ESAF Small Finance Bank IPO Details and Review

ESAF Small Finance Bank is gearing up for its upcoming Initial Public Offering (IPO), set to open for subscription on the 3rd of November, 2023. This financial institution places a primary emphasis on extending loans to rural and semi-urban clientele, and it has displayed substantial revenue growth over the past several years. In this article, we will furnish you with comprehensive information about the ESAF Small Finance Bank IPO, covering essential details, the IPO’s size, the Grey Market Premium (GMP), as well as an analysis of its positive attributes, risk factors, and an overall review

ESAF Small Finance Bank IPO – Issue Details

IPO Opening Date	03-Nov-23
IPO Closing Date	07-Nov-23
IPO Listing Date	16-Nov-23
Issue Type	Book Built Issue IPO
Face Value	Rs 10 per equity share
IPO Price band	Rs 57 to Rs 60 per equity share
Lot Size	250 Shares
Listing at	BSE and NSE
Total Issue Size	Rs. 463 Crores
Fresh issue	Rs. 390.7 Crores
OFS	Rs. 72.3 Crores
Employee Discount	Rs.5 Per Share

About ESAF Small Finance Bank Limited

ESAF Small Finance Bank specializes in catering to the financial needs of rural and semi-urban clients. The bank’s array of financial products encompasses:

(a) Micro Loans (b) Retail Loans (c) MSME Loans (d) Loans to Financial Institutions (e) Agricultural Loans

As of March 2023, ESAF Small Finance Bank boasts an extensive presence with a network spanning 700 outlets, 743 customer service centers, 20 business correspondents, and 481 business facilitators. Additionally, the bank operates a network of 581 ATMs strategically located across 21 states within India.

ESAF

Financial Summary of ESAF Small Finance Bank Limited

Period Ended	31-Mar-21	31-Mar-22	31-Mar-23	30-Jun-23
Financial Year ending / Period ending (Amt in Crores)
Assets	12,338.65	17,707.56	20,223.66	20,795.94
Revenue	1,768.42	2,147.51	3,141.57	991.78
Profit After Tax	105.40	54.73	302.33	129.96
Net Worth	1,352.06	1,406.80	1,709.13	1,839.09
Reserves and Surplus	902.59	957.32	1,259.66	1,389.62
Total Borrowing	1,694.00	2,952.83	3,354.20	2,739.13

Objects of the IPO

The IPO of ESAF Small Finance Bank is set at Rs 463 Crores, encompassing both Offer for Sale (OFS) and a Fresh Issue.

Offer for Sale (OFS) – Rs 72.3 Crores: Under the OFS, the proceeds will go to the selling shareholders, and the company will not directly receive any funds.
Fresh Issue of Rs 390.7 Crores: The generated funds will be allocated for the following purposes:

The net proceeds will be utilized to bolster the bank’s Tier-I capital base, ensuring it can meet its future capital needs, particularly with the expected growth in the bank’s assets, including loans/advances and investment portfolio. This allocation is essential to adhere to the regulatory capital adequacy requirements stipulated by the RBI.

Furthermore, the bank anticipates deriving advantages from having its Equity Shares listed on the Stock Exchanges, thus enhancing its visibility and access to the capital markets.

Valuation of ESAF Small Finance Bank IPO Price

With an IPO price band ranging from Rs 57 to Rs 60 per share, it’s important to assess the Price-to-Earnings (P/E) ratios for ESAF Small Finance Bank.

If we take into account the last fiscal year’s earnings per share (EPS) of Rs 6.71, the P/E ratio calculates to be 9x. However, when considering the weighted EPS from the last three years, which amounts to Rs 4.47, the P/E ratio equates to 13x.

Comparing these figures to the P/E ratios of listed peers, Spandana Sphoorty Financial is trading at an exceptionally high P/E of 471x, while Ujjivan Small Finance Bank has a relatively lower P/E of 9.8x. The industry’s average P/E stands at 94.7x.

Given this context, the IPO’s price band, ranging from a P/E of 9x to 13x, can be considered reasonably priced in light of the diverse P/E ratios within the industry.

Positive Aspects in ESAF Small Finance Bank IPO

Geographic Expansion: The bank’s deep understanding of the microloan segment has facilitated its expansion beyond its home state of Kerala. This strategic move has allowed the bank to tap into new markets and broaden its customer base.
Rural and Semi-Urban Focus: ESAF Small Finance Bank concentrates on serving the rural and semi-urban banking sector. This targeted approach has accelerated the company’s growth, as it caters to the financial needs of these underserved segments.
Retail Deposits Growth: The bank has demonstrated robust growth in its retail deposits portfolio. This signifies a growing level of trust and engagement from individual customers, contributing to the bank’s stability and expansion.
Strong Revenue and Margin Growth: Over the past three years, ESAF Small Finance Bank has exhibited impressive revenue and margin growth. This sustained growth underscores the bank’s ability to manage its operations efficiently and generate healthy financial returns.

Risk Factors in ESAF Small Finance Bank IPO

OFS IPO proceeds would go to selling share holders and company would not get anything.
As of June 30, 2023 and March 31, 2023, 2022, and 2021, 74.70%, 75.04%, 81.16%, and 84.80% of its Advances Under Management (AUM) were Micro Loans.
As of June 30, 2023 and March 31, 2023, 56.52% and 63.66% of our AUM were Microfinance Loans, while 18.18% and 11.38% were Other Micro Loans.
Any decrease in demand for its Micro Loans may have adverse effects on its business, financial condition, results of operations, and cash flows.
As of June 30, 2023, and March 31, 2023, 2022, and 2021, 75.15%, 75.35%, 83.59%, and 85.50% of its advances (net of provisions) were unsecured advances. Failure to recover these unsecured advances in a timely manner may negatively impact its financial condition, results of operations, and cash flows.
Its business is concentrated in South India, specifically Andhra Pradesh, Karnataka, Kerala, Tamil Nadu, Telangana, and the Union Territory of Puducherry.
As of June 30, 2023, a significant portion of its banking outlets, gross advances, and deposits are from South India, with a focus on Kerala and Tamil Nadu. Adverse economic changes in South India, particularly in Kerala and Tamil Nadu, could adversely affect its financial condition, results of operations, and cash flows.
They are subject to regular inspections by the RBI, and non-compliances have been observed in the past.
They are currently addressing certain major observations by the RBI, and unresolved issues could lead to sanctions and penalties, materially affecting its reputation, business, financial condition, results of operations, and cash flows.
Investors should read all internal and external risk factors from ESAF Small Finance Bank RHP.

ESAF Small Finance Bank IPO – Should you subscribe or not?

ESAF Small Finance Bank mainly focuses on providing loans to rural and semi-urban customers in South India. The bank has generated strong financials, both in terms of revenue and margins. Its IPO price is set at a reasonable valuation.

On the other hand, a majority of its loans are microloans, which are unsecured. Failure to recover these unsecured microloans can have a significant financial impact. Additionally, the bank’s exclusive focus on South India also poses a risk.

Investors who understand both these pros and cons can consider investing in such IPOs.