Western regions of India, Fedbank has shown strong performance with profit after tax growing at 71 percent CAGR for FY21-23.

However, the asset quality had deteriorated with the gross non-performing assets (NPA) increasing from 1.01 percent in FY21 to 2.03 percent in FY23 due to impact of COVID and further to 2.26 percent in June FY24 quarter. Even net NPA jumped to 1.76 percent in Q1FY24, up from 1.59 percent in FY23 against 0.71 percent in FY21.

As of June 2023, its 86.24 percent of its total loan assets are secured against tangible assets, namely gold or customer’s property, while unsecured loans constituted 13.5 percent of total loan assets.

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Shivani Nyati, Head of Wealth at Swastika Investmart also said despite the company's strong track record of growth and profitability, along with its diversified customer portfolio, strong distribution network, and focus on providing affordable financial solutions to underserved and unbanked segments, the lack of enthusiasm among investors could lead to a flat or even negative listing.

A flat or negative listing is a possibility, and investors should be prepared for the potential for short-term losses, she said.

The retail-focussed NBFC intends to utilise fresh issue proceeds for augmenting its Tier – I capital base to meet future capital requirements, arising out of the growth of business and assets.

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