Chennai-based micro finance lender and a Small finance bank (SFB) license holder Equitas Holding is coming up with an IPO to reduce foreign holdings below 49% stipulated by RBI and raise fresh funds. This is the first IPO from a small finance bank license holder and is likely to generate considerable interest. Detailed IPO analysis is given below to aid investors in their decision to subscribe to the IPO.

IPO Details

IPO Size : Approximately 2175 crores. (fresh issue of Rs 720 crore and an offer for sale by promoter P.N. Vasudevan, MD of company & private equity shareholders)

Issue Price : Rs. 109 – 110

Issue Date : 5th April – 7th April 2007

Lead Managers : Axis Capital, Edelweiss Financial Services, HSBC Securities and Capital Markets (India) Pvt Ltd, ICICI Securities Ltd.

About the Company

Business : It is ranked at 5th spot among MFIs that include Janalakshmi, SKS micro , Ujjivan and Satin. Eight micro finance firms including Equitas , last year received a small finance bank licence . These firms are required to reduce foreign holding to the 49 % in line with RBI rules. Apart from micro finance business it provides finance for used commercial vehicles as well as loan against property and to micro and small enterprises and small housing loans to self employed.

Promoters & Venture Funds : N. Vasudevan the main promoter holds approximately 3% stake. The top 3 shareholders include IFC, CDC and India Financial Inclusion Fund. Others are likes of Sequoia Capital, Dutch development finance institution FMO, Helion Venture Partners, Aavishkaar, India Financial Inclusion Fund, Westbridge Ventures, Lumen Investment Holdings , Creation Investments, Sarva Capital, Aquarius Investments etc. some exiting , some part exit.

Financials : Revenue in 2014-15 Rs.755.9 crore (up 56%) . Net Profit at 106.6 crores (up 44%) . This year revenues have shown healthy trend and in 9 months last full year revenue has been achieved. Profit have also shown a decent growth.

Financial Ratios : EPS approximately 4.5 in 2014-15, This year approximately 6 on existing capital. New equity capital added is not much. SKS has annualized PE ratio of 25. P/BV : Financial institutions are many times assessed on this ratio. price-to-book value (PBV) multiple and this is 2.2 times for this IPO. SKS enjoy more than 3 PBV ratio.

Comparison: Another SFB licensee, Ujjivan Financial Services Ltd, also plans to come out with IPO. It did a pre IPO placement at a price-to-book value multiple of 2.1 times.

Assessments

Plus Points : Ist Issue from a Small finance bank (SFB) license holder

Risks : Margins may be affected as it makes transition to a small Bank.

Overall Assessment : Based on PE ratio, PBV ratio (2.2) in comparison to SKS micro finance (> 3) there could be some room available to investors . The PBV ratio for 2016 is approximately 1.8. Profit margins are low compared to SKS micro finance and hence SKS despite being denied a small financial bank approval may do well. But Banking license should result in low cost of funds even as converting from micro finance institution to a bank has considerable medium term costs. Overall seems ok looking into potential of micro finance sector, other forthcoming issues like Ujjivan finance & focus of government on rural economy as well as low NP reported by such companies. Also co. has steady performance record.

Post Closing & Post listing

Subscription : The IPO received overwhelming response and was subscribed more than 17 times. Retail participation was for 8,60,26,995 shares at cut off against offered 69380826 equity shares resulting in approximately 1.24 times subscription.

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