Equitas Small Finance Bank’s IPO is more of a valuation bet


India’s small finance banks have found themselves at the receiving end of vulnerability as their customers are the most hit by the pandemic. Hence, these lenders once hailed for growth potential are no longer preferred pickings for investors.

It is in this background, Equitas Small Finance Bank’s initial public offer (IPO) will hit the market today. The bank’s promoter Equitas Holdings will offer 72 million shares through an offer-for-sale. Together with a fresh issue of about 87 million shares, the lender plans to raise roughly ?500 crore from the market.

The IPO indicative price is ?32-33 per share which values the lender at ?3800 crore post issue, according to analysts at Emkay Global Financial. At this level, Equitas Small Finance Bank’s valuation multiples at 1.2 times post issue are modest compared with listed peers such as Ujjivan Small Finance Bank (1.8 times FY21 book value) and AU Small Finance Bank (5.1 times FY21 book value). To be sure, the holding company’s shares are trading around ?50. Analysts believe together with the recent uptrend in financial stocks may also help investors get a modest listing pop. “Our current TP (target price) for Equitas Holdco implies a per share value of ?40 for Equitas SFB (assuming a 40% holdco discount), implying a decent upside to the issue price,” said Emkay in a note.

That said, a pandemic makes it imperative for investors to look at the resilience of the bank. Here, the lender earns points in some metrics but struggles with others. The bank has been able to grow its liability franchise steadily with deposits totalling to ?10,788 crore as of March 2020. Compared with peers, Equitas Small Finance Bank has also been able to grow its loan book faster. What’s more is that net interest margins are superior to peers.

But a post-pandemic world is more about being safe than about growth. While the share of bad loans in the total loan book for Equitas Small Finance Bank is not large, the insurance against risks through provisions is low. This could cause discomfort to investors looking for a long term bet. The contribution to bad loans have been largely from non-micro finance book for the bank. Given this book is fairly new, the pressure on asset quality could continue, analysts said.

There are other risks as well. Through this IPO, the promoter holding of the bank will reduce to 82% from the current 95%. Regulation requires promoter holding to be brought down to 40% within three years of starting operations. Equitas Small Finance Bank is running out of time. The bank’s management has said that the lender would explore mergers and acquisition or even direct secondary market sale to reduce stake. The method the promoters adopt to reduce stake will have implications for investors, and is a key overhang.

Nevertheless, most brokerages have recommended investors to subscribe to Equitas Small Finance Bank’s IPO. But the fact remains that the biggest selling point is the modest valuation compared with peers.

News Source: Livemint

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