Should You Subscribe To Equitas Small Finance Bank IPO? Brokerages’ Take
A “centre leader” counts money to be distributed as a micro-loan at a meeting. (Photographer: Adeel Halim/Bloomberg)

Should You Subscribe To Equitas Small Finance Bank IPO? Brokerages’ Take

At least three brokerages recommended investors to subscribe to Equitas Small Finance Bank’s initial public offering, citing a well-diversified portfolio, stable asset quality and an under-served market.

“We believe microfinance institutions’ books could be most vulnerable to the Covid-19 impact due to unsecured nature, and thus diversification bodes well for the bank," IDBI Capital said in a report. That corroborates with the views of ICICI Direct and KRChoksey.

India’s second-largest microfinance bank by deposits launched its three-day maiden offer on Oct. 20. The IPO—set to end on Oct. 22—comprises a fresh issue of up to 8.75 crore shares worth Rs 280 crore, and an offer-for-sale of 7.2 crore shares by parent Equitas Holdings Ltd. The price band has been fixed at Rs 32-33 apiece.

Equitas Small Finance Bank, according to a statement, has already raised Rs 139.68 crore by allocating over 4.2 crore shares to 35 anchor investors at the upper price band on Oct. 19.

Still, some concerns remain.

The brokerages warned against business uncertainties, regional dependencies and unfulfilled regulatory requirements. According to IDBI capital, a less-than-perfect reputation of the bank’s management is a worry. “Part-time Chairman and Non-Executive Independent Director Arun Ramanathan’s name previously appeared as one of the directors of JCT Electronics Ltd. in the willful defaulter database maintained by TransUnion CIBIL Ltd.,” it said.

Here’s what the brokerages had to say.

IDBI Capital

  • Recommends ‘Subscribe’ to the issue from a long-term perspective.
  • The bank has diversified the loan portfolio towards non-microfinance segments such as small business loans, vehicle loans, MSE and corporates. Non-microfinance percentage of portfolio stood at 74% compared with 5-20% for its peer small finance banks.
  • A large section of the Indian population lacks access to formal banking services or is served by informal providers, positioning Equitas Small Finance Bank for future growth.
  • The continuing impacts of Covid-19 are highly unpredictable and may have an adverse effect on business, operations and our future financial performance.
  • The bank needs to fulfil stringent regulatory requirements and prudential norms and not comply of same could affect the business.
  • Bank promoter and directors are involved in certain legal proceedings, any adverse developments related to which could materially and adversely affect business, reputation and cash flows.
  • A major portion of advances comes from the state of Tamil Nadu and any adverse impact could lead to impact in the portfolio.

ICICI Direct

  • Recommends ‘Subscribe’ to investors.
  • Given the large opportunity in the space of operation, Equitas Small Finance Bank is poised to grow its book at a faster pace ahead.
  • The bank’s credit analysis and valuation methodology requires market knowledge and practical experience which is developed over a period of time. Thus, this strategy is difficult to replicate.
  • With a substantial network of banking outlets and focus on technology, Equitas Small Finance Bank is placed to keep growth trajectory in deposits abated. Such focus on building retail deposit franchise is seen aiding margins and thereby core performance ahead.
As Equitas Small Finance Bank has diversified from microfinance, it is relatively better placed then other peer small finance banks. Thus, we expect a diversified asset mix would help protect Equitas Small Finance Bank from counter cyclical impacts across economic cycles.
ICICI Direct
  • The continuing impact of the pandemic may affect the business negatively.
  • Deposit base dependent on a limited number of customers.
  • New products, entry in new geography pose a risk of NPA.

KRChoksey

  • Recommends investors to ‘Subscribe’ to the IPO.
  • Past good performance has built the growth drivers and provides better prospects for the bank’s performance in the future.
  • Healthy market share led by diversification in asset products and strong retail deposits.
  • Asset quality trend is stable although a key concern due to Covid-19 pandemic.
  • The highest concentration of advances from Tamil Nadu (southern India) may not be good for bank’s asset quality.
  • Credit availability or liquidity in the market may get affected due to global or Indian economic conditions.
  • Changes in the RBI policy rates may affect the bank’s rate on interest-earning assets and interest-bearing liabilities.
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