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Equitas Small Finance Bank IPO: Should you invest? Here's what experts say

On the financial front, Equitas Small Finance Bank's net profit increased to Rs 243 crore in FY20, from Rs 210 crore in FY19, while its net income rose to 1,777 crores in FY20

Equitas Small Finance Bank IPO: Should you invest? Here's what experts say

According to CRISIL Report 2019, ESFBL is the second-largest SFB in terms of assets under management (AUM) and total deposits

The Rs 520 crore IPO of Equitas Small Finance Bank (ESFB) will open today for subscription and close on October 22. The initial public offer (IPO) of the Chennai-based lender consists of a fresh issue of Rs 280 crore (8.5 crore equity shares) and an offer for sale of 7.2 crore equity shares, taking the total issue size to Rs 517.6 crore.

Bids can be made by applicants for a minimum of 450 equity shares and in multiples of 450 equity shares thereafter, extending up to 13 lots. The merchant bankers of the IPO have fixed the price band at Rs 32-Rs 33 per equity share and shares will be listed on the benchmark indices on November 2, 2020. The share allocation in Equitas Small Finance Bank IPO is likely to get finalised on October 27.

Equitas Small Finance Bank (SFB) said in its DHRP that it plans to use the IPO proceeds to augment its Tier I capital base to meet future capital requirements. Company promoter Equitas Holdings is holding 95.49% stake in Equitas Small Finance Bank, which post the IPO will decline to about 82%, as per the additional information in its DRHP filed with the market regulator.

The offer includes a reservation of up to Rs 1 crore worth of shares for eligible employees of Equitas Small Finance Bank and Rs 51 crore of shares for Equitas Holdings' shareholders.

Eligible shareholders mean those individuals and HUFs who are the public equity shareholders of EHL (excluding such persons who are not eligible to invest in the offer under applicable laws or are otherwise unable to make any such investment) as on the date of the red herring prospectus i.e. October 11, 2020, the company's filing said.

JM Financial, Edelweiss Financial Services and IIFL Securities have been appointed as book-running lead managers to the ESFB IPO.

On the financial front, Equitas Small Finance Bank's net profit increased to Rs 243 crore in FY20, from Rs 210 crore in FY19, while its net income rose to 1,777 crores in FY20.

Incorporated in Chennai in 1993, ESFBL has 856 banking outlets and 322 ATMs spread across 17 states and union territories in India, as of June 2020. Equitas Small Finance Bank (ESFB) had filed the draft red herring prospectus (DRHP) on December 16, 2019. The issue was earlier scheduled for subscription by the end of March, however, was put on hold due to the spread of COVID-19 pandemic.

According to CRISIL Report 2019, ESFBL is the second-largest SFB in terms of assets under management (AUM) and total deposits.

Here what brokerages have said about the IPO:

ICICI Direct in its note said, "ESFB had strong advances growth along with maintaining asset quality. Unserved and underserved customers as target offer a vast opportunity for business growth. We have a SUBSCRIBE recommendation on the stock."

Geojit Financial Services in its IPO note said, "At the upper price band of Rs. 33, ESFBL is available at a P/BV of 1.4x based on its book value of Rs. 24.1. Based on FY20 P/BV the issue seems fully priced while the outlook for FY21 is slightly weak given the ongoing interest waiver litigation filed in Supreme Court. In spite of short to medium term concerns, we expect these concerns to normalise by FY22E and so recommend Subscribe with a long-term perspective."

Commenting on the IPO, Jaikishan Parmar- Sr. Equity Research Analyst from Angel Broking said, "Though the bank has a diversified loan book and the best CASA ratio among SFBs, the return ratios are subdued with GNPA above 2.5% for last 3 years.  Our concern for Equitas SFB is the fresh formation of bad loans from moratorium book that would keep provisions high and return ratios compressed. We believe investors should wait for price discovery before making any investment decision. Considering the above factors, we recommend a NEUTRAL rating for the IPO."

"Equitas has rightfully reduced its portfolio concentration in microfinance to 23% from 46% in FY17, given the risks and volatility associated with this business, while it has well-diversified into non-MFI loans encompassing vehicle, housing and SME segments being the key drivers of growth. The bank has also now ventured into the secure gold loan business. However, it also needs to work toward geographic diversification given the sizeable exposure to its home state," Emkay Global said in a note.

Nirmal Bang in its IPO note said, "We believe Equitas SFB can deliver top quartile ROE of 15%+ in the long term (by FY23E) driven by a decline in cost/Income to below 60% from 66% in FY20 and normalization of credit costs to ~1.5% from 1.9% in FY20. Equitas SFB is available at a 30% discount compared to listed peers. We recommend to 'Subscribe for the long term'."

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