About the company:
Suryoday Small Finance Bank is a Rs 582 crore IPO consisting of Rs 248 crore fresh issue and balance is offer for sale. The objectives of the offer is augmenting the Bank's Tier-1 capital base to meet the Bank's future capital requirements. The issue opens to public on Wednesday 17th March and closes on Friday 19th March. It has a price band set at Rs 303 to 305 per share with a lot size of 49 shares.
Suryoday Small Finance Bank Limited (“SSFB”) was incorporated on November 10, 2008. SSFB is among the leading SFBs in India in terms of net interest margins, return on assets, yields and deposit growth and had the lowest cost-to-income ratio among SFBs in India in Fiscal 2020.
SSFB serving customers in the unbanked and underbanked segments in India and promoting financial inclusion. Their average “priority sector” loans, as a percentage of average Adjusted Net Bank Credit (“ANBC”) for Fiscal 2018, 2019 and 2020 and 9 months ended December 31, 2020 was 99.08%, 112.10%, 103.67% and 114.09%, respectively. SSFB commenced their microfinance operations in 2009 and have since expanded the operations across 13 states and union territories. As of December 31, 2020, their customer base was 1.44 million and the employee base comprised of 4,770 employees and they operated 554 Banking Outlets including 153 Unbanked Rural Centres (“URCs”).
They have set up 661 customer service points (“CSPs”) as additional service or touch points during April 1, 2020 and January 31, 2021. Their delivery platform also includes partnering with business correspondents (“BCs”) for sourcing both asset and liability business. Bank’s founder, Managing Director and Chief Executive Officer, Baskar Babu Ramachandran is a first generation entrepreneur with several years of experience in the financial services sector.
Their investors include a mix of development finance institutions such as IFC and DEG, private equity investors such as Gaja Capital India AIF Trust (represented by its trustee, Gaja Trustee Co. Pvt. Ltd.), Gaja Capital Fund II Ltd, TVS Entities, ASK Pravi Private Equity Opportunities Fund and Lok Capital Growth Fund and institutional investors including HDFC Holdings Ltd., HDFC Life Insurance Co. Ltd., IDFC FIRST Bank Ltd and Kotak Mahindra Life Insurance Co. Ltd.
FINANCIAL PERFORMANCE
Looking at the financial performance the company’s Gross Loan Portfolio and deposits has grown at a CAGR of 46.98% and 94.95% over FY18 to FY20. This is due to lower base effect. As of 31st December, 2020, retail deposits comprised 72.40% of their total deposits. Within retail deposits, CASA ratio was 13.32% which is low. As of December 31, 2020, the Bank’s gross NPAs were 0.78 % of gross advances, and net NPAs were or 0.33 % of net advances. The Bank has not classified any borrower’s account which has not been declared as NPA as at August 31, 2020 as per the RBI Prudential Norms. However, if bank had classified borrower accounts as NPA the Bank’s gross NPA ratio as on December 31, 2020 would have been 9.28%, on a proforma basis and net NPA of 5.38% which is also very high.
KEY RISKS
Shares pledge by promoters: 11.52% of total equity shares pledged by on the promoters Baskar Babu Ramachandran for this personal capacity raises a red flag. Any default could lead to dilution of these shares
Private placement done at lower levels than issue price: On 23rd Feb the company did a private placement to mutual funds at Rs 292 and on 2nd March they did a private placement to promoters at Rs 180. In just a matter of few days, the IPO is priced at Rs 303. This jump in price in a matter of few days is not justified which raises another red flag
Litigation against promoter: There is an outstanding case against one of the promoter worth Rs 4377 crore. Any adverse decision in the proceedings may have an adverse effect on the business.
COVID-19 pandemic: has led to uncertainty for the small finance banking space. Any rise in NPAs would lead to balance sheet deteroriation for bank. Further, rising cases and potential lockdown increases uncertainty for the sector.
Low CASA Ratio: CASA ratio is the ratio of deposits in current and saving accounts to total deposits. A higher CASA ratio indicates a lower cost of funds. Suryoday SFB has a low casa ratio of 11.45% as on march 2020 when compared to peers. This could lead to higher cost of funds.
CONCLUSION
At the upper IPO price band of Rs 305 the offer is valued at a price/book of 2.28 times which is overpriced in our opinion. Keeping all the risks in mind, we suggest investors to wait till the 3rd day of issue date, check the subscription numbers and then apply for this IPO only for listing gains. Fundamentally the company has a number of red flags, and long-term investors should avoid this IPO.
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