 "How Equitas set the pace for IPOs in 2016")
Last week, his company's Rs 2,170-crore initial public offering was over-subscribed nearly 17 times. While it was the biggest IPO in 2016, it was also the first to have been oversubscribed without any participation from foreign institutional investors.
Since the IPO was to bring down the foreign shareholding in Equitas to 49 per cent from 93 per cent to meet the requirements for a small finance banking licence, foreign investors were restricted from participating in it.
This led to doubts being raised about the IPO's success. However, retail investors more than picked up the slack. Through the IPO, Equitas has collected over Rs 26,800 crore, a record for a banking and financial services company in India.
As the company does not need funds for operational purposes, insiders say the money will be used to set off the expenses incurred on the IPO and extend loans to other group companies.
The success of the IPO has raised the hopes of other small finance banking licensees which plan to come up with their IPOs later this year. However, there are many things that Equitas has done differently to engender trust in its business model.
Unlike many other companies in India which are led by their promoters, Vasudevan holds only 3 per cent in the company. Equitas is funded by international investors, namely CDC Group, India Financial Inclusion Fund, Lumen Investment Holdings and Creation Investments, among others. This means the company is run by professional managers, a key factor in assuaging investor concerns about its IPO.
Showing promise
On other matrices too, it is on a solid footing: it has over 3,75,000 members in rural and urban areas combined and is the fifth largest micro-finance company in India after Bandhan, SKS, Janalakshmi and Ujjivan; its non-performing assets as a percentage of assets under management stood at 1.33 per cent as on 31 December 2015. In comparison, the non-performing assets of SKS Microfinance was at 0.97 per cent (excluding Andhra Pradesh) .
These factors were the reasons why retail and high net worth individuals got excited about the IPO; these two segments were oversubscribed 1.4 and 57.3 times, respectively. However, there are challenges ahead for the company.
Once it becomes a bank, it can no longer get term loans from commercial banks to finance its operations. It will then need to depend on deposits from customers apart from other forms of financing. This will be a completely new way of doing business for Equitas.
In fact, in the initial phase, the costs are likely to outweigh the benefits of having a small financial bank licence as the company will have to comply with high levels of capex and cash reserve ratio requirements.
Unlike non-banking financial companies, banks need to keep 4 per cent of their deposits as cash reserves. This, analysts say, could crimp its net interest margins from the current 11 per cent to 8 per cent.
The lack of a national footprint could come in the way of growth too. Over half of its assets under management are in just one state: Tamil Nadu. If its business in the state is affected due to political or environmental reasons, it could severely dent its overall performance.
It must also tweak its business mix. Apart from micro-finance, which accounts for 53.3 per cent of its total business, 25.5 per cent is contributed by vehicle finance, an area where the danger of loans turning into non-performing assets runs high.
"The commercial vehicle book of Equitas has not yet fully seasoned, and there could be some volatility seen in non-performing assets there," says an analyst.
Siddharth Purothit, analyst at Angel Broking, says, "Equitas's return on assets and return on equity is comparatively low and it would take a few years to improve as the company is now converting itself to a small finance bank. This is a big challenge for the company's profitability."
Drawing up plans
Vasudevan, however, is not worried. To gain a national footprint, he is banking on partnerships with dealers of used commercial vehicles for access to potential customers. At the same time, to keep costs low and to reach as many people as possible, mobile phones and tablets will form a big part of his strategy. Vasudevan wants to provide the whole gamut of banking services from loan application to approval on one platform to make life easier for his customers. The digital focus will also help him keep the bank's administration costs low by reducing the need for opening physical branches.
Dismissing fears about initial costs of running a bank weighing on future revenue, Vasudevan believes the bank will, in fact, add new streams of revenue from transaction charges and treasury operations to make up for the additional expenses. He also hopes to mobilise retail deposits to keep the cost of funds low.
Experts believe garnering low-cost current and savings account deposits would be a slow process, and Equitas might be better off if it went for bulk deposits by offering slightly higher rates than commercial banks (a strategy successfully adopted by Bandhan).
All in all, analysts have given their thumbs up to its strategy. Jaymin Trivedi of Aditya Birla Money believes Equitas will remain on a high growth trajectory, given its strong managerial capabilities. There is potential to grow at 40 per cent over the next couple of years, say analysts.