IPO Analysis: Utkarsh Small Finance Bank Ltd

IPO Rating: Apply for long term

About the issue:

Incorporated in 2016, Utkarsh Small Finance Bank is an SFB (Small Finance Bank) in India and has recorded the third fastest Gross Loan Portfolio growth between Fiscal 2019 and Fiscal 2023 among SFBs with a Gross Loan Portfolio of more than Rs 6000 crore. The company is coming out with its initial public offering (IPO) of equity shares with a face value of Rs 10 per equity share. The price band of the issue has been fixed at Rs 23 to Rs 25 per equity share. The issue size is Rs 500 crore at a higher price band.

The IPO opening date is July 12, 2023, and it will be closing on July 14, 2023. The issue is likely to be listed on the exchange on July 24, 2023. The IPO market lot size is 600 Shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 13 lots (7800 shares or Rs 195,000) at the upper price band.

Objects of the Issue

The bank proposes to utilise the net proceeds from the issue towards augmenting its Tier–1 capital base to meet its future capital requirements. Further, the proceeds from the issue will also be used towards meeting the expenses in relation to the issue.

Promoter holding

The pre-issue shareholding is 84.75 per cent, post the IPO the promoter stake will be 69.28 per cent.

Company profile

Utkarsh Small Finance Bank is an SFB in India and recorded the third fastest Gross Loan Portfolio growth between Fiscal 2019 and Fiscal 2023 among SFBs with a Gross Loan Portfolio of more than Rs 6000 crore. The bank’s Promoter, Utkarsh CoreInvest Limited, commenced its operations as a NBFC in Fiscal 2010 and was focused on providing microfinance to unserved and underserved segments and in particular in the states of Uttar Pradesh and Bihar. The bank is headquartered in Varanasi, Uttar Pradesh and has over the years expanded its SFB operations strategically in states where we have been able to leverage the prior microfinance experience of Utkarsh CoreInvest Limited.

The bank’s operations are spread across India and are present in 26 States and Union Territories with 830 Banking Outlets as of March 31, 2023. The bank’s operations are focused in rural and semi-urban areas and as of March 31, 2023, it had 3.59 million customers (both deposit and credit) majorly located in rural and semi-urban areas primarily in the states of Bihar and Uttar Pradesh, in Fiscal 2022, are among the states with the best asset quality but with low and moderate credit penetration (Source: CRISIL Report).

The bank offers a range of financial products and services that address the specific requirements of our customer segments while assessing factors including income profile and the type of security available. its asset products include (i) microbanking loans that include joint liability group loans, and individual loans; (ii) retail loans that include unsecured loans, such as business loans and personal loans, and secured loans, such as loans against property (LAP) (iii) wholesale lending that includes short term and long term loan facilities to SMEs, mid and large corporates and institutional clients; (iv) housing loans with a focus on affordable housing; (v) commercial vehicle/construction equipment loans; and (vi) gold loans that were launched in Fiscal 2022. On the liabilities side, it offers savings accounts, current accounts and a variety of term and recurring deposit accounts. In addition, it also provides non-credit offerings comprising ATM-cum-debit cards, and bill payment systems and distributes third-party point-of-sales terminals, mutual funds and insurance products.

Financial

On the financial performance front, for the last three fiscals, USFB has posted a Total income/net profit of Rs 1,705.84 crore /Rs 111.82 crore (FY21), Rs 2,033.65 crore/Rs 61.46 crore (FY22), and Rs 2,804.29 crore/Rs 404.5 crore (FY23).

Valuation and Outlook

The issue is priced at a P/BV of 1.12 based on its NAV of Rs. 22.23 as of March 31, 2023, and at a P/BV of 1.10 based on its post-IPO NAV of Rs. 22.82 at an upper price band. The bank has a return on average asset of 2.42 per cent.

Amongst the listed peers, Equitas Small Finance Bank Ltd and Ujjivan Small Finance Bank Ltd have P/BV of 2.77x and 2.01x, respectively. Hence, the issue appears fairly priced.

The company has not paid any dividend for the reported periods of the offer document. It has already adopted a dividend policy in February 2016 and amended it in July 2022. The policy will be based on its financial performance and future prospects.

The bank’s deposits have grown from Rs 7,507.56 crore as of March 31, 2021, to Rs 10,074.18 crore as of March 31, 2022, and further to Rs 13,710.14 crore as of March 31, 2023. Its retail term deposits comprised 39.83 per cent, 37.28per cent and 40.66 per cent of the bank’s total deposits, as of March 31, 2021, 2022 and 2023, respectively, while CASA as a percentage of overall deposits was 17.68 per cent, 22.37 per cent and 20.89 per cent as of March 31, 2021, 2022 and 2023, respectively. The bank has been focusing on growing a stable and sustainable CASA base and its CASA was Rs 2,863.73 crore as of March 31, 2023.

The bank’s net NPAs were Rs 108.81 crore, Rs 235.79 crore and Rs 50.51 crore, and accounted for 1.33 per cent, 2.31 per cent and 0.39 per cent of its Net Advances, as of March 31, 2021, 2022 and 2023, respectively. Increase in the bank’s NPA levels due to deterioration in the credit quality of its customers. While the net NPAs have improved subsequently, and as of March 31, 2023, the bank may experience higher NPAs than anticipated due to its borrower’s reduced ability to make timely repayments.

Owing to strong deposit growth and improving CASA, we recommend subscribing to the issue for the long term.