1
Please refer to important disclosures at the end of this report
1
1
The Promoter of Equitas Small Finance Bank (ESFB) i.e. Equitas Holdings Limited
(EHL) was granted the RBI Final Approval on June 30, 2016, to establish a Small
Finance Bank (SFB). Subsequently, the Bank was converted to a SFB and it
commenced operations on September 05, 2016. Unlike other microfinance
companies, it has a diversified loan portfolio and less dependence on
microfinance business. The main focus of ESFB is on financially unserved and
underserved customers.
Positives : (1) The bank is well capitalized (CAR – 23.6% & CET 1 – 22.4% as on
Q1FY21, (2) Bank has diversified portfolio ( SME- 42%, Vehicle - 24%, MFI- 24%,
Housing – 4% and remaining others, (3) It has highest number of outlets
compared to all SFBs. (4) ESFB has the best CASA ratio among SFB (ESFB –
20.5%, Ujjivan SFB – 12% & AUSFB -14.5%.
Concerns: (1) ESFB for FY20 reported RoA/RoE of 1.4%/9.8%, which we believe is
lower; whereas listed players Ujjivan SFB reported RoA/RoE of 2.2%/14%, AU SFB
reported RoA/RoE of 1.6%/15.6%, (2) Asset quality ratio is weak compared to
listed peers. For FY20, GNPA of ESFB was 2.7%, for Ujjivan and AUSFB it was 1%
and 1.7%, respectively, (3) ESFBs provision coverage ratio is at 48% vs. That of
listed peers at >65%, (4) 36.2% of the loan book is under moratorium as on
August 31, 2020, which would increase possibility of jump in GNPA and will
impact return ratios adversly.
Market outlook and valuation: At the upper end of the price band, Equitas SFB
demands Adj. PB of 1.26x post considering fresh issue. Though the bank has
diversified loan book and best CASA ratio among SFBs, the return ratios are
subdued with GNPA above 2.5% for last 3 years. Our concern for Equitas SFB is
fresh formation of bad loans from moratorium book that would keep provisions
high and return ratios compressed. We believe invesors should wait for price
discovery before making any investment decision. Considering above factors, we
recommend NEUTRAL rating for the IPO.
Key Financials
Y/E March (` cr)
FY17
FY18
FY19
FY20
NII
521
858
1,147
1,489
% chg
65
34
30
Net profit
104
32
211
244
% chg
(69)
561
16
NIM (%)
6.2
8.2
8.4
9.0
EPS (`)
1.0
0.3
2.1
2.3
P/E (x)
32
104
16
14
P/ABV (x)
1.7
1.7
1.5
1.3
RoA (%)
1.1
0.3
1.4
1.4
RoE (%)
5.2
1.6
9.8
9.7
Source: Valaution done on upper price band.
NEUTRAL
Issue Open: Oct 20, 2020
Issue Close: Oct 22, 2020
Offer for sale: `238cr
QIBs 50% of issue
Non-Institutional 15% of issue
Retail 35% of issue
Promoters 82.0%
Others 18.0%
Fresh issue: `280cr
Issue D etails
Face Value: `10
Present Eq. Paid up Capital: ` 1053cr
Post Issu e Shareh o ldin g Pa ttern
Post Eq. Paid up Capital: `1,138cr
Issue size (amount): **`518cr
Price Band: `32-33
Lot Size: 450 shares and in multiple
thereafter
Post-issue implied mkt. cap: *`3,651cr
- **`3,756cr
Promoters holding Pre-Issue: 95%
Promoters holding Post-Issue: 82%
*Calculated on lower price band
** Calculated on upper price band
Book B uilding
EQUITAS SMALL FINANCE BANK LIMITED
IPO Note | BFSI
Oct 19, 2020
2
Oct
19,
Equitas Small Finance Bank Limited | IPO Note
Oct 19, 2020
2
Compnay Details
ESFB was originally incorporated as ‘V.A.P. Finance Private Limited’ on June 21,
1993. The Bank’s Promoter, Equitas Holdings Limited (EHL) was granted the RBI
Final Approval on June 30, 2016, to establish an SFB. Subsequently, the Bank was
converted to SFB and it commenced operations on September 05, 2016 as a SFB.
Before converting into SFB, Equitas used to give small loans in joint lending group,
similar to Spandana and Credit Access.
EHL to hold 82% stake in ESFB post listing.
Average ticket size of entire loan book is Rs0.4mn; 96% of market in this ticket size
is unorganized and indicates huge untapped potential.
As on June 30, 2020, it had 856 branches and 322 ATMs across 17 states and
UTs. It does not have a presence in East India and at present plans to leverage on
existing presence in South, West and North India.
Exhibit 1: Listed peers portfolio diversification (%) FY20
SFB / Peers
MFI
HFC
Vehicle
SME
Retail
Other
Outlet
Equitas SFB
23
4
24
42
7
604
Ujjivan SFB
76
11
7
6
575
AU SFB
2.3
42
38
2.7
15
467
Spandana Sphoorthy
100
Credit Access Gramin
100
Bandhan Bank
51
21
7
21
1018
Source: Company
Key Management Personnel:
Vasudevan Pathangi Narasimhan is the MD and CEO of the Bank. He has
extensive experience in the financial services sector and had served as the
executive vice president and head of consumer banking group in Development
Credit Bank Ltd, for more than one and half years. He has also worked for about
2 decades in Cholamandalam Investment and Finance Co. Ltd., part of the
Murugappa Group.
Sridharan Nanuiyer is the CFO of the Bank. He joined erstwhile Equitas Holding,
now the Bank on August 16, 2010.
Sampathkumar K. Raghunathan is the Company Secretary and Compliance
Officer of the Bank. Prior to joining the Bank, he worked at Hinduja Leyland
Finance Ltd.
3
Oct
19,
Equitas Small Finance Bank Limited | IPO Note
Oct 19, 2020
3
Issue details
This IPO is a mix of OFS and issue of fresh shares. The issue would constitute fresh
issue worth `280cr and OFS worth of `238cr. OFS is primarily to meet regulatory
(RBI) requirements. Small Finance Banks, with a net worth of more than `500cr,
were mandated by the RBI to list within three years of launching operations.
In this IPO, there is a reservation kept for employees and share holders of Equitas
Holdings worth `1cr and `51cr respectively. (Eligible EHL Shareholders: Individuals
and HUFs who are the public equity shareholders of Equitas Holdings & the
Promoter, as on the date of the Red Herring Prospectus i.e. October 11, 2020.
Exhibit 2: Pre and Post shareholding pattern
Particualr
No of shares (Pre-issue)
%
No of shares (Post-issue)
%
Promoter
1,00,59,43,363
95
93,39,43,363
82
Public
4,74,58,239
5
20,43,06,724
18
Total
1,05,34,01,602
100
1,13,82,50,087
100
Source: RHP Note, Calculated on upper price band
Objects of the offer
Ensuring adequate capital to support growth and expansion, including
enhancing the Bank’s solvency and capital adequacy rati.
Meet regulatory requirement of listing.
Risk
Improvement in asset quality and deposits in mid-term would be key risk to
our NEUTRAL call.
4
Oct
19,
Equitas Small Finance Bank Limited | IPO Note
Oct 19, 2020
4
Exhibit 3: Relative valuation and operating metrics
Particular (`cr)
AUM
CASA
(%)
NIM
(%)
GNPAs
(%)
NNPAs
(%)
Cost/
Asset
PCR
(%)
CARR
(%)
Market
Cap
P/BV
(X)
P/E
(X)
ROA
(%)
ROE
(%)
Equitas SFB
15,600
21.0
8.6
2.7
1.4
5.7
48
21.6
3,756
1.26
15.4
1.4
9.7
Ujjivan SFB
14,366
12.0
12.2
1.0
0.2
5.8
80
29.0
5,331
1.75
15.2
2.2
14.0
AU SFB
30,036
14.5
5.0
1.7
0.6
2.7
65
21.7
22,377
4.91
37.2
1.6
15.6
Spandana S
6,800
15.5
0.6
0.1
3.6
81
53.0
3,505
1.30
10.4
6.7
15.0
CreditAccess
9,680
12.6
1.6
- .0
3.4
100
23.7
10,368
3.54
31.6
2.4
13.1
Bandhan Bank
74,300
37.1
8.2
1.4
0.5
2.6
66
23.7
50,379
3.21
16.7
4.1
22.9
Source: Equitas SFB valuation done on upper band of IPO, and other Co. valuation taken as on CMP of 17/10/2; P/BV done on Q1FY21 Networth; For
Equitas Fresh issue added in Networth calculation, PE on FY20 EPS
Exhibit 4: Listed peers Dupont compared with Equitas SFB
SFB
Ujjivan
AU
Bandhan
Equitas
Particular
FY19
FY20
FY19
FY20
FY19
FY20
FY19
FY20
Interest earned
15.8
16.8
11.5
11.5
13.2
14.7
14.5
15.1
Interest expended
6.2
6.7
6.2
6.4
4.3
6.2
6.6
6.6
Net Interest Income
9.5
10.2
5.2
5.1
8.9
8.5
7.9
8.5
Other income
1.8
2.0
1.8
1.7
2.1
2.1
1.9
1.6
Total income
11.3
12.2
7.0
6.8
11.0
10.6
9.8
10.1
Operating expenses
8.6
8.2
4.2
3.8
3.6
3.3
6.9
6.7
Empolyee Exp
4.5
4.5
2.3
2.0
2.0
1.8
3.8
4.0
Other Exp
4.2
3.7
1.9
1.8
1.6
1.4
3.1
2.6
PPOP
2.7
4.0
2.8
3.0
7.4
7.4
2.9
3.4
provisions
0.4
1.1
0.6
0.8
1.5
1.9
0.7
1.4
PBT
2.3
2.9
2.3
2.2
6.0
5.5
2.2
2.0
Exceptional items
- .0
- .0
- .0
0.2
- .0
- .0
- .0
- .0
Tax items
0.6
0.7
0.8
0.6
2.1
1.4
0.8
0.6
RoA
1.7
2.2
1.5
1.6
3.9
4.1
1.4
1.4
Leverage
6.7
6.4
9.5
9.9
4.9
5.6
6.8
7.0
RoE
11.5
14.0
14.0
15.6
19.0
22.9
9.8
9.7
5
Oct
19,
Equitas Small Finance Bank Limited | IPO Note
Oct 19, 2020
5
Income Statement
Y/E March (` cr)
FY17
FY18
FY19
FY20
Q1FY21
Net Interest Income
521
858
1,147
1,489
404
- YoY Growth (%)
65
34
30
Other Income
233
241
283
282
30
- YoY Growth (%)
3
17
(0)
Operating Income
754
1,100
1,430
1,772
434
- YoY Growth (%)
46
30
24
Operating Expenses
497
879
1,004
1,174
292
- YoY Growth (%)
77
14
17
Pre - Provision Profit
258
221
426
598
142
- YoY Growth (%)
(14)
93
40
Prov. & Cont.
96
172
102
247
68
- YoY Growth (%)
78
(41)
141
Profit Before Tax
161
49
324
351
74
- YoY Growth (%)
(70)
567
8
Prov. for Taxation
57
17
113
107
16
- as a % of PBT
36
34
35
31
22
PAT
104
32
211
244
58
- YoY Growth (%)
(69)
561
16
Balance Sheet
Y/E March (` cr)
FY17
FY18
FY19
FY20
Q1FY21
Equity
1,006
1,006
1,006
1,053
1,053
Reserve & Surplus
1,006
1,038
1,248
1,691
1,748
Networth
2,012
2,044
2,254
2,744
2,802
Deposits
1,921
5,604
9,007
10,788
11,787
- Growth (%)
192
61
20
Borrowings
4,779
5,177
3,973
5,135
5,526
Other Liab. & Prov.
533
488
531
650
778
Total Liabilities
9,245
13,313
15,765
19,317
20,892
Cash Balances
248
386
403
381
429
Bank Balances
866
825
858
2,156
1,497
Investments
1,891
3,857
2,344
2,343
3,479
Advances
5,702
7,707
11,595
13,747
14,389
- Growth (%)
35
50
19
Fixed Assets
288
281
237
213
198
Other Assets
251
258
327
478
902
Total Assets
9,245
13,313
15,765
19,317
20,892
- Growth (%)
44
18
23
6
Oct
19,
Equitas Small Finance Bank Limited | IPO Note
Oct 19, 2020
6
Key Ratio
Y/E March
FY17
FY18
FY19
FY20
Profitability ratios (%)
NIMs
6.2
8.2
8.4
9.0
Cost to Income Ratio
66
80
70
66
RoA
1.1
0.3
1.4
1.4
RoE
5.2
1.6
9.8
9.7
B/S ratios (%)
CASA Ratio
29.2
25.3
20.5
Credit/Deposit Ratio
3.0
1.4
1.3
1.3
CAR
35.5
29.6
22.4
23.6
Tier I
32.3
27.1
20.9
22.4
Asset Quality (%)
Gross NPAs
3.3
2.7
2.5
2.7
Net NPAs
1.5
1.7
1.6
1.8
Slippages
-
4.5
2.7
3.0
Loan Loss Prov. /Avg. Assets
1.0
1.5
0.7
1.4
Provision Coverage
54
37
36
33
Per Share Data (`)
EPS
1.0
0.3
2.1
2.3
BVPS
20.0
20.3
22.4
26.1
ABVPS (70% cover.)
19.6
19.6
21.4
24.9
DPS
Valuation Ratios
PER (x)
32
104
16
14
P/ABVPS (x)
1.7
1.7
1.5
1.3
Valaution done at upper price band of the IPO
7
Oct
19,
Equitas Small Finance Bank Limited | IPO Note
Oct 19, 2020
7
Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com
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