Equitas Small Finance Bank IPO Review and Analysis – Should you invest?
Equitas Small Finance Bank IPO Review – Should you invest or Avoid?
Equitas Small Finance Bank IPO would open for subscription on October 20, 2020. This bank was the largest small finance bank in India in Fiscal 2019. Its IPO issue price is between Rs 32 to Rs 33 per share. Investors have given thumbs up to quality IPOs only in the recent times. If you observe, few of the IPOs have failed to attract investors recently. Should you invest in Equitas Small Finance Bank IPO? What are the risk factors of investing in this IPO?
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About Equitas Small Finance Bank Limited
They were the largest SFB in India in terms of number of banking outlets, and the second largest SFB in India in terms of assets under management and total deposits in Fiscal 2019. They have been able to successfully diversify their loan portfolio and significantly reduce is dependence on its microfinance business as compared to other microfinance companies that have converted to SFBs.
Equitas Small Finance Bank IPO Details
Here are the IPO issue details.
|Equitas Small Finance Bank Ltd IPO Details|
|IPO Date||Oct 20 to Oct 22, 2020|
|Face Value||Rs 10 per equity share|
|IPO Price band||Rs 32 to Rs 33 per share|
|Issue Size||Total of Rs 517.6 Crores
Fresh issue – Rs 280 Crores
OFS – Rs 237.6 Crores
|IPO Lot Size||450 shares|
|Lead Managers||JM Financials, Edelweiss Financials and IIFL Securities|
|Listing at||BSE and NSE|
Download Equitas Small Finance Bank IPO DRHP
Download Equitas Small Finance Bank IPO RHP
Objects of issue – Equitas Small Finance Bank IPO
In terms of the RBI in-principle approval, RBI final approval and SFB licensing guidelines, the bank is required to list its equity shares on the stock exchanges within three years from the date of commencement of business by the bank. Here are the objects of the IPO issue.
(i) Offer for sale – The promoter selling shareholder shall be entitled to the proceeds from the offer for sale. Bank will not receive any proceeds from the offer for sale.
(ii) Bank proposes to utilize the Net Proceeds from its offer towards augmenting Bank’s Tier I capital base to meet Bank’s future capital requirements.
Who are the company promoters?
Equitas Holdings Limited is the promoter of the company.
Here is the summary of the financial information of the company.
|Total Revenues (Rs in Millions)||Profits after tax
(Rs in Millions)
|3 Months ending Jun-20||7,509.6||576.7||7.7%|
Its EPS for FY2020 is Rs 2.39 and last 3 years average EPS is Rs 1.94.
Its deposits grown at 38.7% CAGR in the last two years. Interest earned grown at 31.42% CAGR during similar period.
Its deposits grown by 33.56% CAGR in the last two years. Interest expended grown by 30.92% CAGR during similar period.
What are the key strengths of Equitas Small Finance Bank Limited?
Every investor should understand the company’s key strengths so that one can compare with its competitors to know how unique is such company in their business. Their investment decision would change based on these facts. Here are the key strengths of the company.
1) Customer centric organization with a deep understanding of the unserved and underserved customer segments.
2) Among the largest SFBs in India with a well-diversified asset portfolio.
3) Strong retail liability portfolio with a strategic distribution network.
4) Customized credit assessment procedures for effective credit risk management.
5) Technology as an enabler to drive operating procedures.
6) Professional management, experienced leadership and trained employee base.
What are the various strategies of Equitas Small Finance Bank Ltd?
Company strategies would help investors to know what company is intending to do in the future and whether these strategies would help in revenue or margin growth. Such information would help investors to decide whether to invest for short term, medium term or for the long term. Here are the company strategies.
1) Leveraging on its existing network for deepening penetration and driving operational efficiency.
2) Strengthen liability franchise and focus on increasing its retail base to further improve cost of funds.
3) Leverage data for analytics to drive operational efficiency.
4) Continue to focus on digital products and technology to grow operations.
5) Continue to diversify product offerings and leverage cross-selling opportunities.
6) Increasing focus on non-interest income sources.
Reasons to invest in this IPO
Here are a few reasons to invest.
1) Equitas Small Finance Bank is among the largest SFBs in India with a well-diversified asset portfolio. It has a strong retail liability portfolio with a strategic distribution network.
2) Company has posted strong revenue growth in the last 3 years. Its revenues grew from Rs 1,772 Crores in FY2018 Vs Rs 2,927 Crores in FY2020.
3) It is generating consistent margins in the last 3 years.
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Risk Factors of investing in this IPO
These risk factors can impact company revenue and margins which would affect its share price. Investors should go through these points and understand them before investing.
1) Current Covid-19 crisis is unpredictable and could have significant impact on this banking business. Loan defaults / NPAs can increase.
2) These banks are subject to stringent RBI regulatory requirements and prudential norms and inability to comply with such laws, regulations and norms may have an adverse effect its business, results of operations, financial condition and cash flows.
3) Bank has not complied with paragraph 6 of the Small Finance Bank Licensing Guidelines. In the event of any continued non compliance, they may be subject to various sanctions and penalties by the RBI and its business, financial condition, results of operations and cash flows could be adversely impacted.
4) Bank business is vulnerable to interest rate risk, and any volatility in interest rates or inability to manage interest rate risk could adversely affect its net interest margins, income from treasury operations, business, financial condition, results of operations and cash flows.
5) This bank has limited operating history as Small Finance Bank and its future financial and operational performance cannot be evaluated on account of its evolving and growing scale of operations.
6) There is stiff competition in small business loans, microfinance and vehicle finance. Any adverse developments in such segments could adversely affect its business and results of operations.
7) Bank promoter is required to reduce its shareholding in the Bank to 40% of its paid-up equity share capital on or prior to September 4, 2021. Except for the Offer for Sale, as of the date of this Red Herring Prospectus, promoter has not approved any specific method to achieve such compliance. However, if and when any method is proposed to be undertaken, bank cannot assure that any required consent, approval, waiver or clarification will be received in a timely manner, or at all, to enable its promoter to reduce its shareholding as required.
8) Bank advances are majorly for customers located in Tamil Nadu and any adverse changes in the conditions affecting the region can adversely impact its business, financial condition, results of operations and cash flows.
9) Its micro finance loan portfolio and unsecured business loans portfolio are not supported by any collateral that could help ensure repayment of the loan, and in the event of non-payment by a borrower of one of these loans, they may be unable to collect the unpaid balance.
10) If the bank is not able to control the level of non-performing assets in its portfolio or if there is an increase in RBI mandated provisioning requirements, it could adversely affect its business, financial conditions, results of operations and cash flows.
11) For complete internal and external risk factors, you can refer the RHP of the company.
How to apply for Equitas Small Finance Bank IPO?
You can follow these steps to apply for this IPO.
1) Login to your demat account
2) Visit IPO section
3) Check for Equitas Small Finance Bank IPO link and click to bid
4) Select the IPO price and select bid qty and submit
Ensure you have sufficient amount in your bank account before you submit.
Equitas Small Finance Bank IPO Tentative Dates / Timetable
|Equitas SFB IPO Schedule|
|Finalization of Basis of Allotment||27-Oct-20|
|Unblocking of ABSA and Initiation of Refunds||28-Oct-20|
|Credit of shares to Demat Accounts||29-Oct-20|
|IPO Shares Listing Date||02-Nov-20|
Equitas Small Finance Bank IPO price valuations
1) On the upper price band of Rs 33 and EPS of Rs 2.39 for FY20, the P/E ratio works out to be 13.8x.
2) For last 3 years EPS of Rs 1.94, the PE ratio is 17x.
3) Means, the company is asking the issue price of Rs 33 of the upper price band in the P/E range of 13.8x to 17x.
4) There are listed peers like AU Small Finance Bank, whose shares are trading at P/E of 32.9x (Highest) and Shriram Transport Finance (doing similar business and not a bank) at P/E of 5.8x (Lowest) and the industry average is 16x. Hence the company issue share price on higher price band of Rs 33 at P/E of 13.8x to 17x is reasonably priced.
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Equitas Small Finance Bank IPO – Should you invest?
Equitas Small Finance Bank is one of the largest small finance banks in India with diversified asset portfolio. It is generating strong revenue and margin growth in the last 3 years. Its issue share price is also reasonably priced. Investors can invest in this IPO with a 3-5 years time frame. We need to wait to see investor sentiment during the subscription period for expecting any listing gains.
Equitas Small Finance Bank IPO Analysis on Youtube channel. You can view the video version here.
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I like very much for this article.
Thanks Suresh Ji,
Your article are really helpful having balanced analysis and non ambiguous / non biased.
Keep sharing and enlighten us with true knowledge.
Thank you Shah
Thanks for sharing.
I would avoid this IPO