Equitas SFB IPO Financial Analysis (Subscribe for Long Term)

Equitas SFB Strengths

One of the largest Small Finance Bank (SFB) with strong asset credit portfolio.
Well diversified product offerings.
Satisfactory financial performance.

Equitas SFB Challenges

Sourcing deposits from the customers to support the loan portfolio.
To maintain the current NPA levels.

Equitas Small Finance Bank IPO Details

The subsidiary of Equitas Holding Ltd, Equitas small finance bank was incorporated in 1993 at Madras, Tamil Nadu. Equitas is coming up with an IPO amounting to Rs 532 crore. Previously the IPO size was around Rs 1000 crore but it was revised as the SFB highlighted that it is not in need of larger funds currently. The IPO comprises of:

Fresh issue of 8 crore equity shares amounting to Rs 280 crore
Offer for sale of upto 7.2 crore equity shares amounting to around Rs 252crore
Out of the total issue, reservation for eligible EHL shareholders amounting to Rs 51 crore.
Out of the total Issue, reservation for eligible employees amounting to Rs 1 crore.

BRLM of the issue

JM Financial
Edelweiss Financial Services
IIFL Securities

Registrar to the issue

KFin Technologies Pvt Ltd.

IPO Details

Price Band: Rs 32-Rs 33 per share
Issue Open date: 20^th Oct 2020
Issue Close date: 22^nd Oct 2020

Objects of the Fresh Issue offer

To augment Bank Tier I capital base to meet Bank’s future capital requirements for expansion and comply with regulatory requirements.

About Equitas Small Finance Bank

EFB is the largest SFB in India in terms of the number of banking outlets, and the second-largest SFB in India in terms of assets under management and total deposits in Fiscal 2019. As per the Crisil Report, in FY19 ESFB had a market share of 16% in terms of assets under management in India. ESFB commenced operations as SFB in the year 2016; it operated as an NBFC prior to commencement of operations as an SFB. ESFB offers a range of banking services to customers with a focus on serving the financially unserved and underserved customer segments in India. As of June 30, 2020, ESFB distribution channels comprised 856 Banking Outlets and 322 ATMs across 17 states and union territories in India.

Gross Advances (including IBPC issued) have been Rs15,366.94 crore as of March 31, 2020. Secured advances were 75.75% of gross advances as of June 30, 2020. Deposits have grown at a CAGR of 38.75% from Rs 5,603.97 crore as of March 31, 2018, to 10,788.41 crore as of March 31, 2020. As of June 30, 2020, the CASA ratio and retail deposits to total deposits ratio was 19.97% and 37.13%, respectively. As on 30^th June 2020, ESFB had 3.58 million accounts.

ESFB credit portfolio can be divided into:

Small business loans (including housing finance)- Small Business Loans comprises of loans to group loan customers for working capital or capital investment requirements for existing businesses. These loans are secured by way of property with ticket sizes ranging between Rs50,000 and Rs 2 million.
Microfinance- Under our microfinance business, ESFB provide group loans with ticket sizes ranging between Rs 5,000 and Rs 35,000 to the women
Vehicle finance loans- vehicle finance customers are typically first-time formal financial channel borrowers purchasing used commercial vehicles. ESFB has also recently commenced advancing loans for the purchase of new commercial vehicles.
MSE finance- MSE finance is extended to enterprises engaged in business activities that maintain formal records for credit evaluation, primarily in urban and semi-urban areas.
Corporate Loans- ESFB extend term loans to NBFCs that further lend to retail customers in the form of microfinance, vehicle finance, housing finance and similar sectors, and to certain corporates. ESFB typically lend to these entities that are predominately rated BBB from a recognized credit rating agency. Average ticket size of loans is in the range of Rs150 million to Rs500 million.
Other loans- Products include loans against gold, overdraft facilities against fixed deposits, and unsecured business loans.

Equitas Small Finance Bank IPO Financial Analysis

Equitas Small Finance Bank IPO Financial Review/Financial Performance

ESFB has a good track record of financial performance. Interest earned for FY20 has increased by 22% to Rs 2927.80 crore from Rs 2394.83 crore in FY19. PAT has also increased to Rs 243.64 crore in FY 20 from Rs 210.57 crore in FY19. For Q1FY21, PAT is 57.67 crore against interest earned of Rs 750.97 crore. Net margins have ranged between 7%-8% for the last three fiscal years. Return on Net worth is 8.90% for FY20.

Gross and the net NPAs have remained low between 1%-3%. However, they may increase in the coming quarters as the moratorium period is over in August and bad debts may increase due to covid impact though it is considered that the SFB has made COVID accumulated provisions of Rs 144.63 crore. Also, being into the small business loans and MSE category, the customers could demand for more interest waivers.

Table 1 - Financials and Ratios (Amount in Rs Crore)
Title	Q1FY21	FY2020	FY2019	FY2018
Interest Earned	750.97	2927.80	2394.83	1772.90
PAT	57.67	243.64	210.57	31.83
Total Accets	20892.14	19314.55	15762.69	13301.15
Cash flow from operating activities	-896.38	439.61	1803.37	210.51
Net margin	7.68%	8.32%	8.79%	1.80%
Gross NPA	2.68%	2.72%	2.53%	2.68%
Net NPA	1.48%	1.66%	1.44%	1.46%

Valuation and peer comparison

At NAV of Rs 25.92 the issue is price at P/BV of 1.27 and has a P/E of 13.81 at upper price band as against industry average P/E of 16 which makes the issue fully priced.

Table 2 - Peer comparison is produced below
Peers	EPS	P/E	RoNW	NAV
Equitas SFB	2.39	NA	8.92%	25.92
AU Small Finance	22.78	32.24	15.45%	143.6
Ujjivan Small Finance	2.19	15.02	11.71%	17.29
DCB Bank Limited	10.90	7.48	10.84%	100.44
City Union Bank	6.48	22.30	9.36%	69.03
Sundaram Finance	71.85	18.72	12.70%	604.24
Credit Access Gramin	23.00	32.26	12.43%	186.43

Future prospects and Conclusion

ESFB is seeking the reverse merger of the Bank with its Holding company, Equitas Holding Co after the expiry of the lock-in period in the year September ’21. ESFB is among the largest SFBs with a well-diversified asset portfolio and reasonable loan book. Sourcing deposits from the customers in the future at competitive prices to build up the loan portfolio and to contain the NPAs levels remain the key challenge of ESFB. Considering the above factors, good track of financials and the Investors might subscribe for the long term as the NBFC sector may remain volatile in the medium term.

Reviewer recommends Subscribe for Long Term to the issue.

Review By CA Priyanka Choudhary on

Review Author

About CA Priyanka Choudhary

CA Priyanka Choudhary, a freelance chartered accountant

Priyanka Choudhary Jain is a Chartered Accountant and an experienced credit analyst. She has worked with CRISIL as Senior Credit Analyst on ratings assignments including business and financial analysis in Corporates as well as the Public Finance Sector.

Email: [email protected]

DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at own risk. Investors should bear in mind that any investment in stock markets are subject to unpredictable market related risks. Above information is based on RHP and other documents available as of date coupled with market perception. Author has no plans to invest in this offer.