What you must know about the SBFC Finance IPO

SBFC Finance Ltd is classified as a systemically important non-deposit taking NBFC (non-banking finance company). SBFC Finance Ltd was established in the year 2008, with a primary focus on small business owners, entrepreneurs, self employed as well as on the salaried persons. Its predominant lending products are the secured MSME loans and gold loans. Today, there are a vast number of entrepreneurs and small business owners who lack access to traditional sources of bank financing. Most banks insist on a pay slip and a steady job and that is where most of the small businesses take a hit. It is this gap that SBFC Finance intends to fill up.

Considering that the traditional assessment metrics may not be applicable to the self-employed professionals, SBFC Finance a unique set of parameters for evaluating this segment before giving a loan. The NBFC is spread across 105 cities and towns located across 16 states and these are served through a network of 137 branches. The NBFC will use the proceeds from the fresh issue portion to boost its capital adequacy buffers to enable further growth in the loan book. For the latest financial year ended FY23 saw net interest income (NII) grow 49% to ₹379 crore. NIMs are extremely healthy at 9.32%.

Highlights of the SBFC Finance IPO Issue

The size of the issue is known, but the number of shares to be sold is not yet known since the price band for the SBFC Finance IPO is yet to be fixed. What we know, as per the Red Herring Prospectus (RHP) is that the total size of the issue of SBFC Finance Ltd will be worth ₹1,025 crore. This will comprise of ₹425 crore by way of fresh issue and ₹600 crore by way of an offer for sale. The original fresh issue component was ₹750 crore but post the pre-IPO placement of shares worth ₹150 crore, the fresh issue size was reduced to ₹600 crore.

The ₹425 crore offer for sale (OFS) will entail sale of shares by the promoting entities viz. Arpwood Partners Investment Advisors LLP, Arpwood Capital and Eight45 Services LLP. The pricing of the IPO is expected to be finalized in the next few days, post which, the number of shares sold in the IPO would also be known. The issue will be managed by ICICI Securities Ltd, Axis Capital Ltd and Kotak Mahindra Capital Company. The registrar to the issue is Link KFIN Technologies Ltd (formerly Karvy Computershare Ltd).

The company was promoted by SBFC Holdings Pte Ltd, Clermont Financial Pte Ltd, Arpwood Partners Investment Advisors LLP, Arpwood Capital Private Limited and Eight45 Services LLP as the main company promoters. Currently the promoters hold 80.48% of the company, which will get diluted post the IPO. The fresh portion of the IPO will be used for essentially boosting the capital buffers of the NBFC to make them capable of building on their lending book. Most banks and NBFCs have seen their net margins expand rapidly in the last few quarters as the cost of funds has not kept pace with the rising lending rates. That is the phase that most financial stocks in India have been immensely benefiting from.

As per the terms of the offer, 50% of the net offer is reserved for the qualified institutional buyers (QIBs), while 35% of the total issue size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors . The table below captures the quotas.

The company has a face value of ₹10 per share and post the IPO, the stock of SBFC Finance Ltd will be listed on the NSE and on the BSE. Being a fresh issue of equity, combined with offer for sale, the IPO will result in dilution of equity and EPS, apart from transfer of ownership internally.

Check SBFC Finance IPO GMP

Key dates for SBFC Finance IPO and how to apply?

The issue opens for subscription on 03rd August 2023 and closes for subscription on 07th August 2023 (both days inclusive). The basis of allotment will be finalized on 10th August 2023 and the refunds will be initiated on 11th August 2023. In addition, the demat credits are expected to happen on 14th August 2023 and the stock will list on 16th August 2023 on the NSE and the BSE. SBFC Finance Ltd IPO comes at a time when the financials are doing extremely well and at a time when the momentum in the mainboard IPO market is just about coming back. It is hoped that for the IPO market, FY24 is able to recreate the IPO magic of FY22. Let us now turn to the more practical issue of how to apply for the IPO of SBFC Finance Ltd.

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. Investors can apply in the retail quote (up to ₹2 lakh per application) or in the HNI / NII quota (above ₹2 lakh). Minimum lot sizes will be known after pricing. It must be noted that the anchor allocation will happen on 02nd August, 2023; a day before the IPO opens for subscription to the public. Anchor allocation will be deducted from QIB portion.

Financial highlights of SBFC Finance Ltd

The table below captures the key financials of SBFC Finance Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI

There are few key takeaways from the financials of SBFC Finance Ltd which can be enumerated as under

1. In the last 2 years, the revenues have grown as has the profit after tax. While revenues were static for 3 years in between, the recent NII spread improvement has boosted sales and profits of SBFC Finance Ltd
    
2. The latest year profit margins are much higher than what is normally seen in the case of non-banking finance companies. PAT margins at above 20% is extremely attractive and is likely to be supportive of higher P/E ratio valuations.
    
3. Above all, the business of non-banking finance is in a sweet spot with the yields on loans growing much faster than the cost of funds. That is likely to sustain for another 2 quarters at the bare minimum, which is a positive for the stock.

While pricing of the IPO will matter here, what is more critical is the eventual PAT margins that will sustain. If it can sustain net profits margins in excess of 20% as it is doing for last 2 years, then it is exceptionally good and value accretive for the IPO. While the top line potential is immense, profitable growth could hold the key. For that, it would depend on how long the spread advantage lasts.