Utkarsh Small Finance Bank IPO: Should you subscribe to the lender's offer?

Utkarsh Small Finance IPO: The price band for the issue, which runs between July 12 and July 14, has been fixed as Rs 23-25 per share

Varanasi-based lender, Utkarsh Small Finance Bank, has opened its initial public offer (IPO) today, July 12, to raise Rs 500 crore. The price band for the issue, which will close on July 14, has been fixed as Rs 23-25 per share.
 

The bank aims to utilise the net proceeds for augmenting its Tier-1 capital base to meet its future capital requirements and towards meeting the expenses in relation to the issue.

Check latest subscription status here
 

Investors can bid for a minimum of 600 equity shares and in multiples thereof. Up to 75 per cent of the offer has been reserved for qualified institutional buyers (QIBs), 15 per cent for non-institutional investors (NIIs), and 10 per cent for retail investors.
 

About the bank

The promoter, Utkarsh CoreInvest, commenced operations as a non-bank finance company (NBFC) in financial year 2009-2010 (FY10) and was focused on providing microfinance to unserved and underserved segments, particularly in the states of Uttar Pradesh and Bihar.
 

It obtained licence from the Reserve Bank of India (RBI) in 2016, and commenced its operations as a Small Finance Bank from January 23, 2017. Its operations are present in 26 states and union territories with 830 branches and 15,424 employees, as of March 31, 2023.
 

Financial profile

According to the company’s Draft Red Herring Prospectus (DRHP), its total income stood at Rs 1,706 crore, Rs 2,033 crore, and Rs 2,804 crore in FY21, FY22, and FY23 respectively. 
 

Net profit, meanwhile, was Rs 120 crore, Rs 60 crore (Covid-19 hit), and Rs 404 crore during the respective years. The top-line grew at a CAGR of 26 per cent over FY21-23.

Its net non-performing assets (NNPAs) were at 1.33 per cent, 2.31 per cent, and 0.39 per cent for FY21, FY22, and FY23 respectively, while its net interest margins were 8.20 per cent, 8.75 per cent, and 9.57 per cent, respectively, for the same period.
 

Utkarsh SFB’s deposits grew 36 per cent year-on-year to Rs 13,710 crore in FY23 with disbursements increasing 37.5 per cent to Rs 12,443 crore, and gross loan portfolio rising 31.3 per cent to Rs 13,957 crore. 
 

Should you subscribe?

Centrum Broking | Subscribe

Utkarsh SFB, predominantly a MFI player with 66 per cent of gross AUM, has witnessed a remarkable turnaround in FY23 with impressive return profile (Return on Avg Assets/Return on Avg Equity – 2.4 per cent and 22.6 per cent, respectively). 
 

The bank’s market share in secured lending rose from 22 per cent in FY22 to 33 per cent in FY23. Moreover, Utkarsh SFB achieved a 36 per cent growth in deposits, with 51 per cent in retail deposits. 

That said, Utkarsh lags its peers in terms of CASA deposits, which stand at a mere 21 per cent as of FY23.

Reliance Securities | Subscribe

USFB plans to scale-up the liabilities franchise, via technology, by focussing on newer geographies including targeting the top 100 cities in terms of overall deposits, in addition to tapping metropolitan and urban areas by promoting its savings accounts along with other deposit products.

Geojit Financial Services | Subscribe

Among peers, USFB had best cost to income ratio of 54.15 per cent in FY23, through cost-efficient practices like automation and digitisation of various process, including loan disbursements.

Its loan portfolio is expected to grow at 22 per cent over FY23-25, while the deposits are expected to grow at 40 per cent-45 per cent CAGR over the same period, driven by rural penetration.

Motilal Oswal | Subscribe for listing gains
Utkarsh SFB offers savings/current accounts, deposit accounts, non-credit offerings viz. debit cards, bill payments and distribute third-party products to retail customers which provides access to low-cost funding, and longer tenure resources profile.

Its deposit base stood at Rs 13,700 crore as of FY23. Strong relationship with its micro-banking customers allows the bank to cross sell its other asset products that cater to the entire customer lifecycle. Given the current buoyant market and high interest for SFB stocks, the issue could garner some curiosity. We suggest investors to Subscribe for listing gains to IPO.

LKP Securities | Subscribe

At higher price band, the stock is valued at 1.8(x) P/BVPS with current book value per share of Rs 18. Factoring the superlative return ratios ROAA/ROAE of 2.42 per cent/22.84 per cent for FY23, we believe that Utkarsh Small Finance Bank is worth subscribing.

Nirmal Bang | Subscribe

Utkarsh has managed to reduce its exposure to the unsecured micro banking segment from 82 per cent in FY21 to 66 per cent in FY23 which has de-risked its business model. We expect this trend to continue. 

Over FY21-23 period, Utkarsh has outperformed its peers on all fronts - loan growth, return ratios, and asset quality. Yet, its valuation on P/B basis is at a significant discount compared to peers, at 1.1x FY23 post issue BVPS. 

Considering the industry growth headwinds, we expect healthy profitability to resume for Utkarsh.

Ashika | Not Rated

Bulk deposits account for 48.6 per cent of the SFB’s total term deposits. More importantly, top 10 and 20 depositors account for 14.33 per cent and 21.04 per cent of total deposits, respectively, leading to a potential cause of volatility in operations, in case of sudden withdrawal.

Also, the SFB has a history of delays in making certain disclosures and regulatory filings to BSE under the Listing Regulations (for non-convertible debentures), alleged non-compliance with provisions of the Companies Act 2013, and any penal action in this regard may impact its credentials.