To subscribe or not-- Equitas Holdings IPO

Equitas Holdings Ltd. is going to be the first IPO to be launched in financial year 2016-17. The company will become the first of the ten recipients entitled to RBI’s Small Finance Bank (SFB) licence, to go public. Equitas is not only a micro finance company, but it also has a diversified financial services portfolio, focused on individuals and Micro and Small Enterprises (MSEs) that are underserved by formal financing channels. On April 5, 2016 its initial public offer (IPO) will open, and the same will close on April 7, 2016. The price band at which the company is offering its share is Rs 109-110 and it aims to raise Rs 2,176 crore in the upper price band by issuing 19.79 crore equity shares of Rs 10 each (fresh issue for Rs 720.5 crore + Offer for Sale of Rs 1,456.4 crore). The minimum bid lot for the IPO is 135 equity shares.

It has three subsidiaries: for its micro finance business (Equitas Microfinance); vehicle finance and MSE loans (Equitas Finance); and home loan (Equitas Housing Finance). It is headquartered in Chennai and has its operations spread across 11 states through a network of 520 branches. As of March 31, 2015, Equitas Microfinance is the 5th largest microfinance company in India in terms of gross loan portfolio. On a consolidated level, Equitas has AUMs (Assets Under Management) of Rs 40 bn. spread across and net worth of Rs 12 bn.

COMPANY’S BUSINESS DETAILS

The main objectives of the issue are:  Through the Fresh Issue - of the Rs 720 crore that the company would like to raise, Rs 620 crore would be invested in the bank and the remaining Rs 100 crore would be with the holding company, which would be used to set off all the expenses of the IPO, and will also be extended as a loan to the subsidiaries. One more reason for the IPO is to reduce Foreign Institutional Investors' (FIIs') holding in the company, from 93 per cent to about 35 per cent. RBI norms cap the FII holding in an SFB to 49 per cent.

• The company received in principle, approval from the RBI on 7 October 2015 to set up a SFB.

• It needs to comply with the SFB guidelines and fulfill the conditions of the in-principle approval and any other considerations as may be stipulated by the RBI, until 6 April 2017.

• Equitas Microfinance, Equitas Finance and Equitas Housing Finance are proposed to be merged into a single entity to become the proposed SFB through a court approved scheme of arrangement.

• Proposed SFB will be merged with the company to enable the proposed SFB to be listed.

• RBI and the National Housing Board had accorded their approval for the amalgamation of EMFL and EHFL with EFL, subject to following certain conditions in January 2016.

The second step would be merging the three subsidiaries for which a petition has been filed with the Madras High Court. The secured creditors of Equitas Microfinance, Equitas Finance and Equitas Housing Finance have approved the Merger Scheme in March 2016. The name of the transferee company shall be changed from Equitas Finance Limited to Equitas Small Finance Bank Limited.

1) Adopting to the SFB structure and the pending merger of the subsidiaries

2) Required management bandwith to tap the growth and pan India operations.

3) High required for capital and also meeting the regulatory norms for the SLR and CRR

4) Depleting margins, as RBI will be capping the interest rate that can be charged by the company

5) As per the regulations, lending to PSL can also limit the profit earned by the group.

6) Over-dependence on Tamil Nadu, about 60 per cent of its AUM, could expose Equitas to state-specific risks.

Non Performing Assets: Approximately 70% of its vehicle finance book has been disbursed in the past twelve months, implying that the book is largely un-seasoned. Despite this, Gross NPAs have increased to 3%. According to the management, they have started considering NPAs after 150 days against the standard of 180 days earlier, as per the revised norms from RBI, and have started feeling the pinch, as its NPAs began soaring thereafter. Going forward, adoption of the 90 days non-performing asset recognition process versus the 150 days current standard, can also lead to elevated provisioning, biting into the earnings.

On financial front, Equitas’ revenue has grown at a CAGR (Compound Annual Growth Rate) of 63% to Rs 755.9 crore in FY15, from Rs 283.17 crore in FY13. At bottom line, the company reported a profit of Rs 106.6 crore, an increase of 82.8 per cent CAGR over FY13 profit of Rs 31.90 crore. For first nine months of FY16 it has earned net profit of Rs 120.37 crore on a total income of Rs 794.70 crore. The company disbursed fresh loans of Rs 3,606 crore as on 30th December, 2015. Its AUM as of December 31, 2015, stands at Rs 5,505.19 crore. Coming to the valuation, at the higher price band, the stock is available at around 2.2 PBV multiple which seems to be a lucrative valuation in comparison to other listed NBFCs (Non-Banking Financial Company's) and micro finance companies but it has many other concerns which we have mentioned above.

Conclusion: We believe the company will see an upside of 10-15%, post listing, as the markets are ready to embrace the first SFB structure proposed by RBI. However we don’t recommend it for long-term, due to the merging of its three financing subsidiaries being still in process. After completion of the process, we will give next call from our side.