IPO Size: Rs. 1,960 cr, entirely offer for sale (OFS) by PE funds

• 36% of OFS is by TPG, trimming 21% stake to 16% post IPO
• 36% of OFS is by Matrix, trimming 12% holding to 7% post IPO
• 18% by Norwest, reducing 10% holding to 8% and 9% by Sequoia

Price band: Rs. 450-474 per share

Mcap: Rs. 13,811 cr, implying 14% dilution

IPO Date: Wed 9^th Nov to Fri 11^th Nov 2022, Listing Mon 21^st Nov 2022

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

South Indian Lender, Small Business Loan Provider

Company provides term loan to self-employed individuals (non-salaried) with an average ticket size of Rs. 3 lakh, repayable in EMIs, secured against house property, charged at 24% p.a. fixed rate of interest. This is essentially loan against property, even if called by any other name. 24% rate of interest is extremely high for a ‘secured’ loan, even more than ‘unsecured’ personal loan or micro finance loans. Micro-finance, considered the riskiest lending product as collateral free loan given to self-employed women, also has interest rate between 19-22%.

Company’s business is not financial inclusion, but based on financially less-savvy borrowers, while competition from small finance banks and other NBFCs (high in South India) makes these high interest rates unsustainable, when company’s loan book becomes larger.  

Geographic Concentration

87% of Rs. 5,300 cr loan book of this Chennai headquartered NBFC is from Tamil Nadu, Andhra and Telangana, increasing concentration risk. Also, growth in existing geographies may be slow, as 93-94% districts have already been penetrated. Growth in newer states Maharashtra and Chattisgarh has been slow, with just 3 branches in the last 3-4 years.

Compliance only in Letter and not in Spirit

Company and book running lead managers (BRLMs) have made a mockery of ‘promoter’ classification under IPO regulations, with some funds classified as promoter, while other funds belonging to the same investor classified as non-promoter. Matrix Partners India Investment Holdings II, LLC holding 12.5% is classified as company’s promoter, but Matrix Partners India Investments II Extension, LLC is a non-promoter. Similarly, Sequoia’s SCI Investments V with 8.8% holding is classified promoter, while its other funds SCI Growth Investments III (3.8%) and Sequoia Capital Global Growth Fund III - Endurance Partners, L.P. (3.5%) are both classified as non-promoters.

Major Selling Overhang Likely

65% of company’s post-listing equity will be owned by PE investors, some of whom are invested since 2014 and 2017. They may look for exit after expiry of 6-month lock-in. Share price may be under pressure, as the 65% is quite a large chunk, given experience for Zomato, PayTM, PB Fintech and feared for Nykaa.

Strong growth but Stretched Valuation Multiple

Even in covid, AUM grew at 14% CAGR between FY20-22, with net interest margin (NIM) maintained at 16%. Bottom of the pyramid segment was most affected, especially rural India, post covid 2.0. But company’s peak gross NPA was just 1.7%, with current net NPAs healthy at 0.7%. FY22 PAT of Rs. 453 cr grew to Rs. 139 cr in Q1FY23, leading to a BVPS of Rs. 132. Earning growth outlook remains healthy as leverage is just 0.65x, with a healthy long term credit rating of A+ and incremental cost of borrowing down to 8.5%.

But valuation multiple of 3.2x FY23E PBV is seen stretched, implying limited multiple expansion from hereon. Rather it carries risk of contraction, given the shareholding structure. Besides, price for most of the highly-valued lenders is down - Aavas down 40% YTD, Aptus down 11% from IPO in 15 months, while others like Shriram City Union Finance are ruling at PBV of only 1.2x.