Equitas Small Finance Bank IPO Details: Market Guru Anil Singhvi says avoid

Zee Business Managing Editor Anil Singhvi has clearly advised investors to Avoid Equitas Small Finance Bank IPO as the valuations are not at all attractive. The Market Guru highlighted promoters of ESFB need to reduce 42% stake more by September 2021. He also explained 36% of the book of ESFB is still under moratorium.

Equitas – journey from license to IPO to SFB IPO

Equitas received a license to operate Small Finance Bank on Oct 15 and for IPO on Apr 16 to comply with requirements of domestic shareholding. The operative subsidiaries were merged into holding companies, the financial services business was transferred to SFB subsidiary and banking operations started in Sep-16.

One of the licensee conditions was a separate listing of the SFB within 3 years of commencing operations. RBI made it clear in 2017 as well as 2018 that the decision on reverse merger of Holding company & SFB will be taken near completion of 5 year of operation. This implied that Equitas SFB needed to be listed by Sep-19.

Initially, Equitas came up with a “Scheme of arrangement”, in which they would capitalize the banks reserve and allot SFB shares to holding company investors and list this on exchange. However SEBI rejected this scheme and the only option left with Equitas SFB was to list through the IPO route.

What will happen to Equitas holding in SFB?

One of the other regulations for SFB licensing was that promoters holding in the bank have to be reduced to 40% within 5 year of operations. The current IPO will help reduce the holding company’s stake and will stand at 82% post IPO completion. The holding company will have one year to further reduce its stake to 40%.

Antiques view on Equitas SFB

Equitas hit a rough patch post-conversion to the bank due to a confluence of factors like demonetization, diversifying into new products, costs related to banking conversion. Business started stabilizing in 2018, especially on the liability side. While early signs of operating leverage were visible with cost to AUM dropping from 12.4% in FY18 to 8.7% in FY20, but muted profitability was the result of accelerated covid related provision. The company has already provided covid related provisions of Rs 140 cr (0.9% of AUM).
Given the possibility that equitas can scale up its business in new secured products by leveraging its current branch network thus operating leverage will continue to occur this coupled with its focus more towards secured lending could lead to decrease in credit cost. These factors could result in high possibility of it hitting mid teens RoEs by FY22e, thus making the current valuation of 1.2x post money book attractive.

Antique’s view on Equitas holding

Given that Equitas Holding has no operating business, except 82% stake in the bank. With SFB being valued around Rs 3760 cr, this would imply that holding co is trading at a discount of 45%. In case the regulator allows reverse merger at the end of 5 years, the discount could narrow significantly.

Issue Details:

Fresh Issue of Equity shares aggregating upto ₹ 280 Crore and Offer for sale of up to 72,000,000 Equity Shares by Equitas Holdings Ltd (“EHL”).

Issue summary:

Net Issue size of the IPO is Rs 510 Cr – Rs 518 Cr and Face value stands at Rs 10. Post Issue Implied Market Cap of ESFB would be Rs 3,651 cr – Rs 3,756 Cr. JM Financial, Edelweiss Financial and IIFL Securities are Book Running lead managers for the issue. The issue opens today and closes on 22nd October (Thursday).
Promoted by Equitas Holdings Limited (“EHL”), Equitas Small Finance Bank (“ESFB”) was incorporated on June 21, 1993. The Bank, seeking in principle approval from RBI to undertake a merger of EHL with the Bank, such that the merger would be effective from September 4, 2021 and seeking in-principle approval to permit the dilution of EHL’s shareholding in the Bank pursuant to such merger.
ESFB is the largest SFB in India in terms of number of banking outlets, and the 2nd largest SFB in India in terms of Assets under Management (“AUM”) and total deposits in Fiscal 2019. (Source: CRISIL Report). ESFB has been able to successfully diversify their loan portfolio and significantly reduce their dependence on the microfinance business as compared to other microfinance companies that have converted to SFBs.

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Their asset products include small business loans, housing loans, and agriculture loans, Vehicle Loan, MSE Loan etc. On the liability side, they offer current accounts, salary accounts, savings accounts, and a variety of deposit accounts to their clients. In addition, ESFB also provides non-credit offerings comprising ATM-cum-debit cards, third party insurance, mutual fund products, and issuance of FASTags.
As of March 31, 2019, ESFB had the largest network of banking outlets among all SFBs in India (Source: CRISIL Report). As of June 30, 2020, their distribution channels comprised 856 Banking Outlets and 322 ATMs across 17 states and union territories in India.
The shares will be listed on BSE and NSE.

(Authored by Rahul Kamdar)