Capital Small Finance Bank IPO – Is this Good or Bad for investment?

Capital Small Finance Bank is coming up with IPO which is scheduled to open on February 7, 2024. As the name indicates, it is the small finance bank (SFB) in India. It has generated strong revenue and margin growth in the last few years. This article outlines Capital Small Finance Bank IPO Details, Dates, Size, Objectives, reasons to invest, risk factors and provide complete review of the IPO which would help investors to take decision whether to invest or avoid.

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Capital Small Finance Bank IPO Details and Dates

IPO Opening Date 07-Feb-24
IPO Closing Date 09-Feb-24
IPO Listing Date 14-Feb-24
Issue Type Book Built Issue IPO
Face Value Rs 10 per equity share
IPO Price band Rs 445 to Rs 468 per equity share
Lot Size 32 Shares
Listing at BSE and NSE
Total Issue Size Rs. 523.07 Crores
    Fresh issue     Rs. 450 Crores
    OFS     Rs. 73.07 Crores

About Capital Small Finance Bank Limited

Capital Small Finance Bank is among the 12 Small Finance Banks in India regulated by RBI.

Capital SFB commenced business as first small finance bank since 2016, authorized by the RBI. It offers a variety of banking products in states like Punjab, Haryana, Delhi, Rajasthan, Himachal Pradesh, and Chandigarh. The bank’s offerings include agricultural loans, MSME and trading loans, and mortgage loans. It has over two decades of experience in the banking industry and focuses on the middle-income segment, particularly in rural and semi-urban areas.

The bank’s core strategy involves providing access to affordable credit to customers who have limited access to formal banking channels. Since its conversion into a small finance bank, it has expanded its operations into new areas, resulting in an increased customer base and improved operational metrics.

With 173 branches and 175 ATMs, the bank predominantly serves rural and semi-urban areas, covering 24 districts and 75.75% of its total customers. It aims to continue expanding its business and focuses on secured lending, with an average gross NPA ratio of 2.52% and negligible write-offs.

The bank has consistently shown growth in profit after tax, RoA, and RoE, with a focus on retail deposits and CASA deposits. It generates fee income from various products and services and targets to be the primary banker for its customers through a mix of product offerings, customer service, physical branches, and digital channels.

A significant portion of the loan book is secured, with loans primarily secured by immovable properties. The bank has strategically focused on building a granular loan book, with a significant increase in loans with a ticket size of up to ₹2.5 million. Additionally, it boasts of having the lowest interest rates and cost of deposits compared to other similar small finance banks.

Capital Small Finance Bank IPO Price Valuation

  • The IPO price band is Rs 445 to 468 per share
  • If we consider last 3 years weighted EPS of Rs 21.68, the P/E ratio works out to be 22x
  • If we consider the last year FY23 EPS of Rs 27.21, the P/E ratio works out to be 17x
  • If we annualise 6 months ended Sep-23 EPS, the P/E ratio works out to be 15x
  • The listed peers like AU Small Finance bank trading at P/E 29x (Highest) and Ujjivan Small Finance Bank Limited is trading at P/E of 9.5x (Lowest) and industry average P/E is 19.3x. Hence, the IPO Price band at P/E of 15x to 22x is fully priced.

Capital Small Finance Bank IPO Objectives

The IPO size is Rs 523.07 crores which has both OFS and fresh issue.

  • OFS of Rs 73.07 Crores – Under offer for sale, the proceeds would go to selling share holders and company would not benefit.
  • Fresh issue of Rs 450 Crores – Fresh issue would be used for augmentation of Bank’s Tier –1 capital base to meet bank’s future capital requirement.

Capital Small Finance Bank Ltd Financials

Period Ended 31-Mar-21 31-Mar-22 31-Mar-23 30-Sep-23
Assets 6,371.24 7,153.92 7,990.77 8,390.69
Revenue 557.27 632.40 725.48 415.22
Profit After Tax 40.78 62.57 93.60 54.39
Net Worth 450.79 515.78 610.61 711.76
Reserves and Surplus 416.88 481.74 576.36 676.41
Total Borrowing 616.72 498.43 721.38 572.76

Why to invest in Capital Small Finance Bank IPO?

Here are the reasons to consider investing in this bank IPO:

  1. Retail-focused deposit franchise: The bank has developed a strong retail-centric deposit base, with a significant portion consisting of CASA (Current Account Savings Account) deposits. This stability in deposits provides a solid foundation for the bank’s operations and indicates customer trust.
  2. Secured and diversified loan portfolio: The bank has consciously built a secured and diverse loan book over the years, with a focus on income generation. The majority of loans are secured by immovable properties, minimizing risk exposure. The bank offers various loan products to cater to the needs of its customers.
  3. Streamlined credit assessment and risk management: The bank follows stringent credit assessment processes and risk management practices, leading to good asset quality and low delinquencies. Its focus on secured lending and conservative loan-to-value ratios contributes to maintaining high asset quality.
  4. Customer-centric approach: With over two decades of experience, the bank has a deep understanding of its market and customer base. It offers a wide range of products and services to meet the financial needs of its customers, particularly those in rural and semi-urban areas. The bank focuses on building long-term relationships with its customers.
  5. Consistent track record of growth: The bank has demonstrated consistent improvement in financial metrics, including total advances growth, deposit growth, and profitability. Its efficient operations and expanding footprint into new geographies indicate growth potential and operational efficiency.
  6. Financial stability and liquidity: The bank maintains healthy liquidity ratios and has a stable financial position, which is crucial for its long-term sustainability and growth. Its ability to meet regulatory requirements and maintain strong liquidity coverage ratios adds to its financial stability.

Risk factors in Capital Small Finance Bank IPO

Here are the risk factors associated with investing in the IPO of the mentioned bank:

  1. OFS : The IPO objectives contain both OFS and Fresh issue. OFS portion goes to selling share holders and company would not get benefitted.
  2. Non-Compliance with Regulatory Requirements: The bank has previously settled matters with SEBI due to non-compliance with applicable laws related to the allotment of equity shares. Failure to comply with regulatory requirements may lead to penalties, restrictions on banking activities, increased scrutiny, and potential termination of the bank’s license.
  3. Regulatory Oversight and Inspections: The bank is subject to inspections by the Reserve Bank of India (RBI) and has received directives to address various non-compliances, including NPA identification, credit monitoring mechanisms, and KYC procedures. Non-compliance with RBI directives could result in penalties and restrictions, adversely affecting the bank’s operations and financial performance.
  4. Contingent Liabilities: The bank has significant contingent liabilities, including guarantees given on behalf of customers, which could adversely impact its financial condition if these liabilities materialize or if customers default on their obligations.
  5. Competition in the Banking Sector: The Indian small finance banking industry is highly competitive, with the bank facing competition from other small finance banks, NBFCs, cooperative banks, public and private sector banks, and financial services companies. Failure to compete effectively may impact the bank’s business, financial condition, and results of operations.
  6. Revenue Dependency on Lending Business: The bank derives a significant portion of its revenue from its lending business. Any adverse developments in the lending business, such as increased defaults or economic downturns, could adversely affect the bank’s financial condition, cash flows, and results of operations.
  7. Ineligibility of Statutory Auditors: The bank’s current statutory auditors have been found ineligible by the RBI for undertaking audit activities for the financial year 2024. Failure to appoint another eligible firm within stipulated timeframes may delay the finalization of audited financial statements and could result in uncertainty regarding auditing procedures.

Investors should carefully consider all these risk factors indicated in Capital SFB IPO RHP and conduct thorough due diligence before investing in the bank’s IPO.

FAQs on Capital Small Finance Bank IPO

Is Capital Small Finance Bank Safe?

All small finance banks including Capital SFB are regulated by RBI. If you want to invest in fixed deposits, deposit insurance up to Rs 5 Lacs is applicable like any other bank to this small finance bank too.

Also Read: Jana Small Finance Bank IPO Review

What is the Capital Small Finance Bank IPO GMP today?

Grey market premium is the premium that is being traded over and above the share price in the offline market. While it may not be accurate and difficult to validate, some of the popular websites indicate GMP as below:

  • Chittorgarh indicate Capital SFB has dropped from Rs 50 to Rs 43 in the last couple of days
  • 5-Paisa also indicates that GMP of Capital SFB has dropped from Rs 50 to Rs 47 in the last 3 days.
  • IPOWatch closely tracks it and indicate that Grey market premium now for Capital small finance bank is at Rs 50.
  • IndiaToday tracks Capital Small Finance Bank GMP now as Rs 37.

Can I read Capital Small Finance Bank IPO Review in Hindi?

Yes. You can read it at Capital Small Finance Bank IPO Review in Hindi.

Capital Small Finance Bank IPO Review – Apply or not?

Now you might be wondering whether this IPO is good or bad for investment. Investors should go through all pros and cons before concluding on this.

  • The IPO offers investors an opportunity to tap into a bank with a well-established presence in the market, providing access to a potentially lucrative sector. Bank has developed strong retail centric deposit base and has secured and diversified loan portfolio. It generated strong revenue and margin growth in the past.
  • However, the IPO comes with risks, primarily stemming from the bank’s history of regulatory non-compliance and ongoing regulatory scrutiny. Persistent challenges from regulatory authorities could lead to penalties, operational restrictions, or even license termination, significantly impacting the bank’s operations and investor confidence. Moreover, the bank’s substantial contingent liabilities, particularly related to guarantees, pose financial risks that could effect its resources and profitability in the future.

High Risk investors who are comfortable with all risk factors indicated in the RHP can invest in such IPOs.

Suresh KP

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