IPO Analysis: ESAF Small Finance Bank

IPO Rating: Apply for the long-term

About the Issue: 

Headquartered in Kerala, ESAF Small Finance Bank has a primary focus on extending the reach of banking services to previously unbanked or underbanked regions while providing loans to rural and semi-urban customers. 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 57 and Rs 60 per equity share, resulting in a total issue size of Rs 463 crore at the upper price band. 

The IPO is scheduled to commence on November 03, 2023, and will conclude on November 07, 2023. The anticipated listing on the exchange is set for November 16, 2023. The market lot size for the IPO is 250 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 3,250 shares or a total investment of Rs 1,95,000 assuming the upper price band. 

Objects of the Issue 

The bank intends to allocate the net proceeds from the fresh issue to enhance its Tier-I capital base, ensuring it meets future capital requirements and facilitates the expansion of its core business, primarily focused on lending. Furthermore, these funds will be utilized to cover expenses associated with the offering and to ensure compliance with regulatory requirements on capital adequacy as stipulated by the Reserve Bank of India (RBI) at various intervals. 

Promoter holding 

Kadambelil Paul Thomas and ESAF Financial Holdings Private Limited are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of 74.43 per cent in the company. 

Company Profile 

Headquartered in Kerala, ESAF Small Finance Bank has a primary focus on extending the reach of banking services to previously unbanked or underbanked regions. The bank embarked on its journey in 1992 as an NGO, driven by a vision of fostering sustainable and comprehensive upliftment for the poor and marginalized populations. Nevertheless, it also serves as a comprehensive banking institution with a presence in urban, semi-urban and rural areas. In the year 2022, the bank reached a noteworthy milestone, achieving a total business of Rs 25,000 crore. 

As of March 31, 2023, the bank boasts a network of 700 banking outlets spanning 21 states and 2 union territories. Its diverse portfolio encompasses micro loans, retail loans (including gold loans, mortgages, personal loans, and vehicle loans), MSME loans, and loans extended to financial institutions. In addition to its wide-ranging loan offerings, the bank provides a suite of modern banking services, such as ATMs, debit cards, safe deposit lockers, internet banking, mobile banking, agent banking, SMS banking, RTGS, NEFT and more. 

Financials

Outlook and Valuation 

When analyzing the financial performance, it is evident that the bank has demonstrated substantial growth over the last few years. In FY23, interest income witnessed a remarkable growth of 47 per cent as compared to FY22. Notably, for the Q1FY24, which ended on June 30, 2023, the bank achieved a net profit of Rs 130 crore on a total income of Rs 992 crore, representing a significant growth compared to previous quarters. The interest income reached Rs 898 crore, a significant increase compared to the Rs 690 crore reported during the same quarter last year. 

The advances under management (AUM) witnessed remarkable growth, with a compound annual growth rate (CAGR) of 39.22 per cent from March 31, 2021, to March 31, 2023. Furthermore, as of June 30, 2023, AUM experienced a notable increase of 5.34 per cent. In the case of deposits, they exhibited strong growth as well, with a CAGR of 27.66 per cent from March 31, 2021, to March 31, 2023. Additionally, as of June 30, 2023, deposits saw a substantial increase of 6.75 per cent. 

In Q1FY24, the net non-performing assets (NPA) decreased to 0.81 per cent, a substantial improvement from the 3.78 per cent recorded in the same quarter the previous year, indicating enhanced asset quality. The return on equity (RoE) reached 19 per cent, a significant increase from 4.12 per cent and 8.85 per cent in the previous two years. 

The issue is priced with a P/BV ratio of 1.47 times, calculated using its Net Asset Value (NAV) of Rs 40.92 as of June 30, 2023. At the upper price cap, it is priced at a P/BV ratio of 1.39, considering its post-IPO NAV of Rs 43.32 per share.   

When we compute the PE ratio for the company by considering annualised Q1FY24 earnings to the post-IPO fully diluted paid-up equity capital, the resulting PE ratio stands at 5. As per its official documents, the company has referenced several listed peers, including Suryoday Small Finance Bank, CreditAccess Grameen, Ujjivan Small Finance Bank and Equitas Small Finance Bank which are currently trading at PE ratios of 13, 21, 8 and 14, respectively. Hence, it appears that the offering is attractively priced. 

The bank may encounter challenges in rural areas, such as elevated customer acquisition costs, limited financial and product awareness, and susceptibility to fluctuations in household income due to local factors. Additionally, unsecured advances present potential concerns. However, leveraging its strengths, which include customer-centric products, a technology-driven model supported by a digital technology platform, and a track record of robust growth, the bank is well-positioned for continued growth. Hence, we recommend investors to subscribe to the issue with a long-term perspective.