Bandhan Bank IPO – Should you Invest in this IPO?
Bandhan Bank IPO would open for subscription on 15th March, 2018. Bandhan Bank is one of the leading commercial bank focused on serving under banked and underpenetrated markets in India. Its revenues grew from Rs 7.8 Crores in FY2015 to Rs 2,618 Crores in FY17. It generated margins of 25% in FY17. Due to PNB Scam of Rs 11,500 Crores, investors are in dilemma whether to invest in banking stocks or not. In this situation, upcoming IPO of Bandhan Bank is creating mixed reaction from investors. What are the positive factors in Bandhan Bank Limited IPO? What are some of the hidden factors in Bandhan Bank IPO? Should you invest in Bandhan Bank IPO due to recent turbulence in Banking Sector?
About Bandhan Bank Ltd
They are a commercial bank focused on serving under banked and underpenetrated markets in India. They have a banking license that permits them to provide banking services pan-India across customer segments. They currently offer a variety of asset and liability products and services designed for micro banking and general banking, as well as other banking products and services to generate non-interest income. They were incorporated on 2014 and began operations on August 2015 when Bandhan Financial Services Limited (“BFSL”), their ultimate parent company, transferred its entire microfinance business to them and they simultaneously commenced general banking activities. Bandhan Konnagar was formed in 2001 as a non-governmental organization providing microfinance services to socially and economically disadvantaged women in rural West Bengal. BFSL started its microfinance business in 2006 and the NGO transferred its microfinance business to BFSL in 2009 and thereby the entire microfinance business was undertaken by BFSL. By the time BFSL transferred its microfinance business to them, it was India’s largest microfinance company by number of customers and size of loan portfolio. They believe that the “Bandhan” brand is instrumental to their success.
Bandhan Bank IPO Issue details
IPO opening date: 15-March-2018
IPO closure date:19-March-2018
Face Value: Rs 10 per share
Issue price band: Rs 370 to Rs 375 per share.
Issue size: Approx. Rs 4,500 Crores on higher price band
IPO Lot size: 40 shares and 40 shares there-off
Minimum investment: Rs 14,800
Leading Managers: Kotak Capital, Axis capital, Goldman Sachs, JM Financials, JP Morgan India
Listing: BSE / NSE
Objects of the Bandhan Bank Limited IPO issue
Below are the objects of this IPO.
1) Offer for Sale: The Promoter Selling Shareholders propose to sell Equity Shares held by them. Company will not receive any proceeds from the Offer for Sale.
2) Fresh Issue: As per RBI New Banking Licensing guidelines, equity shares of the bank should be listed within 2 years after they got banking license. In Aug-2018 they would be completing 2 years, hence they need to list the company shares before that. Bank also wants to meet banking future capital requirements with the fresh issue. Company also expects benefits from listing gains.
The Promoters of the Company are:
1) Bandhan Financial Services Limited (BFSL) – A non-banking financial institution for purposes of carrying out non-banking financial activities without accepting public deposits.
2) BFSL – It was accorded in-principle approval by the RBI on April 9, 2014 for setting up a bank in the private sector. The promoter of BFHL is BFSL.
3) FIT – It is an irrevocable charitable trust with objectives including inter alia eliminating functional illiteracy in India by making education economically relevant.
4) NEFIT is an irrevocable charitable trust with objectives including inter alia eliminating illiteracy in India by making education available to the underprivileged.
Company Financials (reinstated)
1) The company generated revenue of Rs 7.9 Crores for the year ended Mar-15 and Rs 4,320 Crores for the year ended Mar-17. Revenues for 6 months ended Sep-2017 was Rs 2,618 Crores.
2) The company posted a profit of Rs 0.57 Crores for the year ended Mar-15 and profit of Rs 1,111 Crores for the year ended Mar-17. Profits for 6 months ended Sep-17 was Rs 657.6 Crores.
3) Its FY17 EPS is Rs 10.15 and 3 years average EPS is Rs 6.21.
What are the key strengths of Bandhan Bank Limited?
Here are the key strengths of the company.
1) Operating Model Focused on Serving Under banked and Underpenetrated Markets.
2) Consistent Track Record of Growing a Quality Asset and Liability Franchise.
3) Extensive, Low Cost Distribution Network.
4) Customer-Centric Approach.
5) Consistent Financial Performance and Robust Capital Base.
6) Experienced and professional team, backed by strong independent board.
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What are the Strategies of Bandhan Bank Ltd?
Here are the key strategies of the company.
1) Maintain focus on micro lending while expanding further into other retail and SME lending.
2) Continue to strengthen their liability franchise.
3) Boost share of non-interest income.
4) Enhance their digital platform to improve customer acquisition and retention and reduce costs.
5) Enhance retail banking systems and procedures to improve efficiency
Reasons to invest in Bandhan Bank IPO
1) Its revenues grew from Rs 8 Crores in FY2015 to Rs 4,320 Crores in FY2017 which indicates strong revenue growth in the last 3 years.
2) It margins increased from 15.9% in FY16 to 25.7% in FY17. It still maintains such high margins for 6 months ended Sep-2017. Such consistent margins provide good visibility of company profits in future and they can reward shareholders and investors.
Risk Factors / Reasons not to invest in a Bandhan Bank IPO
1) Banking Stocks have become high risk after PNB fraud of Rs 11,500 Crores.
2) RBI has asked banks in India to revisit their high value loans of over Rs 50 Crores within 15 days (mid of March, 2018). If any of Indian banks are coming up with a list of higher bad loans, this can impact the banking sector for some time.
3) Their limited operating history and their fast growing and rapidly evolving business make it difficult to evaluate.
4) Their business and future operating results on the basis of their past performance, and their future results may not meet or exceed their past performance.
5) They cannot effectively compare their financial statements for Fiscal Years 2015, 2016 and 2017 due to irregular terms of duration.
6) If they are unable to manage the growth associated with the expansion of their branches, ATMs and DSCs effectively, their financial, accounting, administrative and technology infrastructure, as well as their business and reputation could be adversely affected.
7) A substantial portion of their operations are located in East and Northeast India, making us vulnerable to risks associated with having geographically concentrated operations.
8) Their business comprises both traditional general banking activities and modern micro banking activities that exposes their business overall to the risks faced by each sector, which may negatively impact their performance.
9) They derive a substantial portion of their interest income from loans that are due within one year, and a significant reduction in these short-term loans may result in a corresponding decrease in their interest income.
10) Microcredit lending has its own unique risks and, as a result, they may experience increased levels of nonperforming loans and related provisions and write-offs that negatively impact their results of operations.
11) They rely primarily on deposits as a low-cost means of funding their loan portfolio and there is no guarantee that they will be able to source sufficient deposits or alternative funding to support their business.
12) An increase in their portfolio of non-performing assets may materially and adversely affect their business and results of operations their business is vulnerable to interest rate and investment-related risks. Volatility in interest rates, value of investments and other market conditions could adversely affect their net interest margin, the value of their fixed income portfolio, their income from treasury operations, the quality of their loan portfolio and their financial performance.
13) They face the threat of fraud and cyber-attacks targeted at disrupting their services, such as hacking, phishing and Trojans, and/or theft of sensitive internal data or customer information. This may cause damage to their reputation and adversely impact their business and financial results. Their business and financial results could be impacted materially by adverse results of legal proceedings.
14) RBI guidelines relating to prompt corrective action could materially and adversely affect their business, future financial performance and results of operations.
15) Other risk factors (Internal and external) can be viewed in the red hearing prospectus (RHP).
Recommendation / Investment strategy – Bandhan Bank IPO
On the upper price band of Rs 375 and on restated FY17 EPS of Rs 10.15, P/E ratio works out to 37x. Even based on last 3 years restated consolidated EPS of Rs 6.21, P/E ratio works out to 60x. Means, company is asking higher price band of Rs 375 in the P/E ratio of 37x to 60x. There are listed peers who are trading at P/E of 62x (Highest) and 3.87x (Lowest) and Industry average is 33.7x. The P/E of listed peers are Gruh Finance (62x), AU Small Finance Bank (59x) on higher side and IDFC Bank (18x), Yes Bank (3.87x) are on lower side, hence Bandhan Bank IPO Issue price on upper band of Rs 375 is fully priced.
Company posted strong revenue growth in the last 3.5 years. It is generating high margins. Its issue price is also reasonably priced compared to the listed peers. However, with PNB fraud, banking sector is in turbulence now. Banks are expected to make higher provisions which could impact their margins for next couple of quarters. Banking stocks are taking correction due to this. By mid of March, banks would come back to RBI about high value loans and their risk factors. Till such time, there would be uncertainty in banking sector. High risk investors with 2-3 years’ time frame can invest in this IPO. Alternatively let’s wait for some more correction and if Bandhan bank shares are available at discounted price post listing, investors can invest in this IPO. One may or may not get listing gains considering the banking sector uncertainty.
Disclaimer: I do not have an interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.
Readers, what is your view on this IPO? Do you feel one would get listing gains?
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Bandhan Bank IPO – Should you Invest
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