Suryoday SFB IPO elicits mixed reaction from analysts; here's why

Analysts covering the Suryoday SFB IPO share mixed views and are split between high valuations and good return ratios

The three-day initial public offer (IPO) by Suryoday Small Finance Bank (SFB) is slated to open on Wednesday, March 17 along with the much-awaited issue by Rakesh Jhunjhunwala-backed Nazara Technologies.

The IPO is a mix of an offer for sale (OFS) and a fresh issue in which the company is looking to sell 1.9 crore shares, priced in the range of Rs 303-305 per share to raise up to Rs 581 crore. Investors can bid for a minimum of 49 shares and in multiples thereof. The bank proposes to utilise the net proceeds from the fresh issue towards augmenting its Tier – 1 capital base and to meet future capital requirements.

Analysts covering the IPO share mixed views and are split between high valuations and good return ratios.

"The IPO is valued at 2.7x of 9MFY20 book value, which appears to be at a premium of 30-35 per cent compared to Ujjivan SFB and Equitas SFB and significant discount compared to AU SFB. As AU SBF has got a significant scale with a sharp reduction in the unsecured lending book, valuation comparison with AU SFB will not be appropriate," said Vikas Jain, senior research analyst at Reliance Securities.

But he did note that the company's performance has been quite impressive, supported by a substantial reduction in the cost of funds and a stellar increase in advances.

The gross loan portfolio has grown at a CAGR of 47 per cent from Rs 1,718 crore in FY18 to Rs 3,711 crore as of FY20. The figure stood at Rs 3,901 crore as of Q3FY21. PAT (profit after tax) has increased at 212 per cent CAGR from Rs 11.4 crore in FY18 to Rs 111.1 crore FY20 and was at Rs 54.8 crore in 9MFY21. During FY19-FY20, its average NIM (net interest margin) came in at 12 per cent and RoE (return on equity) at 12 per cent.

However, during 9MFY21, the bank's performance has deteriorated as pandemic led lockdown and economic crises impacted the weaker section of society severely.

"What concerns us is that with proforma GNPA (gross net performing assets) at 9.3 per cent, SSFB’s pool of bad loans is the highest among listed peers. While the collection efficiency improved to above 100 per cent (inclusive finance at 112.5 per cent in December), re-surge of Covid cases in key business states such as Maharashtra and Karnataka to weigh on revival and further weaken assets quality," said Choice Broking in a note.

Grey market performance

As per grey market watcher Manan Doshi, co-founder Unlistedarena.com, the issue was commanding a premium of Rs 28-34 per share in the unlisted market, up 8-11 per cent over the issue price. "The issue looks moderately priced. The management quality of the company is very good and it also has good backing from institutional investors. This year has been very difficult for the financial sector, especially small finance banks due to the Covid-19 pandemic and hence one needs to be watchful for a few quarters on the recovery," Doshi said.

Brokerage call

Choice Broking: Avoid

At a higher price band, the company is valued at P/BV of 2x post-issue BVPS which appears expensive given weak assets quality outlook, concentrated business to some states, low CASA share and small business size. Asked valuation is in line with peers Equitas and Ujjivan SFB but these banks are significantly large in size and have superior fundamentals than Suryoday SFB. Post issue, RoE is unlikely to improve to double-digit or FY20 level (RoE: 11.4 per cent in FY20) anytime soon. Further, it is well capitalized with CAR at 41.2 per cent. Despite this, the company comes with a fresh issue of Rs 248 crore. Considering all these parameters, we assign an ‘Avoid’ rating to the issue.

LKP Securities: Subscribe

At a higher price band (Rs 305), the stock is valued at 2.28(x) P/BVPS with a current book value per share of Rs 133.5. Factoring the good return ratios, FY20 ROA/ROE of 11.3 per cent/2.5 per cent, we believe that Suryoday Small Finance Bank is worth subscribing to. Thus we recommend Subscribe.

Equinomics Research: Avoid

"We are advising people to avoid the issue as the company is not from an attractive theme in the secondary market space and the valuations are also not comfortable. Although, risk-taking people can apply for listing day gains as all IPOs are roaring on listing day," said G Chokkalingham, founder and MD at Equinomics Research.

Anand Rathi: Subscribe for long-term

The company is placed at a little bit higher valuation as compared to its peers. However, it is expected that the company is going to get benefited from the overall growth in demand of commercial vehicle loans and affordable housing finance which results in improvement in overall return ratios. Additionally, we also expect operating parameter to improve further at a healthy rate owing to improvement in NIM, asset quality. Hence, considering the differentiated business model and with the current financials, we recommend a Subscribe (Long Term) rating to this IPO.

Religare Broking: Subscribe for long-term

We feel the bank would continue to face challenges in the near term however its medium to long term outlook remains bright. Going ahead, the bank focus remains on growing secured portfolio in non-MFI such as commercial vehicles and housing loans, also expanding distribution channel as well as increase geographical presence will remain their top priorities. Investors can Subscribe for the long term.