Verdict: Indeed A Rising Sun
Rs. 581 cr IPO
Suryoday Small Finance Bank (SFB) is launching a Rs. 581 crore IPO, between Wed 17th Mar to Fri 19th Mar 2021, in the price band of Rs. 303-305 per share, 43% of which is fresh issue and 57% is OFS by 8 financial investors. This is a mandatory listing under SFB guidelines, due since Nov 2020. Issue represents 18% of post-issue capital, with listing on 30th Mar.
Pre-IPO in Feb at 4% discount to IPO price
Bank raised Rs. 152 cr from domestic funds at Rs. 291.75 per share in Feb, while 4 promoters infused Rs. 60 cr at Rs. 180 per share (no ESOPs to promoters) earlier this month, to keep their stake above 26% under RBI regulations, mandatory till Jan 2022. ~8% of bank’s equity held by the promoters, is pledged to part-finance their regular fund infusion, but further pledge looks unlikely. IFC is completely off loading its 4.5% holding, clocking 29% IRR on 6.5 year old investment. 18 other financial investors such as HDFC and Kotak group, IDFC First, Gaja Capital, stay invested, although trimming their collective 58% holding to 45% post IPO.
70% Book comprises Micro Finance
Started as a micro finance institution in 2009 and transformed into a SFB in Jan 2017, Suryoday operates 554 banking outlets, 75% concentrated in Maharashtra, Tamil Nadu, Odisha and Karnataka, with Rs. 3,800 cr loan book comprising 70% micro loans, 9% CV and 6% affordable housing loans. With no operations in Assam and West Bengal, bank is urban focused garnering 65% of micro loans from metro/urban areas.
Bank clocked net interest income and PAT of Rs. 491 cr and Rs.111 cr respectively in FY20, which stood at Rs. 353 cr and Rs. 55 cr for 9MFY21. Suryoday’s key competitive moat is low cost to income ratio of 47% (FY20) among peers (Ujjivan 67%, Equitas 66%, AU 54%), despite smaller AUM. Even after maintaining Rs. 1,000 cr excess liquidity due to covid (fetching 4% annual return over 19% average yield), 9MFY21 cost to income ratio of 56% is comparable to peers. Second advantage is superior net interest margin (NIM) of 12% for FY20 against Ujjivan’s 11%, Equitas’ 9% and AU’s 5%. Once the excess liquidity (amounting to 25% of current AUM) is deployed, as urban areas unlock gradually (rural India opened earlier), financial ratios such as cost to income ratio, NIMs, RoA will risefurther. Gross NPA, as of 31.12.20, stood at 0.78% (micro book 0.03%) while net NPA is 0.33%. Proforma gross NPA stands at 9.28%, on which, Rs. 54 cr interest reversed and Rs. 170 cr covid provision held. Current net worth of Rs. 1,400 cr results in BVPS of Rs. 143.
At Rs. 305, bank’s market cap will be Rs. 3,237 cr, which discounts one year forward expected BVPS of Rs. 168 by PBV multiple of 1.8x, which is similar to Ujjivan and Equitas, and lower than AU’s 5x. During 9MFY21, Suryoday’s loan book grew 7%, whereas peer Ujjivan, which also has ~70% book in the form of micro loans, contracted 3.6%. Suryoday’s Dec 2020 disbursements in micro loans and affordable housing have already surpassed Dec 2019 number. Low cost to income ratio even on low AUM base is a huge advantage, besides adequate liquidity on hand to accelerate loan growth over the medium term.
Strong fundamentals like high institutional backing, low cost structure and expected loan growth make this bank promising. Hence, one can subscribe to the IPO as a quality small cap.
Grey Market Premium (GMP) of Suryoday Small Finance Bank: Grey Market Premium of Suryoday SFB is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.
Disclosure: No Interest.