RBL Bank IPO Valuations In Line With Peers; Brokerages Upbeat
The offer opens on Friday and closes on August 23.
RBL Bank Ltd., formerly called Ratnakar Bank Ltd., aims to raise Rs 1,210 crore through an initial public offer, which opens on Friday and closes on August 23.
The private sector bank aims to raise Rs 832.5 crore through the issue of fresh equity shares. The remaining Rs 380.5 crore will be raised through an offer for sale by existing shareholders, including Beacon India Pvt Equity Fund, GPE (India) Ltd, and 147 individual shareholders of the bank. The price band for the issue has been fixed at Rs 224-225 per share.
Anchor investors have already committed Rs 364 crore towards the initial public offering of RBL Bank. These investors include Fidelity, Nomura, Merryl Lynch, and ICICI Prudential MF.
The bank had, in December, raised Rs 488 crore in a pre-IPO private placement, at an issue price of Rs 195 per share.
Kotak Mahindra Capital Co Ltd., Axis Capital Ltd., and HDFC Bank Ltd., among others are the bankers to the issue.
Use of Proceeds
The proceeds from the issue will be used to augment the bank’s tier-I capital base to meet future capital requirements, and also to ensure compliance with Basel III and other Reserve Bank of India guidelines, the company has said in its prospectus.
Financials
Over the years, the company has undergone significant transformation which reflects in its financial performance. Net interest income and net profit for the bank have grown at 44.7 percent and 45.6 percent respectively over the five-year period till March 2016.
The share of non-interest income increased from 26.4 percent of the net total income in FY12 to 37.5 percent in FY16 due to growth of foreign exchange, treasury, income from letters of credit, credit card revenue and other charges.
The cost-to-income ratio, which indicates the bank’s efficiency, has fallen from 70.4 percent in FY14 to 58.6 percent in FY16.
The bank’s CASA, or current account savings account, ratio, at 18.6 percent in FY16, is lower than many private banking peers, but there could be scope for improvement given that it is growing at about 45 percent compounded growth rate.
The bank’s management has indicated that it will continue to offer an interest rate of over 7 percent on savings bank deposits in an attempt to attract more deposits. Since these deposits bear a lower interest rate, a higher CASA ratio would lead to lower overall cost of deposits.
As of March 31, the bank’s total capital adequacy ratio and common equity tier-1 CAR was above the regulatory requirement at 12.9 percent and 11.1 percent respectively. The bank expects its capital adequacy ratio to rise to above 14 percent if the issue is fully subscribed.
The bank’s total advances stood at Rs 21,229.08 crore as on March 31 this year, while total deposits stood at Rs 24,348.65 crore. Its loan book has also grown at over 45 percent per annum over the past four years.
Asset Quality
Bad loans have seen a significant jump in FY16, up 210 basis points to 0.98 percent or an increase of 87 percent over FY15 on an absolute basis. The Reserve Bank of India’s asset quality review that kickstarted in the second half of FY16 resulted in the reclassification of several standard loans into non-performing assets.
As of March 31, the total bad loans on the books of India’s scheduled commercial banks stood at 7.6 percent of advances, so RBL Bank’s asset quality is better in comparison. However, it must be noted that RBL’s loan book is much smaller than most of India’s established banks.
The bank’s exposure to the stressed metals sector is relatively lower at 1.35 percent.
Valuations
At the upper price band of Rs 225 per share, the stock is offered at 2.5 times its pre-IPO book value. On post IPO book value it is offered at 2.18 times. This is higher than the average peer group valuation of 1.93 times price to book value (which includes ten private sector banks).
Thumbs up From Brokerages
Broking firms seem upbeat on the RBL Bank IPO and have given a ‘Subscribe’ rating on the back of attractive valuations.
Angel Broking has recommended that investors ‘subscribe’ to the IPO given the growth prospects of the bank and attractive valuation.
At the upper end of the price band, ie Rs 225, the stock is offered at 2.4x its pre-IPO BV, while on post IPO BV it’s offered at 2.1x. We believe the issue is attractively priced taking into account the valuations at which other mid-sized private sector banks are currently trading.Angel Broking’s IPO Note
Sushil Finance Consultants says the bank’s return on equity at 9 percent is quite low, but the trend is upwards. The management has created an excellent platform to springboard into future growth, the brokerage said in its IPO note.
At the asking price of Rs 225 at diluted earnings per share of 7.91 and price-to-equity of 28.45, the issue seem reasonably priced. Given the strong management and improving balance sheet one can invest in the IPO for the medium to long term.Sushil Finance Consultants’ IPO Note
NVS Wealth Managers has a ‘subscribe’ rating on the IPO as well.
At the issue price of Rs 225 per share, the IPO is priced at a PE multiple of little over 23x and P/BV of 2.2x which compares very favourably with its new age peers and considering the likely increased earnings based on current financial year 2017 as well as addition to the net worth and increased book value, the pricing could become much more attractive.NVS Wealth Managers’ IPO Note
Emkay Global has also given a ‘subscribe’ recommendation as they believe that with a business market share of just about 30 basis points, a well diversified loan book, able top management team, adequate capitalization and no asset quality pangs, the bank is well poised to make profitable market share gains in the medium term.
We believe, the profitability (ROAs) could improve further if the bank is able to leverage the investments made in distribution and systems over past few years and sweat its resources efficiently.Emkay Global’s IPO Note
Prabhudas Lilladher has recommended investors to subscribe with a long term view as they believe at the upper price band of Rs 225, the stock is fully valued.