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BACKGROUND

FFS (Fedbank Financial Services) is a Mumbai based NBFC promoted by Federal Bank. FFS is present in 16 states and union territories across India with a strong presence in Southern and Western regions of India. As of March 31, 2023, FFS covered 191 districts through 575 branches. FFS has the third lowest cost of borrowing among MSME & gold loan peer set in India.

Objects and Details of the Issue:

The public issue consists of Offer For Sale of Rs. 492 Cr and Fresh Issue of Rs. 600 Cr aggregating to total issue size of Rs. 1092 Cr. FFS shall utilize the proceeds from the Fresh Issue towards augmenting its Tier-I capital base to meet its future capital requirements. Tier 1 capital stood at 14.7% as on June 2023.

Investment Rationale:

* Focused on retail loan products with a collateralized lending model targeting individuals and the emerging MSME sector which is difficult to replicate

* Strong underwriting cum collection capability and presence in select customer segments

* Strong parentage of Federal Bank facilitates easy access to funding as well lower cost of funds

Valuation and Recommendation:-

FFS has grown its AUM at a CAGR of 37% over FY21-23. However upon comparing FFS with companies focused on LAP and Gold loans, we observe that FFS derives a higher share of loan book from competitive segments like Gold (33% mix), Medium ticket LAP (25% mix) and Unsecured Business Loans (16% mix). Further FFS has delivered lower ROA in FY23 at 2.3% compared to peer average of 3.4% and thus deserves to trade at a discount. Therefore we recommend ‘Neutral’ rating for the issue.

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SEBI Registration number is INH000001766