Equitas Small Finance Bank Limited

Started in 1993, Madras based Equitas Small Finance Bank Ltd (ESFBL) in Fiscal 2019 was the largest small finance bank in India considering banking outlets and the 2nd largest small finance bank considering assets under management and total deposits. Unlike other micro-finance companies, it has a diversified loan portfolio and less dependence on micro-finance business. With the main focus on financially unserved and underserved customers, the bank offers a wide range of banking products and services. The company provides micro-finance loans promoting financial inclusion, housing finance, vehicle finance, and MSE finance. Equitas Small Fin Bank offers financial products according to customers' income profile, type of security available and nature of business. Apart from this, the bank also provides current accounts, salary accounts, savings accounts, other deposit accounts, ATM-cum-debit cards, mutual fund products, third party insurance, and issuance of FASTags. ESFBL follows credit assessment procedures through a risk management framework which is analyzed by its Risk Management Committee. As on 30th June 2020, it has the largest distribution channel among Small Finance Banks (SFBs) including 856 Banking Outlets and 322 ATMs in India across 17 states and union territories. The deposits have grown at a CAGR of 38.75% from Rs 56,039.73 million as of March 31, 2018 to Rs 107,884.05 million as of March 31, 2020. As of March 31, 2019 the CASA ratio was the second highest among SFBs in India, and the retail deposits to total deposits ratio was the third highest among SFBs in India (Source: CRISIL Report). As of June 30, 2020, the CASA ratio and retail deposits to total deposits ratio was 19.97% and 37.13%, respectively. The cost of funds (calculated as interest expense divided by average interest-bearing liabilities), which was 8.36%, 8.13%, 7.97% and 7.63% (annualized)/ 1.91% (unannualized) as of March 31, 2018, 2019, 2020 and June30, 2020, respectively. As per financial performance, ESFBL has posted total income/net profits of Rs. 1212.70 cr. / Rs. 104.13 cr. (FY17), Rs. 1772.90 cr. / Rs. 31.83 cr. (FY18), Rs. 2394.83 cr. / Rs. 210.57 cr and Rs 2927.80 cr / Rs 243.64 cr (FY20). For upto Q1 of FY21, company has posted profit of Rs 57.67 Cr on total revenue of Rs 750.97 Cr. So company has shown exceptional performance. ESFBL has posted an average EPS of Rs. 1.94 and average RoNW of 7.85% for last three fiscals. Issue is priced at a P/BV of 1.25 as per NAV of 26.47 on 30.06.20. As per FY20 earnings, P/E is around 15.42. If we attribute latest annualised earnings of FY21 on fully diluted equity post issue, then asking price is at a P/E of around 16.28. As per RHP, the listed peers are shown in above table.  On BRLM's front, three BRLMs are associated with this IPO, and have handled around 25 IPOs in last three fiscals, and from last 10 IPOs, 4 opened below issue price and remaining opened above issue price on the day of listing. As of now, from last 10 IPOs, 4 are trading below issue price and remaining above issue price. ( As on 14.10.2020 ) As per financials, results are very good, RoNW is 8.92% for last three fiscals and issue looks fully priced with respect to current earnings. This industry is growing at good rate, but current situation is not good for banking sector and next some time will remain very challenging for banking industry. Performance of BRLMs are good. So we give NEUTRAL rating to this IPO and one may invest from long term perspective.

• 1 Equitas Holdings Limited