IPO Size: Rs. 463 cr 

• 84% of Rs. 391 cr is Fresh Issue, for augmenting capital
• 16% or Rs. 72 cr is Offer for Sale (OFS) by the corporate promoter ESAF Financial Holdings (74% to drop to 63%) and 2 life insurer investors PNB and Bajaj Allianz (8.6% combined holding to drop to 6.8%)

Price band: Rs. 57-60 per share  

M cap: Rs. 3,088 cr, implying 15% dilution

IPO Date: Fri 3^rd Nov to Tue 7^th Nov 2023, Listing Thu 16^th Nov 2023

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Third Attempt to List

ESAF Small Finance Bank (ESAF SFB) is undertaking the IPO to comply with RBI regulations to list by 31^st July 2021. This is bank’s 3^rd attempt at IPO, with earlier two SEBI permissions for Mar 2020 and Oct 2021 filings having expired. Even now, OFS size has been halved and fresh issue component trimmed by 20% from DRHP filed in Jul 2023.

Kerala Headquartered Mirco-finance Lender

ESAF SFB serves 72 lakh customers, through a network of 700 banking outlets, nearly 70% located in semi-urban and rural areas. Bank has assets under management (AUM) of Rs. 17,204 cr, 75% of which are unsecured micro-finance loans, 16% retail loans (gold, vehicle, mortgage) and balance MSME, agriculture and other loans. 87% of ESAF’s business is generated from South India - 43% from home state Kerala, 22% from Tamil Nadu and 22% from Karnataka, Telangana, Andhra and Puducherry.

Covid Stress Behind It

Net interest income stood at Rs. 1,836 cr in FY23 and rose to Rs. 586 cr in Q1FY24, with net interest margin (NIM) healthy at 10.7% and at 3.1% (not annualized) respectively, as average yield is between 21-23%, given high microfinance exposure. Net NPA had swollen to 3.92% as of 31.3.22, but have since normalized to 1.13% as of 31.3.23 and further to 0.81%, as of 30.6.23, indicating coming out of the pandemic stress. FY23 EPS of Rs. 6.7 jumped to Rs. 29 in Q1FY24.

During Q1FY24, advances grew at slower-than-industry growth of 3% QoQ to Rs. 14,322 cr, but deposit growth was stronger, at 7% QoQ, to Rs. 15,650 cr. Low-cost CASA ratio of 18% through is still low, in comparison to peer average of 25%.

‘Left Money on the Table’

Based on net worth of Rs. 1,839 cr as of 30.6.23, post-money book value per share (BVPS) stands at Rs. 43, which leads to PBV multiple of 1.4x. Microfinance focused SFBs such as Utkarsh, Ujjivan and Equitas are ruling at PBV multiples (as of 30.6.23) of 1.9x and above. Thus, the IPO has been priced at adequate discount, in comparison to peers. Even on an absolute basis, on an expected BVPS of Rs. 51 as of 31.3.24, IPO is being undertaken at a PBV multiple of 1.2x which is seen very attractive, for 17.7% RoE clocked in FY23, and factors in the geographically concentrated loan book.

On earnings basis too, current year PE multiple of 5.6x is seen quite low, based on FY24E EPS of Rs. 10.8, post dilution. In Mar 2021, ESAF had raised Rs. 162 cr at Rs. 75 per share and after 2.5 years, IPO is being made at 20% lower price, despite growth and better asset quality achieved during this period.