Published on 20/10/2020 12:24:09 PM | Source: Nirmal Bang Ltd

IPO Note - Equitas Small Finance Bank Ltd By Nirmal Bang

Posted in IPO Reports| #Nirmal Bang Ltd #IPO

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Equitas offers a unique opportunity to participate in a business model that offers nimbleness and pricing power of an NBFC on one hand and the deposit generating ability of a bank on the other. Equitas has successfully diversified across eight products with its core focus on self-employed individuals that are underserved by formal financing channels.


Details and Objects of the Issue; Reservation for EHL shareholders

* The public issue consists of (i) offer for sale of Rs. 238 Cr by EHL - Equitas Holdings Ltd (Parent) and (ii) fresh issue of Rs. 280 Cr to augment Tier 1 capital for future growth. Post the IPO, EHL’s stake in ESFB would stand reduced from 95.5% to 82.1%.

* Investors who hold EHL (Equitas Holdings Ltd) shares on October 11, 2020, are eligible to apply under the shareholder's category. There is a reservation of 10% of the offer for shareholders (Rs. 51 Cr). The EHL shareholders can apply up to Rs. 2 lac in the shareholders category. EHL shareholders can also apply under the retail category.


Investment Rationale:

* Fast paced diversification towards high-yield secured products.

* Significant scope for improvement in cost efficiency on the back of operating leverage post completion of the SFB branch conversion.

* Robust liability traction to lower borrowing costs & support NIMs.

* Proven track record of stable asset quality.


Valuation and Recommendation

Equitas has successfully reduced the microfinance mix in its loan book from 54% in FY16 to 23% today. Its diversified loan book, adequate capital, experienced management and conservative approach to minimize risk, provides Equitas a long runway for profitable growth. Equitas’ transition to a SFB during FY16-18 resulted in lower AUM growth (16% CAGR) and higher opex growth (57% CAGR), translating to lower return ratios. However, post the conversion, Equitas stepped up its loan growth to 37% CAGR over FY18- 20, while opex growth remained subdued at 16% CAGR. This resulted in cost/income declining from 80%in FY18 to 66% in FY20 and a simultaneous increase in ROE from ~2% in FY18 to ~9% in FY20. 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 long term’.


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