Equitas' shares command 15% premium in grey market

The Rs 2,170-cr IPO subscribed 38% a day before close

Microfinance lender Equitas Holdings' shares are changing hands at a premium of 12-15 per cent in the grey market, three brokers aware of the functioning of the unofficial trading platform, said.

Equitas Holdings' Rs 2,170-crore Initial Public Offering (IPO) — the first by a small finance bank (SFB) licence recipient — was subscribed 38 per cent on Wednesday.

The price band for the IPO, which closes on Thursday, is between Rs 109 and Rs 110 per share. Traders are paying additional Rs 14-17 per share in the grey market for Equitas shares. The grey market premium was less than Rs 10 last week and has shot up following good response to the IPO, said a broker.

The IPO has already been subscribed 60 per cent in the retail (small investor) category and 26 per cent in the institutional (big money) segment, data provided by stock exchanges showed.  The issue has attracted over 225,000 retail applications, said a banker handling the IPO.

Trading of shares in the grey market is notional in nature. Typically, a grey market trader makes a commitment to a retail applicant to buy shares at a price. The IPO applicant benefits as gains get locked in, while the trader expects the shares to list at even a higher premium. The grey market premium on Equitas shares is the highest for an IPO this year.

Brokers say they are also seeing demand for financing from high net worth individuals (HNIs, or super-rich) for the Equitas IPO. Most HNIs are likely to place big leveraged bets on the last day (Thursday) of the IPO, they said. As on Wednesday, the HNI portion of the IPO was subscribed only 3.6 per cent. Equitas on Monday had raised Rs 650 crore from 16 anchor investors, mostly mutual funds, by allotting 59.3 million shares at Rs 110 apiece. Foreign investors are not allowed to bid in the Equitas IPO but can purchase shares after listing.

Most brokerages have advised their clients to subscribe to the Equitas IPO, citing good long-term prospects. "We believe the pricing is reasonable as it is lower than that of well-run private sector banks, and it also seems to sufficiently capture the likely compression in RoA (return on assets) over the next few years due to required investments," said IIFL.

Equitas's return on equity (RoE) and RoA stood at 13 and 3.1 per cent, respectively, in December. The IPO is priced at 1.85 times its price to book (FY16 on post-issue adjusted basis).

"After conversion to a small finance bank, the return ratios might be compressed. But we expect the same to scale up after that. We believe the issue is attractively priced, looking at the growth options the company offers in the long run," said Angel Broking.