Equitas Small Finance Bank IPO: How attractive is the stock for long-term investors?

ET Intelligence Group: Equitas Small Finance Bank (SFB) plans to raise Rs 280 crore through fresh issue of shares to boost its tier I capital. In addition, its promoter Equitas Holdings (EHL) will sell shares worth upto Rs 238 crore to reduce its stake to around 82% from the current 95.5%. This needs to further fall to 40% to abide by the regulatory requirements and may serve as a hangover on the stock after listing. The IPO demands a lower valuation compared with peers including Ujjivan SFB and AU SFB. But, Equitas SFB has poorer asset quality largely due to higher loan loss in its vehicle finance segment. Its provision coverage is comparatively less. It also demonstrates lower return ratios compared with the peers. This may keep long-term retail investors away from participating in the IPO. IPO dates: 20-22 October 2020IPO Price: Rs 32-33IPO size: Upto Rs 518 croreLot size: 450 sharesBusiness and financialsChennai headquartered Equitas SFB acquired the license from RBI in 2016. Its total advances grew to Rs 15,923 crore from 10,781 crore between FY18 and FY20. It further rose to Rs 17,312 crore in the June 2020 quarter. The small business loans, micro finance and vehicle finance segments constituted 42%, 23% and 24% of the total loan book during the quarter. Equitas SFB’s total income increased to Rs 2,927.8 crore from Rs 1,772.8 crore and net profit rose to Rs 243.6 crore from Rs 31.8 crore between FY18 and FY20.Equitas SFB has a higher CASA (current account and savings account) ratio of 20% than 14-16% for peers. However, its cost of funds at 7.6% is not widely better than the peers – 7.7% and 7.2% for Ujjivan SFB and AU SFB respectively. Moreover, Equitas SFB’s gross nonperforming assets (GNPA) ratio is higher at 2.7% compared with 1% and 1.7% for Ujjivan and AU. Its provision coverage is also quite low at 48.8% compared with above 60% for the peers.ValuationThe IPO is valued at a price-book (P/B) multiple of 1.2 on post-IPO equity. This is lower than P/Bs of 1.7 and 4.9 for Ujjivan SFB and AU SFB reflecting Equitas SFB’s lower asset quality and provisioning. 78730318The SFB division of the banking sector is expected to grow by 25% annually between FY19 and FY22 in terms of assets under management according to CRISIL following the government’s focus on financial inclusion. Long-term investors may consider other SFB peers with better asset quality and return ratios to take advantage of the future growth prospects of the segment.
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