Equitas Small Finance Bank is a 510 crore IPO which consists of a fresh issue of Rs 280 crore and an offer for sale of 7.2 crore Equity Shares by Equitas Holdings. The issue opens to public on Tuesday 20th Oct and closes on Thursday 22nd October. It has a price band set at Rs 32 to 33 per share with a lot size of 450 shares. Proceeds of the fresh issue will be utilized towards augmenting the Bank's Tier I capital base, to meet the future capital requirement.
Equitas Small Finance Bank Limited (ESFB) is the largest SFB in India in terms of number of banking outlets, and the 2nd largest SFB in India in terms of Assets under Management (AUM) and total deposits in Fiscal 2019. (Source: CRISIL Report). ESFB has been able to successfully diversify their loan portfolio and significantly reduce their dependence on the microfinance business as compared to other microfinance companies that have converted to SFBs. ESFB offers a range of banking products and services to customers with a focus on serving the financially unserved and underserved customer segments in India. ESFB ‘s strength lies in promoting financial inclusion within these segments, with their group beginning operations in 2007 as an NBFC providing microfinance loans through EMFL. ESFB has been providing housing finance since 2011 through EHFL. They have also been providing vehicle finance and MSE finance through the Erstwhile NBFC that received its asset finance license in 2012, primarily to economically disadvantaged households. While their business model has transitioned over the years, the provision of sustainable credit to unserved and underserved segments has remained their core focus.
As of March 31, 2019, ESFB had the largest network of banking outlets among all SFBs in India (Source: CRISIL Report). As of June 30, 2020, their distribution channels comprised 856 Banking Outlets and 322 ATMs across 17 states and union territories in India. They also distribute products through digital channels, and leverage technology to identify opportunities to better serve their target customer segment. To this end, they have introduced facial recognition features for transaction authentication in their mobile banking application.
Covid-19 Impact: The Bank has experienced and may continue to experience a significant decline in collections as a significant proportion of its collections is cash-based and involve physical presence of their employees. There has been and there may continue to be a decline in disbursements due to reduced economic activity. As a result, related revenue from processing fees and documentation charges, have and may continue to decline. There may be a significant increase in the NPA levels due to possible deterioration in the credit quality of its customers. Reduction in policy rates may be passed on to customers; however, there may not be a corresponding reduction in borrowing costs in-line with the reduction in policy rates.
Financial Performance: The bank’s Deposits and advances have grown at a CAGR of 39% and 34% respectively over the past 2 years. Its Net profit has grown at 180% over the same period. As of March 31, 2019 the CASA ratio was the 2nd highest among SFBs in India, and the retail deposits to total deposits ratio was the 3rd highest among SFBs in India. As of June 30, 2020, the CASA ratio and retail deposits to total deposits ratio was 19.97% and 37.13%, respectively.
However due to its limited operating history, we cannot say whether this growth will continue, especially in times of the covid-19 pandemic where there is high uncertainty on collections, disbursements and moratorium . This sector is highly impacted from the pandemic and one will need to keep a check on the company’s Non performing Assets going forward. Currently the bank’s NPAs are already relatively higher than its peers. Also the NPA’s have not seen any improvement over the past 3 years .The asset quality may worsen due to the covid-19 disruptions making its very risky.
Key risks: As of March 31, 2020 and June 30, 2020, advances towards customers in Tamil Nadu represented 54.26% and 54.31%, respectively, of Gross Advances as of such dates This leads to high concentration risk as any adverse changes in the conditions affecting the region can adversely impact their business.
Also substantial portion of the loans offered are for first-time borrowers with no credit history thus increasing the risk further
According to the RBI guidelines, Promoters of small finance bank have to reduce its shareholding in the bank to 40% of paid up share capital within five years from the date of commencement of business operations as a SFB. Post the IPO, holding company Equitas’ stake will fall to 82 per cent, which will have to be reduced further to 40 per cent by September 2021..This would remain an overhang for the company.
Finally, the company has been trading at a very thin grey market premium due to several reasons. First, there are concerns over banks that deal with small borrowers. Secondly, its peer Ujjivan SFB, which got listed last year at a huge premium, is now trading below its issue price and Thirdly, the IPO might list around 2nd November , a day before the US elections, when the market may see a lot of volatility.
Therefore keeping these risks in Mind we recommend market participants to AVOID this IPO.
You can also watch an exclusive analysis by our research analyst Mr. Rishabh Shah to know some important business insight and what he recommends about this issue. Click here to watch now.