India: Equitas Holdings IPO Hits Markets, What These Brokerage Houses Are Saying

Apr 2016
India, April, 06 2016 - The IPO of Equitas Holdings was subscribed 9 per cent in the first day of the offer on Tuesday.

Equitas Holdings (EHL) hit the capital market on Tuesday (April 5) to raise Rs 2,200-crore through an initial public offer (IPO), making it the first issue of the financial year 2016-17. The company has fixed the price band at Rs 109-110 per share for the issue which will close on April 7.

The IPO of Equitas Holdings was subscribed 9 per cent in the first day of the offer on Tuesday. The Rs 2,200 crore-IPO, received bids for 1,21,44,600 shares, as against the total issue size of 13,91,91,802 shares, according to data available with the NSE till 1700 hrs. Retail investors portion was subscribed 17 per cent.

Incorporated in June 2007, Equitas Holdings is Chennai based financial services provider focused on individuals and micro and small enterprises (MSEs). It is one of the 10 companies that have been selected by the RBI to set up small finance banks, aimed at helping small businesses and farmers get easier access to funding. The company operates in 11 states, one union territory and the NCT of Delhi.

The funds generated from the fresh issue will be used to develop IT infrastructure for the new bank and for lending purposes among others. The book running lead managers to the issue are Axis Capital, Edelweiss Financial Services, HSBC Securities and Capital Markets (India) Private Limited and ICICI Securities Limited. Shares of Equitas will be listed on BSE and NSE both.

The company is a leading player in microfinance segment with approx 5.5 per cent market share. It also operates in pre-owned vehicle, MSE and affordable housing segments. Converting a Small Finance Banks (SFB), which give the company access to low-cost funds coupled with wider cross-selling opportunities.

The company has three wholly-owned subsidiaries Equitas Micro Finance (EMFL), Equitas Finance (EFL) and Equitas Housing Finance (EHFL). EMFL is the fifth largest microfinance company in India in terms of loans at Rs 2,935 crore (53 per cent of total loans). The consolidated AUM of EHL has grown at a strong pace of 50 per cent CAGR in FY11-15 to Rs 4,010 crore, increasing to Rs 5,505 crore as on 9MFY16. NIM was at 11.6 per cent as on 9MFY16 while profit after tax was at Rs 120 crore.

Should you invest?

Reliance Securities:
The brokerage house does not rule out the probability of fluctuation in the return ratios in intermittent period, due to its conversion into SFB. Considering its presence in high growth niche segment, higher margin, superior execution skills demonstrated by the current management team and strong corporate governance track record; Reliance suggests ‘Subscribe’ from a long-term perspective.”

SMC Investment and Advisors:
The expertise of Equitas in lending to unbanked segments is a key strength and this may drive future growth. Moreover, with its experience in vehicle finance and MSE loans, it is expected that the business of the company would also grow in its upcoming Small Finance Bank, for which it has got a license from RBI. Investors with a longer term horizon can opt the issue.

Angel Broking:
At the upper band of the offer price (Rs 110) the issue is priced at 1.8x its diluted BV of Rs 60 (pre-dilution 2.3x). The company has decent ROE and ROA of 13 per cent and 3.1 per cent. Though post conversion to a SFB the return ratios might be compressed, while Angel Broking expects the same to scale up subsequently. The brokerage house believes the issue is attractively priced looking at the growth options the company offers in the long run. It recommend ‘Subscribe’ to the issue.

Prabhudas Lilladher:
Post issue, at upper band of Rs 110 EHL will trade at 1.9x based on 9MFY16 ABV of Rs 58.6 (including dilution) which the brokerage house believes is fairly priced. Prabhudas Lilladher has ‘Subscribe’ rating on the IPO.

Centrum Wealth Research
The issue is valued at 1.9x its Dec’15 adjusted book value (post-dilution basis, at ?110). While the small finance bank would be a new format in India, it being the first listed play, the issue is likely to witness considerable market interest. However, the return ratios of over 3 per cent RoA and 13% RoE, will have to be monitored going ahead, as the company is likely to witness constraints resulting out of stringent RBI norms to be followed on forming the SFB. Considering, Equitas’ future growth prospects as a SFB backed by its steady past performance and healthy asset quality, investors may consider Subscribing to the issue.

Choice Broking

Equitas will operationalise as a SFB from FY17 and margins are likely to squeeze from this level due to negative carry on CRR and SLR, need to increase investments on the operating infrastructure and prevailing high competition in banking space. ROE of the company is already lower at 13 per cent compared to the industry average of 17-18 per cent and may further come under pressure in the near future. Furthermore, the business of the company is much more concentrated in one state (Tamil Nadu). Considering all these factors, IPO is reasonably priced at 2.9(x) at the higher price band. Thus, Choice Broking assigns ‘Subscribe with Caution’ rating to this issue.


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