The September quarter was a busy quarter for IPO market and despite tremendous listing gains of over 100% in some of the stocks including Happiest Minds, Route Mobile among others, correction in these counters is imminent. Now should one consider with their surplus consider betting on the upcoming Equitas Small Finance Bank IPO that opens tomorrow. Here is an overall assessment and experts recommendations on the issue:
1. IPO details:
Equitas Small Finance Bank IPO: The Rs. 517.60 crore IPO will comprise a fresh equity issuance of Rs. 280 crore and offer for sale of Rs. 237.60 crore. IPO price is between Rs. 32-33 per share. Minimum bid size is for 450 shares.
The earlier size of the issue was pegged at Rs. 1000 crore but given the market conditions as well as comfortable CAR of the bank, the issue size was curtailed significantly.
After the public issue, the stake of Equitas Holdings Limited in Equitas Small Finance Bank will be reduced to about 82 percent.
As per the RBI rules, within 5 years of operations, promoters' stake in the small finance bank should be reduced to 40%. This small finance bank will complete its 5 years of operations in September 2021. The bank is also considering merger and acquisition for paring Equitas Holdings holding in the firm.
2. About the lender:
Catering to the underserved and unserved segments, this Chennai based small finance bank is the second largest in respect of AUM and total deposits and the top most on the basis of number of branches. The company started operations as an NBFC in the year 2007 and extends microfinance loan, home loan, MSME and vehicle finance. Also, the lender besides the regular savings, current, deposit and salary account also offers third-party insurance, mutual funds as well as issues FASTags.
3. Issue objective:
Through the mopped capital from the issue, the bank aims to increase its Tier I capital for meeting its future capital requirement. Bank is adequately capitalized and as per the bank's MD and CEO the resources from the issue will be used as growth capital.
As per brokerage firm Emkay Global the issue of Equitas Small Finance Bank is reasonably valued at 1.3 times trailing 12-month price to book value in comparison to 1.8 times valuation provided to Ujjivan SFB
5. Key Risk:
- Investors even perceive the risk that given the RBI norms promoters will need to par stake in the stock which will weigh on the stock price.
- Another risk is that the stock would likely list on November 2 just ahead of the US November 3 election where Indian markets will be too choppy.
- Also, there has been no decision on interest on interest waiver case, though the Supreme Court expects implementation of Central government allowed waiver to be implemented before November 2.
- Ujjivan Small Finance bank listed competitor has been trading below its issue price
6. Analyst recommendations:
Emkay Global Financial Services has a ‘buy' recommendation on Equitas (Holding firm) for the reasons cited below:
-Superior loan book diversification
-Strong capital ratio
-Healthy deposit accretion
It's goal value of Rs 64, for Equitas Holdco implies a per share worth of Rs 40 for Equitas SFB implying an honest upside to the problem value. "Thus, we recommend ‘subscribe' to SFB IPO," said Emkay Global.
The IPO pricing (Rs32-33) has been cheap valuing the financial institution at 1.3x P/ABV TTM (post-IPO money), in comparison with shut peer Ujjivan SFB buying and selling at 1.8x P/ABV TTM, Emkay added. "Equitas SFB is well capitalized with CAR at 21.6% (vs.15% required), including CET 1 at 20.6%," it mentioned.
Quatum Securities also has given a ‘Subscribe' rating to the IPO of Equitas Small Finance Bank with a long term perspective considering improved performance from FY22 onwards given the current challenges such SME or MFI companies face amid the ongoing pandemic as well as PIL filed in the SC concerning extension of moratorium.