IPO Analysis: Fedbank Financial Services Limited

IPO Rating: Apply for listing gains

About the Issue: 

Fedbank Financial Services Limited, promoted by Federal Bank Limited, is a NBFC with a retail focus. It offers mortgage loans like housing loans, small ticket loans against property, medium ticket LAP, unsecured business loans, and gold loans. The company is gearing up to launch its Initial Public Offering (IPO) for equity shares, each having a face value of Rs 10. The IPO price range is set between Rs 133 and Rs 140 per equity share, resulting in a total issue size of Rs 1,092.26 crore at the upper price band. 

The IPO is scheduled to commence on November 22, 2023, and will conclude on November 24, 2023. The market lot size for the IPO is 107 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 1,391 shares or a total investment of Rs 1,94,740 assuming the upper price band.  

Objects of the Issue 

The offer encompasses both the fresh issue and the offer for sale. It's important to note that the company will not accrue any proceeds from the offer for sale. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes: 

1. Augmentation of the company’s Tier I capital base to meet the company’s future capital requirements which are expected to arise out of the growth in the company’s business and assets. 

    

2. The company expects to receive the benefits of listing the equity shares on the stock exchanges, including enhancement of the company’s brand name and creation of a public market for its equity shares in India. 

Promoter holding 

The Federal Bank Limited is the promoter of the company. It currently holds a pre-issue shareholding stake of 72.28 per cent in the company.  

Company profile 

Fedbank Financial Services Limited, promoted by The Federal Bank Limited, is a non-banking finance company with a retail focus. It offers a carefully crafted range of products designed to meet customer needs, encompassing mortgage loans like housing loans, small ticket loans against property, medium ticket LAP, unsecured business loans, and gold loans. Employing an innovative ‘Phygital’ doorstep model, which blends digital and physical initiatives, the company provides customized services to customers across its entire product spectrum. 

In Fiscal 2023 and the three-month period ending June 30, 2023, it ranks as the second and third lowest in terms of borrowing costs among micro, small, and medium enterprises, as well as in the gold loan and MSME & gold loan peer set in India. As of March 31, 2023, the company exhibits the third-fastest growth in Assets Under Management (AUM) among NBFCs in the Indian peer set, with a three-year CAGR of 33 per cent between Fiscals 2020 and 2023.  

Furthermore, it demonstrates the fourth-fastest year-on-year AUM growth, registering a substantial 42 per cent for the three-month period ending June 30, 2023. Presently, the company has extended its reach across 17 states and union territories in India, operating through a network of 584 branches, notably establishing a strong foothold in the Southern and Western regions. 

Financials 

Outlook and Valuation  

The company faces a substantial concentration of loans towards emerging self-employed individuals and MSMEs, and any defaults from these borrowers could potentially have adverse effects on the business. Additionally, fluctuations in interest rates pose a risk to the company's lending and treasury operations. However, the company's presence in underpenetrated markets with strong growth potential serves as a significant competitive advantage. 

The company's well-diversified funding profile, coupled with the advantage of lower costs, positions it favourably to attract borrowers. Taking into account the sector outlook, as per the CRISIL Report, retail credit growth is anticipated to benefit from factors like the formalization of the economy, a growing working population, increasing urbanization, and the rising adoption of digital technologies in India.  

In FY23, the interest income reached Rs 1,110 crore, showcasing a notable 35 per cent growth from Rs 822 crore in FY22. Additionally, during Q1FY24, the interest income displayed a remarkable 45 per cent year-on-year growth. The company's bottom line also experienced substantial growth year on year, achieving a net profit of Rs 54 crore in Q1FY24. 

The company has maintained an average Return on Net Worth (RoNW) of 10.87 per cent over the past three fiscal years. In FY23, the net non-performing assets (NPA) decreased to 1.59 per cent, showcasing a notable improvement from the 1.75 per cent recorded in the previous year, signalling enhanced asset quality.  

The issue is priced with a P/BV ratio of 3.19 times, calculated using its Net Asset Value (NAV) of Rs 43.95 as of June 30, 2023. At the upper price cap, it is priced at a P/BV ratio of 2.53, considering its post-IPO NAV of Rs 55.23 per share. 

When we calculate the PE ratio for the company by considering the annualized FY24 earnings relative to the post-IPO fully diluted paid-up equity capital, the resulting PE ratio stands at 21. As per its official documents, the company has referenced several listed peers, including Aptus Value Housing, IIFL Finance, Five Star Business Finance, Manappuram Finance, Muthoot Finance and SBFC Finance which are currently trading at PE ratios of 29, 16, 38, 8, 15 and 48, respectively.  

If we factor in returns, the company lags behind its listed peers in terms of returns on assets (RoA). All peers are offering higher returns, and a few are even available at more appealing prices. Therefore, we suggest investors cautiously consider a moderate subscription to the offering, prioritising potential listing gains.