By Geetanjali Kedia

Equitas Holdings is entering the primary market on Tuesday 5^th April 2016, to raise Rs.720 crore via a fresh issue of equity shares of Rs. 10 each and an offer for sale (OFS) of 13.24 crore equity shares, by 13 investors, both in the price band of Rs.109 -Rs.110 per share. At the upper band, issue size is sized at Rs. 2,176 crore, which is about 59% of the estimated post issue paid up share capital of Rs. 335.40 crore of the company. Issue closes on Thursday, 7^th April 2016.

Company has 3 subsidiaries, Equitas Microfinance (EMF), Equitas Finance (EF) engaged in CV and MSME Financing and Equitas Housing Finance (EHF), with EMF being the 5th largest microfinance company in India. Microfinance holds key to its strong growth and earnings, with its AUM increasing at a CAGR of 43.6% from Rs. 724 crore as of FY12, to Rs. 2,144 crore as of FY15, representing 53.5% of aggregate AUM of Rs. 2,935 crore, as on 31-12-2015. There were 2.78 million loan accounts in the microfinance business, generating PAT of Rs. 58 crores with NIM at 11.1% and average ticket size of loans of about Rs. 10,500. Besides microfinance, company offers a range of financial products and services such as used commercial vehicle finance, MSE finance and housing finance, through its other 2 subsidiaries, which provide it with significant cross-selling and up-selling opportunities to target customers.

Besides, it has received in-principle approval from RBI to set up a small finance bank (SFB), which is valid for a period of 18 months from the date of its grant, viz. till 6^th April,2017. Equitas, given its existing customer base and products, can transition smoothly into a small finance bank. The company is well placed to meet the norm of extending 75% of loans to the priority sector and have atleast 50% of loans up to Rs. 25 lakh. For setting-up SFB, Equitas will have to bring down its foreign holding to below 49% by April 2017, which will come down to 35% from 92.6% currently, post this IPO.

Having presented the background of the company, let’s take a look at its financials. For FY15, on consolidated basis, total income was Rs.755 crores, with net profit of Rs. 107 crores, yielding an EPS of close to Rs. 4. For 9 months ending 31-12-15, total income was placed at Rs. 795 crores, with PAT of Rs. 120 crores, yielding an annualised EPS of Rs. 5.95.

Present equity of the company is Rs. 270 crores, with net worth at Rs. 1,300 crores, giving a pre issue book value of Rs.48 per share. Post IPO, equity base may rise to Rs. 335 crores, with net woth exceeding Rs. 2,000 crores, giving a book value of close to Rs.60 per share.

Equitas Holdings, having AUM of Rs. 5,505 crores as at 31-12-2015, is being valued at 2.3x on book value (pre-issue basis), at the upper price band of Rs. 110, which is seen quite attractive compared to SKS Microfinance, which has Gross Loan Portfolio of Rs. 6,177 crores, as on 31-12-2015 (excluding Andhra Pradesh & Telangana) and is currently ruling at Price to Book of 5.3x. The consolidated AUM of EHL has grown at a strong pace of 50% CAGR in FY11-15.

SKS Microfinance commands premium, due to healthy asset quality (GNPA 0.1%), superior RoE of 23% and fast expanding network, which currently stands at 3,563 branches. However, Equitas Holdings, having a network of 539 branches is looking attractive at 1.83x of post issue book value, given GNPA of just around 1%, with NIM margins of 11.6% and RoE of 13%, as also RoA of 3%. However, it may be noted that GNPA of Microfinance as at 31-12-15 was only at 0.17%. It should be highlighted here that Capital Adequacy for MFI is 21.5%, while for other subsidiaries, it is greater than 32%, which is quite comforting, and is greater that CAR of SKS Micro of 24%.

Going by the industry trend, company’s profitability will take a hit on conversion to Small Finance Bank and RoE may further come under pressure in the short term, once banking operations are launched. Also, major chunk of business is presently heavily concentrated in Tamil Nadu, which is big risk, if any irrational move is taken by the Govt. to appease MF borrowers.

Despite this, professional management, good track record, positive bias on the multiple sectors in which the company is / will be engaged in, as a holding company, IPO is seen fairly valued and investment is advised for listing gains, as also, with a MT view, as an investor.

Disclosure: No interest