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Focus on rural & semi-urban banking: ESAF Small Finance Bank is a new age social bank with primary focus on expanding the services to new unbanked/underbanked customer segments, especially in rural/semiurban centres. As of 1QFY24, rural/semi-urban (combined) accounted for ?91bn (63%) of total gross advances, 57% of total customers (4.07mn), and 502 (72%) of total outlets.

Growing Retail Deposits portfolio: ESAF’s total deposits increased at 28% CAGR from ?90bn in FY21 to ?147bn in FY23. Retail Deposits grew by 23% p.a. to ?133bn. In order to increase its retail portfolio, the bank intends to continue to target HNIs to scale up deposits and CASA base. Further, RBI has granted ESAF an Authorised Dealer Category I licence to deal in Foreign Exchange in India, which enables them to offer deposits in foreign currency, thereby helping to increase its NRI customer base

Rural Opportunity: Rural centres in India while accounting for 47% of GDP, received just 8% of the overall banking credit as of FY23. Thus, showing vast market opportunity for banks and NBFCs to lend in these areas. With increasing focus of the government towards financial inclusion, delivery of credit services in rural area is expected to increase. Further, usage of alternative data to underwrite customers will also help the financiers to assess customers and cater to the informal sections of the society in these regions.

Financials: ESFA’s NII grew at 41% CAGR over FY21-23, while Net Profit grew faster at 69% p.a. CASA ratio stood at 18.2% while retail deposits formed 89% of the total deposits as on 1QFY24. The bank has healthy asset quality with its GNPA/NNPA at 2.5%/1.1% while PCR stood at 56.7% at FY23 end.

Issue Size: ?4.6bn IPO consists of both fresh issue of ?3.9bn and OFS of 12mn shares by promoters and investors: PNB MetLife and Bajaj Allianz. The promoter stake post stake sale would reduce to 62.6%. The market cap post listing would stand at ?30.8bn. Proceeds from the fresh issue will be utilized to meet future capital requirements in Bank’s Tier – 1 capital base.

View: ESFA SFB enjoys healthy market share in the south with robust financials and healthy return ratios. The issue is priced at 1.8x FY23 BV (on fully diluted basis), which seems comfortable. Given the current buoyancy in the micro finance sector, we believe that ESAF is attractively priced, thus recommend Subscribe.