Buy Equitas Small Finance Bank Ltd For Target Rs.80 - Emkay Global
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Amalgamation should ultimately pave way for universal bank licence
The board of Equitas Small Finance Bank (ESFB) has today approved a new scheme of amalgamation between ESFB and the promoter/holdco, Equitas Holdings Ltd (both listed entities), mainly to meet the promoter holding norms in ESFB.
Notably, the holdco structure was voluntarily created to meet the RBI’s norms regarding promoter holdings in ESFB. The RBI had also given promoters an option to exit after completing the five-year lock-in period post incorporation as SFB.
Using this option, ESFB has now approved the amalgamation of the holdco into ESFB, whereby the shareholders of the holdco will get 231 shares of ESFB in exchange for 100 shares of the holdco, subject to regulatory and court approvals. After the amalgamation, the holdco will cease to exist and ESFB will have a 100% public shareholding.
ESFB had recently raised capital via QIP, mainly to meet the SEBI’s requirement to increase public shareholding to 25% and then seek approval for the amalgamation. Post the public shareholding norm compliance, we believe SEBI approval could come swiftly unless it has any observation on the valuation methodology. Post SEBI approval, other regulatory approvals, including NCLT, may take another 3-6m. Thereafter, ESFB can apply for a universal banking licence vs. the current restrictive SFB licence.
Based on the swap ratio (231:100), our calculations show that holdco shareholders will get 790mn shares or a 71% stake in ESFB valued at Rs41.8bn (assuming ESFB’s CMP of Rs53) vs. the current valuation of Rs36.9bn (at an implied discount of 25%). Thus, given the 14% premium on valuations, the scheme should be acceptable to holdco shareholders. That said, there will be ownership loss for holdco shareholders in ESFB to the extent of 3.3% (direct take at 71% vs. indirect stake at 74.6%).
Overall, ESFB has done very well on the liability front while diversifying its asset base away from MFIs. However, since its asset quality has weakened due to the Covid-induced shock, ESFB needs to focus on improving the portfolio quality/mix as well as building better provisioning buffers. We believe that once the merger is completed, ESFB will apply for a universal banking licence, which should be long-term positive for ESFB. Currently, we have a Buy rating on ESFB with a TP of Rs80 (2x Dec’23E ABV).
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