Brokerages are bullish on the public issue of Equitas Holdings Ltd, which opened for subscription on Tuesday. Equitas is the first small finance bank (SFBs) to unveil an initial public offer (IPO) to list on the stock exchanges.
Small finance banks’ prime responsibility is to provide savings instruments to the financially underserved and extend credit facility to small farmers and small businesses. The Reserve Bank of India (RBI) has granted licences to 10 entities to start such SFBs, of which eight are mainly into micro lending.
Brokerages like IIFL, Prabhudas Lilladher, Centrum Stock Broking, Aditya Birla Money and Anand Rathi Stock Brokers among others have advised investors to subscribe to the IPO through which the company plans to raise around Rs 2,200 crore.
The IPO of Equitas comprises of a fresh issue of around 6.6 crore shares and an offer for sale by existing shareholders to the tune of 13.2 crore shares. The price band for the offer has been fixed between Rs 109 and Rs 110. Incidentally, the issue is only for domestic investors as the company wants to reduce the foreign shareholding to around 35 per cent from 92.6 per cent to comply with regulatory cap of 49 per cent foreign holding in small finance banks.
Brokerages are betting on the prospects of small finance banks and believe that investors, especially those looking for long-term gains, can subscribe to the issue.
“We believe that pricing is reasonable given that it is lower than well-run private sector banks and it also seems to sufficiently capture the likely compression in RoA (return on assets) over the next couple of years due to required investments. While there is no precedent of this conversion process… we believe it should be able to navigate the challenge successfully and evolve as a profitable SFB after three to four years. Long-term investors can subscribe in the IPO,” says a note by IIFL.
Similarly, Anand Rathi says the company has been growing at a compounded annual growth rate of 64 per cent in the last four years, and given the growth opportunity in micro finance and its entry into the home finance business, the future growth is expected to be healthy. The brokerage has a ‘long-term subscribe’ rating on the IPO.
While recommending investors to subscribe to the offering, brokerages have also listed concerns like the untested regulatory framework for SFBs, lack of operating history of the company in the banking space and the company’s ability to attract customers.
ICICI Direct has listed the key concerns as: inability to manage expenses post converting to SFBs, inability to raise adequate resources to meet cash reserve ratio, statutory liquidity ratio requirements, heavy dependence on southern states, particularly Tamil Nadu, and scalability concerns due to regional presence.
Meanwhile, on Tuesday, the company announced that it has raised around Rs 652 crore by allotting 5.93 crore shares as part of anchor allocation to mutual funds and other domestic institutional investors.
Some of the entities that were allotted shares were Franklin Templeton MF, Birla Sun Life Trustee Co, SBI MF, PI Opportunities Fund, UTI MF, ICICI Prudential MF, Kotak Mahindra MF, HDFC Standard Life Insurance, Birla Sun Life Insurance, Sundaram MF, Tata AIA Life Insurance and Ambit Alpha Fund.
