Equitas SFB IPO has good ratings, but grey market premium is tepid

NEW DELHI: Shares of Equitas Small Finance Bank were enjoying a small premium in the grey market – or the unofficial market for trading in unlisted shares – on Friday. A host of brokerages have recommended a ‘subscribe’ rating on the issue.

Abhay Doshi, an independent dealer in unlisted shares, said the stock was commanding a 2-3 per cent premium over the IPO price in the unlisted market.

“Trading volumes have been thin and there are many reasons behind it. First, there are concerns over banks that deal with small borrowers. Secondly, peer Ujjivan SFB, which got listed last year at a huge premium, is now trading below issue price. Thirdly, the IPO might list around November 2, a day before the US elections, when the market may see a lot of volatility. Lastly, investors are concerned over the pending Supreme Court verdict on interest waiver for the loan moratorium period,” Doshi said.

Shares of Ujjivan SFB had got listed in December 2019 at a 59 per cent premium over the issue price of Rs 37. On Friday, the stock traded at Rs 30.90.

The Rs 500 crore initial public offering by the Equitas SFB will be sold next week, starting Tuesday, in the price band of Rs 32-33 per equity share. The IPO comprises fresh issue of shares aggregating up to Rs 280 crore and an offer for sale of up to 7.2 crore equity shares by Equitas Holdings, the holding company of the bank.

"We believe there is good interest in the IPO, which is why we are doing it now. We also need to do that as per the tough regulatory requirement,” Equitas Small Finance Bank's Managing Director & CEO PN Vasudevan told ET NOW.

Vasudevan said the bank was adequately capitalised as of now, and the funds raised from the IPO will be used as growth capital.

The bank had earlier planned to raise Rs 1,000 crore through the IPO, but later reduced the size due to its comfortable capital adequacy ratio and also in view of the current market conditions, PTI quoted Vasudevan as saying.

Dinesh Gupta of Unlisted Zone said many recent IPOs failed to hold on to their listing gains while some even debuted at discounts.

"In the case of Equitas SFB, investors are also concerned that the promoters may be required to reduce their holdings in the future, which could weigh on the stock performance, and hence, the premium in the grey market remains tepid at Rs 2-3,” he said.

RBI norms require the promoters of a small finance bank to reduce their shareholdings in the bank to 40 per cent after five years of operations. Equitas SFB will complete its five years of operations in September 2021.

Post the IPO, holding company Equitas’ stake will fall to 82 per cent, which will have to be pruned further to 40 per cent by September 2021, 30 per cent by September 2026 and to 26 per cent by September 2028.

“However, the management has indicated that it would seek permission to do away with the holding company structure,” Emkay Global said in a note.

The brokerage said the IPO has been reasonably priced at 1.3 times trailing 12-month price to book value (post IPO basis), compared with 1.8 times valuation given to Ujjivan SFB.

“Equitas SFB is well-capitalised with a capital adequacy ratio (CAR) of 21.6 per cent against 15 per cent required. It also has CET-1 (common equity tier-I) of 20.6 per cent. After the fresh capital infusion, CAR will improve to 24 per cent (including CET-1 at 23 per cent),” Emkay said.

Vasudevan said the two routes under consideration for reduction of Equitas’ holding in the bank are merger and acquisition and a block sale of shares by the holding company.


The IPO will close for subscription on Thursday, October 22.