Equitas SFB IPO: Diversified loan book helps firm overcome poor Day-1

Against an issue price of Rs 32-33 a share, the Equitas Small Finance Bank (Equitas SFB) stock listed at Rs 31. Hitting the bourses at the peak of the pandemic, just a month after the moratorium was lifted, sentiments were not in favour of Equitas and the banking sector. What was also a dampener was the comparison with Ujjivan SFB, which hit the Street in December 2019.
 

When compared to Ujjivan, Equitas’ asset quality didn’t appear very convincing at the time of listing as its gross non-performing assets (NPA) ratio was over 100 basis points (bps) higher than Ujjivan’s. Therefore, with NPA concerns taking centre stage, despite its attractive valuations at 1.2x based on IPO price, the stock didn’t appeal to investors.
 

However, sentiment is changing in its favour. At Rs 61.95 a share, the stock has more than doubled from listing day as the Street is acknowledging its diversified book. Sustained pressure on the microfinance (MFI) segment from all fronts – growth, collection efficiencies and asset quality – is also helping Equitas.

 

One reason for the change was the spurt in Ujjivan’s NPAs in Q3. Proforma gross NPAs rose to 4.83 per cent, from 1.19 per cent in Q2. But gross NPA recognised by Ujjivan stood at 0.96 per cent, about 400 bps lower than proforma. The Street wasn’t comfortable with this. Ujjivan’s 73 per cent dependence on MFI loans as against Equitas’ 20 per cent became significant as a result.
 

In fact, Equitas’ key selling point is its diversified loan book. The banking licence spearheaded the process. For instance, its loan against property (LAP) book was the largest with Rs 7,500 crore of loans accounting for 43 per cent of total assets in Q3. Vehicle finance at Rs 4,275 crore accounted for 25 per cent of total loans. Therefore, even if asset quality is an issue for Equitas, at 4.24 per cent proforma gross NPA in Q3 (2.27 per cent reported gross NPA), this isn’t very concerning.
 

“...we continue to remain positive on the stock from the long-term perspective. We are confident in the bank’s ability to tackle the stress on the back of a strong collection and risk management framework. Continued traction in the liability franchise and shift towards a more secured book augur well,” say analysts at Axis Securities.