Incorporated in 1993, Chennai-based Equitas Small Finance Bank Ltd (ESFBL) was the largest small finance bank in India in Fiscal 2019 considering banking outlets and the 2nd largest small finance bank considering assets under management and total deposits. They are primarily engaged in providing small business loans, microfinance, and vehicle finance to unserved and underserved customer segments
Unlike other microfinance companies, it has a diversified loan portfolio and less dependence on microfinance business. With the main focus on financially unserved and underserved customers, the bank offers a wide range of banking products and services.
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.
As of June 30, 2020, they operated 856 Banking Outlets spread across 17 States and union territories in India. They intend to strategically grow their network of Banking Outlets in new markets in India in order to attract new customers. As of June 30, 2020, they had 15,843 employees.
Price Band – Rs 32 to Rs 33
Issue Size – 517.6 Cr (Fresh Issue 280 Cr, rest 237.6 Cr OFS)
Company post IPO Mcap – 3754 Cr (1.053 billion shares paid up + Fresh issue of 8.48 cr amounting to Rs 280 Cr, 33rs issue price)
Initially, the IPO was expected to arrive last year but due to some delays & also to follow up on the regulatory pressure, it has to tap the IPO market in the worst of times for a BFSI organization. The earlier size was 1000 Cr, but now it’s slashed to 518 Cr.
Dates – October 20 to October 22, 2020
As of June 2020, Small business loans constituted 41.64%, Micro Finance constituted 23.23%, Vehicle Finance constituted 24.25%, MSE Finance constituted 4.57%, and Corporates constituted 4.96% of total advances.
The true picture of NPA unknown – So we all know the moratorium started first with 3 months, with the addition of again 3 months. The morat finally ended in September but All loans have the option to restructure uptil 31st December. For all such loans the 90day window after the restructuring will be important to know if the loan is standard or slips into NPA! So the first signs of stress will clearly be visible in the March 2021 quarter and 3 quarters after that.
RBI RULES – Promoter is required to reduce its shareholding in the Bank to 40% of paid-up Equity Share capital within a period of five years from the date of commencement of business operations as an SFB, which was September 5, 2016, and thereafter required to reduce its shareholding in Bank to 30% and 26% of paid-up Equity Share capital within a period of 10 years and 12 years, respectively, from the date of commencement of business operations. (Promoter owns 95.49% as of RHP Date,82% post IPO)
Our View – The promoter would have to sell his 40%+ stake by September 2021, which is coinciding with one of the worst NPA cycles of the decade. This should make an investor question the viability of doing so after they sell just 10% in an IPO. Anything done afterward will surely lead to a tsunami of float into the market, The stock could face huge downward pressure due to this.
There were 124 instances of fraud detected in Fiscal 2018, 2019, 2020 and 2021 which, inter alia, pertain to instances of theft, phishing, skimming, forgery, identity theft, cash embezzlement, cheating, criminal misappropriation, and criminal breach of trust and 27 instances of robbery and theft reported in Fiscal 2018, 2019, 2020 and 2021.
A large number of our Banking Outlets are located in the State of Tamil Nadu. Consequently, a majority of our advances are towards customers in Tamil Nadu. As of March 31, 2020, and June 30, 2020, advances towards customers in Tamil Nadu represented 54.26% and 54.31%, respectively, of our Gross Advances (including IBPC issued) as of such dates.
Deposits from their 20 largest depositors (excluding certificates of deposit issued) represented 31.95% and 32.25% of total deposits as of March 31, 2020, and June 30, 2020, respectively. Further, deposits from the 10 largest depositors, primarily comprising wholesale depositors, represented 23.94% and 24.94% of total deposits as of March 31, 2020, and June 30, 2020, respectively.
Collateral for their small business loans and secured MSE loans primarily includes mortgage over their customers’ residential or commercial property and they are therefore exposed to adverse movements in the price of such immovable property and the real estate market in general. They are also exposed to the risk arising out of forged title deeds and property documents are given as collateral for secured loans, particularly as there is no centralized land title registry in India to verify the land title of first-time borrowers.
As of March 31, 2020, unsecured loans represented 24.61% of Gross Advances (including IBPC issued), while as of June 30, 2020, unsecured was 24.25% of Gross Advances (including IBPC issued).
In microfinance business, they rely primarily on non-traditional guarantee mechanisms including the peer-guarantee loan model, wherein borrowers form a ‘joint liability group’ (“JLG”) and provide guarantees for loans obtained by each member of such group without such members having to provide collateral or security on an individual basis. There can be no assurance that such joint liability arrangements will ensure full or partial repayment by the other members of a JLG in the event of default by anyone of them.
Their debt is rated by various agencies, including by CRISIL Limited. Certificate of Deposit (CD) program has been rated CRISIL A1+; long-term borrowings and non-convertible debentures/ subordinated debt have been rated CRISIL A+/ Stable.
Balance Sheet – Metrics
P&L – Metrics
25% of the book comes from the highly risky microfinance sector. Considering the rise in NPA across the whole industry due to the fallout of Covid-19, we advise investors to be careful.
The true picture of the loans will only be known by March 2021 and until then we would suggest sticking only to the top lenders with a diversified book and a strong capital adequacy ratio
A Few well-diversified banks are available below the book value and therefore it makes little to no sense to look at a smaller riskier lender such as Equitas SFB. Therefore we have an ‘Avoid’ rating on the IPO.
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