IPO watch: Equitas SFB is no match to listed & unlisted peers

Choice Broking has a 'neutral' rating on the Equitas Small Finance Bank IPO. Emkay Global Financial Services has a ‘buy' recommendation on the issue. Quantum Securities has a ‘subscribe' rating.

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Equitas Small Finance Bank has two comparable peers: Ujjivan Small Finance Bank in the listed space, and Suryoday Small Finance Bank in the unlisted space.
New Delhi: After a couple of stellar primary market listings, Equitas Small Finance Bank has hit the primary market this week. With a price band of Rs 32-33 per share, the bank intends to raise up to Rs 518 crore to augment its Tier-I capital base. Equitas SFB had earlier planned to raise Rs 1,000 crore through the issue.

The current book-building IPO will include fresh issue of shares aggregating up to Rs 280 crore and an offer for sale (OFS) of 72 million shares aggregating up to Rs 237.6 crore.

Considering the lower return ratios and less provision coverage, analysts are advising long-term retail investors to stay away from the issue and wait for fair price discovery post listing.


Even the grey market is signalling a cautious approach on the issue. The premium on the SFB’s unlisted shares in the unofficial market declined to near zero, as the issue opened for subscription on Tuesday.

Equitas Small Finance Bank has two comparable peers: Ujjivan Small Finance Bank in the listed space, and Suryoday Small Finance Bank in the unlisted space.

Challenges in the listed space
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“While the SFB may look attractive on the valuation front, we believe Ujjivan has a better product portfolio and good control on asset quality,” said Vinit Bolinjkar, Head of Research at Ventura Securities.

“Asset quality is the prime concern for the banking sector. Ujjivan is better placed than Equitas on this front,” he said. "Both have equal growth opportunities, but We prefer Ujjivan over Equitas."

Ujjivan Small Finance Bank was listed in December 12, 2019 at Rs 58, registering a 56.76 per cent premium over the issue price of Rs 37. Ujjivan SFB traded around Rs 32 on Tuesday with price-to-book value of 1.78.

In comparison, the Equitas SFB is asking for an adjusted price to book value (P/BV) of 1.26 times after considering the fresh issue.

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Equitas Small Finance Bank IPO: All you need to know
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The Rs 500 crore IPO by Equitas Small Finance Bank (ESFB) will open for subscription on Tuesday. Here's all you must know about the issue before subscribing:

The Rs 500 crore IPO by Equitas Small Finance Bank (ESFB) will open for subscription on Tuesday. Here's all you must know about the issue before subscribing:

Equitas Small Finance Bank (ESFB) was originally incorporated as ‘V.A.P. Finance Private Limited’ on June 21, 1993. The bank promoter, Equitas Holdings (EHL), was granted RBI's final approval on June 30, 2016, to establish a small finance bank (SFB). Subsequently, the bank was converted into an SFB and they commenced operations on September 5, 2016. The bank has sought in-principle approval from the RBI to undertake a merger of EHL with the bank such that the merger would be effective from September 4, 2021. It has also sought principle approval from the RBI to permit the dilution of EHL’s shareholding in the bank pursuant to such merger.

Equitas Small Finance Bank (ESFB) was originally incorporated as ‘V.A.P. Finance Private Limited’ on June 21, 1993. The bank promoter, Equitas Holdings (EHL), was granted RBI's final approval on June..
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The company has fixed the price band for its over Rs 500 crore initial public offering (IPO) at Rs 32-33 per equity share. The IPO consists of a fresh issue aggregating up to Rs 280 crore and an offer for sale of up to 7.2 crore equity shares by Equitas Holdings, the holding company of the bank. The offer opens on October 20 and closes on October 22. Post this offer, Equitas Holdings share in the bank will come down to 82-83 per cent from 95.49 per cent.

The company has fixed the price band for its over Rs 500 crore initial public offering (IPO) at Rs 32-33 per equity share. The IPO consists of a fresh issue aggregating up to Rs 280 crore and an offe..
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The bank's Managing Director and CEO P N Vasudevan said, "We will be using the funds raised as growth capital. We are adequately capitalised as of now and this adds to our capital ratio which supports our growth going forward." At present, the bank's capital adequacy ratio is around 21 per cent and post the issue it will improve to 22 per cent, he told PTI.



The bank had earlier planned to raise Rs 1,000 crore through IPO but later reduced the size due to comfortable capital adequacy ratio and also on account of the present market conditions, Vasudevan said.

The bank's Managing Director and CEO P N Vasudevan said, "We will be using the funds raised as growth capital. We are adequately capitalised as of now and this adds to our capital ratio which support..
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ESFB has the largest network of banking outlets among all SFBs in India. As of June 30, 2020, the bank's distribution channels comprised 856 banking outlets and 322 ATMs across 17 states and union territories in India. It also distributes products through digital channels and leverages technology to identify the target customer segment. To this end, the company has introduced facial recognition features for transaction authentication in their mobile banking application.

ESFB has the largest network of banking outlets among all SFBs in India. As of June 30, 2020, the bank's distribution channels comprised 856 banking outlets and 322 ATMs across 17 states and union te..
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The bank said it experienced a significant decline in collections as a major proportion of its collections is cash-based and involves physical presence of their employees. There has been and there may continue to be a decline in disbursements due to reduced economic activity. 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, it said.

The bank said it experienced a significant decline in collections as a major proportion of its collections is cash-based and involves physical presence of their employees. There has been and there ma..
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The gross advances of the SFB have grown to Rs 15,572.91 crore as of June 30 from Rs 15,366.94 crore as of March 31, 2020 and Rs 11,702.85 crore as of March 31, 2019. Secured advances constituted 75.75 per cent as of June 30 compared with 75.39 per cent as of March 31 and 70.72 per cent as of March 31, 2019.



Deposit for the bank rose at a compounded annual growth rate of 38.75 per cent to Rs 10,788.41 crore in FY20 from Rs 5,603.97 crore in FY18. As of June 30, the CASA ratio and retail deposits to total deposits ratio were at 19.97 per cent and 37.13 per cent, respectively.



(Text Source: Axis Securities)

The gross advances of the SFB have grown to Rs 15,572.91 crore as of June 30 from Rs 15,366.94 crore as of March 31, 2020 and Rs 11,702.85 crore as of March 31, 2019. Secured advances constituted 75...
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Ujjivan hit Rs 23 on March 24, 2020 during the Covid-induced market mayhem and has since been struggling to shrug off the pandemic woes.

Competition in unlisted space
Suryoday Small Finance Bank is seeing good demand in the unlisted space and trades at Rs 270-280. The stock has surged some 15 per cent in last quarter. Off-market dealers see another 25-30 per cent upside in the stock.
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Dinesh Gupta of UnlistedZone, a Delhi-based firm that deals in unlisted securities, said considering the valuations and asset quality, along with growth prospects, Suryoday SFB looks like a better bet.

Suryoday SFB did a private placement to key investors in March 2019 at a Rs 180 a share. That placement was done at a P/BV multiple of 1.68 times.

Cost of funds for Suryoday SFB declined to 8.8 per cent in FY19 from 9.9 per cent a year ago. Suryoday, too, is eyeing a listing this financial year.

Ratings
Choice Broking has an 'avoid' rating on the Equitas Small Finance Bank IPO. Emkay Global Financial Services has a ‘buy' recommendation on the issue. Quantum Securities has a ‘subscribe' rating.
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