IPO watch: Analysts see short-term pain for Equitas Holdings due to transition from NBFC to banking business

ET INTELLIGENCE GROUP: Equitas Holdings, one of the 10 entities to receive a small bank licence, is raising capital from the primary market. The NBFC has a decent past performance and the IPO valuation looks reasonable. There may be some pressure on the financials during the transition to banking business, but analysts expect it to be relatively smooth. Investors with long-term horizon may consider applying for the IPO.

Business Equitas started as a micro-financing company in 2007 and gradually diversified into home and used CV financing and small enterprise lending business. Based in Chennai, it has presence in 11 states with 520 branches. The microfinance business is fifth largest in India in terms of gross loan portfolio. Each business is registered under three subsidiaries which the management plans to merge before becoming a bank. At the end of December 2015, the asset under management (AUM) was Rs 5,505.2 crore.

Financials & Valuations Revenues grew at an annualised rate of 56% between FY12 and FY15, and for the first nine months of FY16, they were at Rs 791.3 crore. Net profit was Rs 120.4 crore. Its net interest margin was 11.6%. For the first nine months, it made consolidated return on asset of 3.1% and return on equity (RoE) of 13%. RoE is lower compared to around 20% for other NBFCs, since it has borrowed three times its equity to fund its business. This is lower than other NBFCs, which have borrowed five-six times their book values.

RoE may further come under pressure in the short term once Equitas launches banking operations. To offset the impact, it plans to increase the extent of borrowing relative to equity. Keeping this in mind, IPO is reasonably priced at 1.85 times the book value (post IPO) at the higher end of the price band. Industry peers such as SKS Microfinance and Sriram Transport finance are trading above 3 times the book.

Concerns In FY15, the company moved a to 150-day recovery cycle. According to the management, this was done primarily keeping in mind the psyche of the CV financing customers, which were finding a 90-day cycle too tight.