IPO Size: Rs. 1,092 cr

• 55% or Rs. 600 cr is fresh issue to augment capital
• 45% is offer for sale (OFS): 84% by PE True North (19% stake to reduce to 9%) and balance by promoter Federal Bank (71% stake to drop to 62%)

Price band: Rs. 133-140 per share

M cap: Rs. 5,165 cr, implying 21% dilution

IPO Date: Wed 22^nd Nov to Fri 24^th Nov 2023, Listing Tue 5^th Dec 2023 (may list T+3 i.e. on 30^th Nov)

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

Update before IPO Opening

On Mon 20th Nov 2023, True North and Federal Bank sold 6.4% and 0.8% stake respectively, at Rs. 140 per share, which is quite unusual. This is not only a hasty decision, as RHP dated 16^th Nov had no mention of the same, but also the transaction is in addition to OFS (i.e. OFS portion not reduced). Company has termed this as ‘pre-IPO placement’, but incorrect to say so, as RHP has already been filed with RoC before the transaction and the IPO size has also not been lowered.

Greed or desperation to exit on the part of PE investor and promoter, just 2 days prior to IPO, sends a strong negative signal to prospective investors. This is anyways company’s second attempt, as first DRHP was filed in Feb 2022.

LAP and Gold loan focussed NBFC

Fedbank Financial Services (Fedfina) is a non-banking finance company (NBFC) having assets under management (AUM) of Rs. 9,430 cr, split 44% loan against property (LAP), 33% for gold loan, 16% unsecured MSME business loan and 6% home loan. With 584 branches, company’s presence is concentrated in South and West India, with Maharashtra and Karnataka accounting for 20% and 19% of the loan book respectively.

Unimpressive Asset Quality

Despite 86% loan book being secured, company’s net NPA stood as high as 1.8%, as of 30.6.23, and has surprisingly risen from 1.6% as of 31.3.23, contrary to most industry peers. Importantly, Fedfina’s net NPA has not declined in the past 2 years, highlighting its weak underwriting skills.

Contracting Margins

FY23 net interest income stood at Rs.706 cr, which rose to Rs. 198 cr in Q1FY24. Net profit was reported at Rs. 180 cr (EPS Rs. 5.6) and Rs. 54 cr (EPS Rs. 1.7) for FY23 and Q1FY24 respectively. Given 85% liabilities are on floating rate basis and borrowings being more of long term in nature, NIMs may not expand further, and have rather contracted to 7.68% in Q1FY24 (annualised), from 8.17% in FY23. Thus, while loan book has grown at 40% in the past, other fundamental parameters are not impressive.  

Unattractive Valuation

Fedfina’s net worth, as of 30.6.23, stood at Rs. 1,415 cr, leading to a post-money book value per share (BVPS) of Rs. 55 and a PBV multiple of 2.6x. Based on expected BVPS of Rs. 61 as of 31.3.24, PBV multiple stands at 2.3x for FY24E.

MSME lending peers such as Five Star Business and SBFC are ruling at PBV multiple above 3x, partly justified by their higher NIMs (20% and 9% respectively) and better asset quality (0.8% and 1.3% respectively).

While company’s PBV multiple is lower than peers, it is not attractive, given its presence in the riskier LAP lending, fundamentals not being the best and NBFC sector itself not being a preferred pick.