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BACKGROUND

ESAF, founded in 1992, is a Small Finance Bank focusing on rural and semi-urban lending. They offer micro, retail, MSME, financial institution, and agricultural loans. Their key strength lies in understanding the microloan segment. They are leveraging technology for underwriting and credit sanctioning for loan products which has resulted in healthy portfolio quality indicators with GNPA/NNPA at 2.5%/1.1% combined with NIMs of ~10.7% resulting in ROA/ROE of 1.6%/19.4% for FY23. The AUM has grown to Rs. 13,924 Cr as of FY23, from Rs. 8,168 Cr as of FY21, at a CAGR of 30.6% between FY21-FY23.

Objects and Details of the Issue:

The public issue consists of Offer For Sale of Rs. 72 Cr and Fresh Issue of Rs. 391 Cr aggregating to total issue size of Rs.463 Cr. The Net Proceeds will be used to boost the bank's Tier-I capital for future growth and regulatory compliance.

Investment Rationale:

* Huge opportunity to support growth over next three years (AUM)

* Focus on rural and semi-urban banking franchise

* Effective Loan Collection and Monitoring Process

* Growing Retail Deposits portfolio

Valuation and Recommendation:-

ESAF SFB has the best asset quality among compared peers. It is favorably placed with portfolio share of 63% from rural and semi-urban, which is the highest among the comparable. Further, it has managed to improve its Non MFI mix from 15% in FY21 to 25% in FY23 which has derisked its business model. We expect this trend to continue. Over FY21- 23 period, ESAF has reasonably done well on all fronts - loan growth, return ratios and asset quality. It’s valuation on P/B basis is at a significant discount compared to peers, at 1.5x FY23 post issue BVPS. Considering that the micro finance industry has come out of severe crisis over 2020-22, with most of the bad loans having weeded out of the system, we expect growth and healthy profitability to resume for the sector as well as for ESAF. We recommend subscribing to the issue.

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