Small Indian financial banks have found themselves at the mercy of vulnerability, as their customers are most affected by the pandemic. As a result, these lenders once hailed for their growth potential are no longer preferred choices for investors.
It is in this context that the initial public offering (IPO) of Equitas Small Finance Bank will arrive on the market today. The bank’s promoter, Equitas Holdings, will offer 72 million shares in a sell offer. In addition to a new issue of around 87 million shares, the lender plans to raise around ??500 market crore.
The indicative price of the IPO is ??32-33 per share which values the lender at ??3,800 crore after issuance, according to analysts at Emkay Global Financial. At this level, Equitas Small Finance Bank’s valuation multiples of 1.2 times post-issue are modest compared to listed peers such as Ujjivan Small Finance Bank (1.8 times the book value FY21) and AU Small Finance Bank ( 5.1 times the book value FY21). Of course, the holding’s shares are traded around ??50. Analysts believe that the recent uptrend in financial stocks may also help investors get a modest quote. “Our current TP (target price) for Equitas Holdco implies a value per share of ??40 for Equitas SFB (assuming a 40% discount on holdco), which implies a decent increase in the issue price, ”Emkay said in a note.
That said, a pandemic is forcing investors to examine the bank’s resilience. Here the lender earns points in some measures but struggles with others. The bank was able to regularly develop its liability franchise with deposits totaling up to ??10,788 crore in March 2020. Compared to its peers, Equitas Small Finance Bank has also been able to grow its loan portfolio faster. In addition, net interest margins are higher than those of their peers.
But a post-pandemic world is more about security than growth. While the share of bad debts in Equitas Small Finance Bank’s total loan portfolio is not large, risk insurance through provisions is low. This could hamper investors looking for a long term bet. The contribution to bad debts comes largely from the bank’s non-micro-finance portfolio. Since this book is fairly recent, the pressure on asset quality could continue, analysts say.
There are also other risks. Thanks to this IPO, the stake of the promoter of the bank will increase to 82% against 95% currently. The regulations require that the promoter’s stake be reduced to 40% within three years of the start of operations. Equitas Small Finance Bank is running out of time. The bank’s management said the lender would consider mergers and acquisitions or even a direct sale in the secondary market to reduce the stake. The method adopted by promoters to reduce participation will have implications for investors and is a key surplus.
Nonetheless, most brokerages have recommended that investors subscribe to the Equitas Small Finance Bank IPO. But the fact remains that the main selling point is the modest valuation compared to its peers.
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