Equitas Small Finance Bank Ltd.

NSE: EQUITASBNK | BSE: 543243 | ISIN: INE063P01018
|

37.30
12.86%
Equitas SFB: Will this small finance bank make a big splash?

by Aakash Athawasya

So far, October has seen multiple names make a big splash with their public market debuts, and looking to join this wave is one small finance bank (SFB). Equitas SFB’s initial public offering sees a key player in the domestic small-scale banking space with a wide and diversified services offering, hit the markets. The IPO was fully subscribed by investors by the third day of the issue.

Equitas SFB is one of the largest domestic SFBs by the number of banking outlets, assets under management (AUM), and total deposits. For the fiscal year 2019, Equitas had a market share of 16% based on AUM in the SFB space, third behind its listed competitors AU Small Finance Bank and Ujjivan Small Finance Bank and recorded the fourth-lowest yields indicating a low dependency on a single sector, according to a November 2019 CRISIL report. 

Relative to other SFB players in the space, the Chennai-headquartered bank has managed to reduce its dependence on its microfinance business and diversify its loan portfolio. However, region-wise, the bank is centered in the south, catering mainly to the Tamil Nadu market, which might prove a concentration problem.

In 2007, Equitas began operating as an NBFC providing microfinance loans through Equitas Micro Finance Limited (EMFL), and by 2011 it began operating in the housing finance space through Equitas Housing Finance Limited (EHFL). In 2012, EMFL received an asset finance license and began provisioning vehicle finance and MSE finance mainly to economically disadvantaged households. In 2016, EMFL and EHFL were amalgamated with EFL, and the new entity was renamed Equitas Small Finance Bank. 

Despite being a year late to hit bourses, Equitas is finally stepping into the public limelight. The SFB’s IPO was originally scheduled for September 2019 but was pushed to March 2020 and due to COVID, further delayed to October 2020. The offering has also been revised from around Rs. 1,000 crores to a fresh issue of Rs. 280 crores and an offer for sale (OFS) by the parent company. A market front runner, in a growing industry, and a large corpus, how will the Equitas SFB IPO fare?

IPO breakdown

The public offering is divided into a fresh issue of 8.4 crore equity shares, and an offer for sale of 7.2 crore equity shares by the selling shareholders. The issue is priced at Rs. 32 to Rs. 33, per equity share. The fresh issue would amount to Rs. 280 crores, and the OFS to Rs. 237.6 crores, taking the total to Rs. 517.6 crores at the upper price band and Rs. 501.9 crores at the lower price band.

As per the norm, the offering would be reserved between QIBs, retail investors, and non-institutional investors at 50%, 35%, and 15% respectively. A provision for employee reservation and EHL shareholder reservation has been made, which shall not exceed 5% and 10% of the post-offer paid-up equity share capital of the company respectively.

Equitas SFB has one promoter, Equitas Holdings (EHL), a publicly-listed company, which before the IPO held 1005.9 crore equity shares, or 95.5% of the pre-offer equity share capital amounting to a total of 1053.4 crores, with the rest (4.5%) held by the company’s employees. Following the offering, which includes the OFS, the promoter’s holding will decrease to 82%, while the public and the employees will hold 18% of the company. 

Data source: Equitas Small Finance Bank, DRHP

The company has stated that the main objective of the issue to utilize the proceeds towards augmenting the bank’s tier 1 capital base to meet its future working capital requirements, furthering organic growth, and expansion. From the OFS, the promoter EHL will be entitled to the proceeds and the company will not receive any proceeds from the same. Further, per the RBI and the SFB Licensing Guidelines, the company is required to list on the stock exchange within three years from the commencement of business.

JM Financial, Edelweiss Financial Services, and IIFL Securities are the book running lead managers (BRLMs) to the offer, and KFin Technologies is the registrar.

Strengths:

  1. Deep understanding of the unbanked space: Diverse financial provisions to unserved and underserved customers
  2. Diverse product-mix: Products shared between small business loans, microfinance, vehicle finance, MSE finance, and corporate loans
  3. Strong retail portfolio and distribution network: Deposits grew at a CAGR of 116.5 % between March 2017 to March 2019, the ratio of retail to total deposits grew from 16.2% in March 2018 to 33.5% in September 2019
  4. Risk management through customized credit assessment procedures
  5. Technology leveraged platforms: Consistent investment in tech-driven operations, 79% of all banking transactions conducted through digital channels
  6. Professional and experienced management
  7. Well-spread banking outlets: The company’s banking outlets are spread in the south (51.8%), west (24%), and north (24.2%) respectively.

Risk factors:

  1. Non-compliance with SFB Licensing Guidelines: The company was mandatorily required to list on exchanges within 3 years of reaching a net worth of Rs. 500 crores, which it reached in September 2019
  2. Subject to interest rate risk and volatility: 
  3. Limited operating history as an SFB: Equitas commenced SFB operations in September 2016, prior to that they operated as an NBFC
  4. Continuous and timely requirement of funds
  5. Legal proceedings: The company and its directors and promoter are involved in 1,775 outstanding cases, which collectively amount to Rs. 154.7 crores
  6. Shareholding reduction: As per the SFB licensing guidelines, the company’s promoter is required to reduce its shareholding to 40% before September 2021, for which no specific method has been approved
  7. Regional concentration: The SFB’s banking outlets and advances are concentrated in Tamil Nadu. As of March 2019, and September 2019, advances towards customers in Tamil Nadu was 56.6% and 55.7% of gross advances respectively
  8. Top-customer concentration: The company’s deposits from the top-20 largest depositors accounted for 32.6% and 35.8% of total deposits as of March 2019 and September 2019 
  9. Microfinance loan and unsecured business loans portfolio are not supported by collateral 
  10. Inability to control the level of NPAs and RBI mandated change could hurt financials: As of September 2019, gross NPAs were Rs. 377.2 crores, or 2.8% of gross advances

Equitas

Data source: Equitas Small Finance Bank,DRHP

Data source: Equitas Small Finance Bank,DRHP

Data source: Equitas Small Finance Bank, DRHP

 

Board of directors

Name

Designation

Vasudevan Pathangi Narasimhan

MD and CEO

Arun Ramanathan

Part-time Chairman, Non-Executive Independent Director

Nagarajan Srinivasan

Non- Executive Non-Independent Director

Arun Kumar Verma

Non-Executive Independent Director

Narayanaswamy Balakrishnan

Non-Executive Independent Director

Lalitha Lakshmanan

Non-Executive Independent Director

Navin Avinashchander Puri

Non-Executive Independent Director

Sridhar Ganesh

Non-Executive Independent Director

Narasimhan Srinivasan

Non-Executive Independent Director

Tabassum Abdulla Inamdar

Non-Executive Independent Director

Vinod Kumar Sharma

Non-Executive Independent Director

 

Financials and valuation

Equitas’ total income for FY20 stood at Rs. 1,777.7 crores, a jump of Rs. 343.1 crores or 23.9% against the previous financial year. For the first quarter of FY21, total income stood at Rs. 433.9 crores. The net interest income (NII) for FY20 was Rs. 1,495 crores, an increase of 29.8% against the previous year’s figures and Q1FY21’s NII stood at Rs. 404.3 crores.

Profit before tax (PBT) stood at Rs. 87.1 crores for the quarter ended June 2020, while FY20’s PBT was Rs. 350.9 crores, moving up by 8.4% against the previous year. Net profit for the bank saw a massive jump between FY18 to FY19 from Rs. 31.8 crores to Rs. 210.6 crores, and thereafter stabilized, increasing by 15.7% to Rs. 243.6 crores in FY20, and for the first quarter of the current financial year, net profit was Rs. 57.7 crores.

Equitas

Data source: Equitas Small Finance Bank,DRHP

The earnings per share (EPS) of the company stood at Rs. 2.2 per share for the first quarter of the year, a drop from Rs. 2.4 per share for FY20. Between FY18 and FY19, the EPS moved up from Rs. 0.3 per share to Rs. 2.1, and between March 2019 and March 2020 it increased by 14.8%.

Taking the upper price band of Rs. 34 per share and the EPS for the most recently concluded quarter with updated financials i.e. Q1FY21’s EPS of Rs. 2.2 per share, the price to earnings ratio of Equitas SFB stands at 15 times.

As per the company’s DRHP, the average industry P/E, based on basic EPS, is 21.8 times, with an upper bound of 62 times and a lower bound of 3.9 times.

Here’s how the company’s P/E stands against its industry peers:

Stock Name

PE TTM

PEG TTM

Market Cap in Rs Cr

Bajaj Finance

43.3

-4.8

         194,181.1

Muthoot Finance

14.1

0.2

          48,653.8

Sundaram Finance

16.9

-0.8

          14,498.5

Manappuram Finance

9

0.2

          14,127.5

CreditAccess Grameen

31

-2.1

            9,147.8

Mahindra & Mahindra Financial Services

6

-0.4

            8,113.3

IDFC Ltd.

-151.8

1

            4,829

Mas Financial Services

25.9

3.9

            4,558

Capri Global Capital

25.8

2.2

            4,206.7

Indostar Capital Finance

-10.9

0

            3,547.9

Ujjivan Financial Services

8.7

0.2

            2,560.5

Au Small Finance Bank

35.07

0.9

            24,030

 

Industry overview

Between FY16 to FY19, the AUM for SFBs has grown at a CAGR of 26%. This growth has been concentrated among the top-3 SFBs, which grew at a CAGR of 34% during this time. The top-3 SFB’s market share in terms of total AUM has grown from 54% in FY16 to 64% in FY19. As of FY19, the top 3 players in the SFB space were, Au Small Finance Bank (33%), Equitas Small Finance Bank (16%), and Ujjivan Small Finance Bank (15%).

Going forward the loan portfolio of SFBs is forecasted to grow at a CAGR of approximately 25% in the short term based on seven key factors. Market opportunities in rural areas, new product offerings and cross-selling opportunities on the liability and the asset side, informal credit channels presence, geographic diversification, local stakeholder management, low-cost funds access and loan recovery, and NPAs control.

In H1FY19, within the SFBs industry, NBFCs grew at a steady pace of 17% y-o-y. In the short term, NBFCs which are heavily reliant on short-term commercial paper (CP) instruments to grow their books will witness a slowdown in growth rates.

The deposit base of SFBs has grown to Rs. 55,500 crores in FY19, from Rs. 26,500 crores in FY18, a 109% increase. However, non-term deposits like current and saving account (CASA) deposits reduced from 24% in FY18 to 20% in FY19. CASA grew at 63% from Rs. 6,100 crores in FY18 to Rs. 10,000 crores in FY19. 

Even in the rural region, SFBs face competition from larger public and private sector banks due to greater trust among customers. Deposits are expected to grow at a CAGR of 60% to 65%, between FY19 and FY22, to Rs. 2.2 lakh crores. as SFBs promote convenient banking habits and build on financial inclusion. 

The microfinance industry’s gross loan portfolio (GLP) has grown at a CAGR of 24% from Rs. Rs. 1.4 lakh crores in FY16 to Rs. 2.7 lakh crores in FY19, while the overall industry has grown at a CAGR of 39% between FY17 to FY19, despite farm loan waivers of the past decade and demonetization. The loan portfolio of the microfinance industry is expected to grow at a CAGR of 25% between FY19 to FY22, which is lower compared to the growth in the previous three years. By FY22, the microfinance industry’s portfolio level is expected to double its FY19 figures, driven by client base expansion, and MFI penetration growth in rural areas.

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Equitas Small Finance Bank Ltd. is trading at high volume of 11.6M with price gain of 12.86.
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