Even as the Suryoday Small Finance Bank (SSFB) garnered 25 per cent subscription on the first day of its IPO opening, various brokerage houses have cautioned their investors to avoid the public offering due to a variety of reasons.
While SSFB’s profitability is higher than others, it is subject to high volatility
Even as the Suryoday Small Finance Bank (SSFB) garnered 25 per cent subscription on the first day of its IPO opening, various brokerage houses have cautioned their investors to avoid the public offering due to a variety of reasons.
Choice Broking in its pre-IPO note said, though SSFB performance remained strong during FY19-FY20 with average net interest margin (NIM) of about 12 per cent, Return on Equity (RoE) of 12 per cent and robust profitability, during 9MFY21, the bank’s performance has deteriorated as pandemic led lockdown and economic crises impacted weaker section of society severely.
The Choice note said, “What makes us more concerned is proforma Gross Non-Performing Assets (GNPA) at 9.3 per cent, SSFB’s pool of bad loans is the highest among listed peers. While the collection efficiency improved to above 100 per cent (inclusive finance at 112.5 per cent in Dec), re-surge of Covid cases in key business states such as Maharashtra and Karnataka to weigh on revival and further weaken assets quality”.
Yes Securities, another Brokerage on the other hand said, “We do not have a positive view on this issue as asset quality is severely impacted by Covid; overall stress is inadequately addressed. Considering a moderate Covid buffer the credit cost could remain elevated for the next couple of quarters and thus weigh on bank’s profitability”.
Choice Broking said the IPO is priced aggressively. At a higher price band of Rs 305, a demanding valuation of Rs 3,237 crore is valued at P/BV of 2x post-issue BVPS which appears expensive given weak assets quality outlook, concentrated business to some states, low CASA share, and small business size. Asked valuation is in line with peers include Equitas/ Ujjivan SFB but these banks are significantly large in business size and have superior fundamentals than SFFB.
Yes Securities said, SSFB’s loan asset diversification is not so credible. Just like Ujjivan SFB, SSFB has somewhat struggled to deliver a credible asset diversification. Microfinance was 76 per cent of Gross Loan Portfolio (GLP) as of FY20 (has come down to 70 per cent now due to a much shorter tenor of these loans). The high ticket size of CV loans at Rs 20 lakh plus and lower yields at near 10-11 per cent suggests a portfolio of new CVs and mid-sized fleet operators. It represents a low-spread diversification. In Secured business loans (BL), while the average ticket size (ATS) is palatable at around Rs 20 Lakh, the average tenor of loans at near 10 years is unusual.
SSFB’s profitability is higher than other SFBs, but it is subject to high volatility. With microfinance as the mainstay business, the bank is yet to develop a resilient and sustainable proposition in most other segments, the profitability would remain subject to high volatility, Yes Securities said.
Yes Securities too believed that SSFB’s offering price may be on par with listed peers like ESFB and USFB, “But, when adjusted for franchise and execution capabilities, it becomes unattractive”, it said.
Ahead of the opening of the IPO on Wednesday, SSFB raised Rs 170.13 crore from 13 anchor investors at the upper price band of Rs 305 per equity share. Marquee anchor investors include ICICI Prudential Life Insurance, 238 Plan Associates LLC (MIT*), Birla Mutual Fund, Axis Mutual Fund, SBI Life Insurance, Ashoka India Opportunities Fund (White Oak Capital Management), IDFC Mutual Fund, ICICI Lombard Insurance Company, Goldman Sachs (Singapore) amongst others were allotted 5,557,920 equity shares, company said in a statement.