Nearly a century-old private lender CSB Bank, is set to launch its initial public offer (IPO) today. The bank, which primarily caters to small and medium enterprises (SMEs), plans to raise up to Rs 410 crore to expand its Tier-I capital. The offer is a mix of fresh issue and offer for sale (OFS) within a price-band of Rs 193 –Rs 195.
The IPO will remain open till November 26, while allotment would be made on December 2, 2019. The shares would be listed on, both, the NSE and BSE on December 4.
Here are the key things you need to know before investing:
ABOUT THE COMPANY
Formerly known as Catholic Syrian Bank, the Kerala-based lender has presence in Maharashtra, Tamil Nadu, and Karnataka. With a customer base of nearly 1.3 million people (as on March 31, 2019), it’s credit portfolio includes sector like agriculture, MSMEs, education, and housing.
In 2018, the Reserve Bank of India (RBI) allowed Fairfax India (via FIH Mauritius Investments Ltd) to acquire a controlling 51 per cent stake in the bank. Apart from Fairfax, ICICI Lombard General Insurance, HDFC Life Insurance, ICICI Prudential Life Insurance, The Federal Bank, Way2Wealth Securities and Edelweiss Tokio Life Insurance, too, hold a stake in the bank.
As on September 30, 2019, CSB had a network of 412 branches (excluding 3 service and 3 asset recovery branches) and 290 ATMs.
For the six months ending September 2019, the bank logged a cumulative net profit of Rs 44.27 crore. It, however, had reported net loss worth Rs 65.69 crore, Rs 127.09 crore, and Rs 57.99 crore in FY19, FY18, and FY17, respectively. The bank’s revenue at the end of H1FY20 was Rs 816.7 crore, and total assets stood at Rs 17,323.25 crore.
Further, the lender improved its asset quality and reduced the gross non-performing asset ratio, i.e. the proportion of assets turning bad out of the total gross advances, from 7.25 per cent in FY17 to 4.87 per cent in FY19. For the first half of the current fiscal, the GNPA ratio stood at 2.86 per cent. Similarly, the net NPA ratio (NNPA) nearly halved between FY17 and FY19.
That apart, the net interest margin (NIM), too, improved from 2.11 per cent (FY17) to 3.43 per cent (H1FY20).
ABOUT THE OFFER
A total of 21.02 million equity shares are being offered for an aggregate amount of Rs 409.68 crore. Of this, fresh issue constitutes 1.24 million equity shares, while 19.78 million shares will be put on the block as OFS.
The price band has been fixed at Rs 193 to Rs 195, and the bids can be applied for a minimum of 75 shares and its multiples.
Besides, 75 per cent of the offer is kept aside for qualified institutional buyers (QIBs), 15 per cent is reserved for non-institutional investors and 10 per cent for retail investors.
On Thursday, the bank mopped up Rs 184 crore from 24 anchor investors including Omers Administration Corporation OAC Custody Account (SCV6), ICICI Prudential MF, SBI MF, Aditya Birla Sun Life Trustee, Axis MF, Sundaram MF, HSBC, and Ashoka India Opportunities Fund.
According to a regulatory filing, the lender has finalised the allocation of 94,54,080 equity shares at Rs 195 per share.
SHOULD YOU SUBSCRIBE?
Given the bank’s consistent improvement in asset quality and turnaround performance in this financial year, analysts suggest subscribing to the public offer, albeit with riders.
“The stock can be a good play from a long-term perspective… Nearly 60 per cent of the bank’s portfolio is made of SME and secured gold ornaments which are safe bets. Going ahead, we expect the bank to report better return on equity (RoE) and consistently improve its performance,” says Yuvraj Choudhary, an analyst at Anand Rathi Shares and Stock Brokers.
Gold loans represented 31 per cent of the total loans outstanding as on March 31, 2019, as per the bank’s DRHP. In financial years 2017, 2018, and 2019, defaults in the portfolio constituted 0.25 per cent, 0.40 per cent, and 0.12 per cent, respectively.
"Nearly 31 per cent advances of the bank are secured by gold ornaments. A sudden decline in the market price of gold may adversely affect CSB's financial condition, cash flows and earnings," say analysts at ICICI Securities, adding, "The bank may be unable to realise the full value of its pledged gold, which exposes the bank to a potential loss."
They, however, assign a 'subscribe' rating to the stock banking on the new promoter and strong management.
"The new management brings capital and execution strength on the table which bodes well for future growth as well as earnings. Further, at the IPO price band of Rs 193-195, the stock is available at a P/BV of nearly 2.2x at the upper band on H1FY20 basis," they wrote in their IPO note,
“The bank is fairly valued at 1.7x of Price/Book value considering the financial performance,” says Umesh Mehta, head of research at Samco Securities.
The bank’s stable management, which is responsible for the turnaround financial performance, especially for asset quality, he says, provides confidence in the bank’s future plans. However, concentrated presence in the southern region could affect expansion plans, he adds.
Analysts at Choice Broking, however, remain cautious on the stock citing concentrated regional presence and higher below 'BBB' rated loans.
"Improvement in business performance has been mainly driven by gold loans while the SME book witnessed contraction. Though gold loan book grew by a CAGR of 28.3 per cent in FY17-FY19, it is difficult to sustain such high growth because of high competition in gold financing segment," wrote Satish Sharma, a research analyst at the brokerage firm, in an IPO note.
"Below 'BBB' rated SME book stood at 59 per cent and corporate at 27 per cent, thus raising doubt over stability in slippage trend. At the higher price band of 195/sh, the demanded valuation at Rs33,824 mn is valued at P/ABV multiple of 2.4(x), factoring all positive developments. At thid valuation, CSB is valued premium to Karur Vysya Bank (1.0x), Karnataka Bank (0.5x), Federal bank (1.4x)," he adds, assigning 'avoid' rating to the stock.
Analysts at Emkay Securities raised similar concerns and said, while the bank has done reasonably well in its first phase of transformation over the past 2-3 years, the second phase of transformational journey to take the bank into a new growth phase will be challenging.
"Given the current stressed scenario and rising competitive intensity, where even established (Federal Bank) and promising
banks (RBL) have slipped. At the upper price band of Rs195, IPO is priced at valuations of 2.4x Sep’19 ABV (post money) for a sub-par RoA/RoE of 0.5%/3%.," they wrote in an IPO note.