What you must know about ESAF Small Finance Bank IPO?

ESAF Small Finance Bank Ltd started its journey as an NGO in 1992 and is modelled on the lines of Grameen Bank of Bangladesh. ESAF Small Finance Bank Ltd focuses on expanding the banking horizon to new unbanked areas. Originally called ESAF Microfinance and Investments Private Ltd, it was a pioneer in establishing structured lending through mutually trusted groups at the village level. ESAF also adopted a unique social business strategy, with a triple bottom line approach, emphasizing on People, Planet and Prosperity. Global studies show that every rupee invested in ESAF, has a Social Return on Investment of Rs3.19. It also empowered women to access employment opportunities and contribute to household income; combined with control over household resources and participation in household financial decision making. It was only in 2016 that it became ESAF Small Finance Bank Ltd got its SFB license and started operations as an SFB in 2017. The SFB has a customer base of  56 lakhs currently. The company has more than 4,100 employees.

ESAF Small Finance Bank Ltd also got the RBI approval for the inclusion in the second schedule of the RBI Act 1934 within two years of its commencement of operations and hence the Bank became a Scheduled Bank since December 2018. ESAF Small Finance Bank Ltd has 700 banking outlets spread across 21 states and 2 Union Territories. It also offers a host of modern banking services like ATMs, Debit Cards, Safe Deposit Lockers, Internet Banking, Mobile Banking, Agent Banking, SMS Banking, RTGS, NEFT, CTS, etc. Some of its standout features include doorstep banking, free video calling facility at branches and Hrudaya Fixed Deposit Scheme. The net proceeds from the IPO fresh issue portion will be utilized by the bank to augment its Tier-1 capital adequacy to meet future capital requirements; a pre-requisite for expanding the asset book. The IPO will be lead managed by ICICI Securities, DAM Capital Advisors (formerly IDFC Securities), and Nuvama Wealth Management. Link Intime India Private Ltd will be the registrar to the issue.

Highlights of the IPO issue of ESAF Small Finance Bank Ltd

Here are some of the key highlights to the public issue of ESAF Small Finance Bank IPO.

• ESAF Small Finance Bank Ltd has a face value of ₹10 per share and the price band for the book building IPO has been set in the band of ₹57 to ₹60. The final price will be discovered within this band through the process of book building.
   
• The IPO of ESAF Small Finance Bank Ltd will be a combination of a fresh issue and an offer for sale (OFS). As you would be aware, a fresh issue tends to bring in fresh funds into the company, but is also EPS and equity dilutive. However, OFS is just a transfer of ownership and does not entail dilution of equity or of EPS.
   
• Let us start with the fresh issue portion first. The fresh issue portion of ESAF Small Finance Bank Ltd IPO comprises the issue of 6,51,16,667 shares (651.17 lakh shares approximately), which at the upper price band of ₹60 per share will translate into fresh issue size of ₹390.70 crore.
   
• The offer for sale (OFS) portion of the IPO of ESAF Small Finance Bank Ltd comprises the sale of 1,20,50,000 shares (120.50 lakh shares), which at the upper price band of ₹60 per share will translate into an offer for sale (OFS) size of ₹72.30 crore.
   
• The OFS selling will be by the promoter shareholders and investor shareholders. Out of the 120.50 lakh shares OFS, promoter ESAF Financial Holdings will offer 82.10 shares while the investor shareholders (PNB Metlife Insurance and Bajaj Allianz Life Insurance) will offer the remaining 38.40 lakh shares.
   
• Therefore, the overall IPO of Honasa Products Ltd will comprise of the issue and sale of 7,71,66,667 shares (771.67 crore shares approximately), which at the upper price band of ₹60 per share will translate into total IPO issue size of ₹463 crore.

While the fresh issue will be capital and EPS dilutive, the offer for sale portion will only result in transfer of ownership. There will 3 shareholders offering shares under the OFS portion. This includes 1 promoter shareholder in the company and 2 non-promoter investor shareholders as explained above.

Promoter holdings and investor quota allocation quota

The company was promoted by Kadambelili Paul Thomas and ESAF Financial Holdings Private Ltd. Currently the promoters hold 74.43% stake in the company, which will get diluted post the IPO. 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 stock of ESAF Small Finance Bank Ltd will be listed on the NSE and on the BSE. The table below captures the gist of the allocation to various categories.

It may be noted here that the Net Offer above refers to the quantity net of employee quota. Employees will have a discount of ₹5 to the IPO price. The anchor portion, will be carved out of the QIB portion.

Lot sizes for investing in the IPO of ESAF Small Finance Bank Ltd

Lot size is the minimum number of shares that the investor has to put in as part of the IPO application. The lot size only applies for the IPO and once it is listed then it can be even traded in multiples of 1 shares since it is a mainboard issue. Investors in the IPO can only invest in minimum lot size and in multiples thereof. In the case of ESAF Small Finance Bank Ltd, the minimum lot size is 250 shares with upper band indicative value of ₹15,000. The table below captures the minimum and maximum lots sizes applicable for different categories of investors in the IPO of ESAF Small Finance Bank Ltd.

It may be noted here that for the B-HNI category and for the QIB (qualified institutional buyer) category, there are no upper limits applicable.

Key dates for ESAF Small Finance Bank Ltd IPO and how to apply?

The issue opens for subscription on 03rd November 2023 and closes for subscription on 07th November 2023 (both days inclusive). The basis of allotment will be finalized on 10th November 2023 and the refunds will be initiated on 13th November 2023. In addition, the demat credits are expected to happen on 15th November 2023 and the stock will list on 16th November 2023 on the NSE and the BSE. ESAF Small Finance Bank Ltd will be special for more than one reason. It will test the appetite for financial stocks and also whether there is appetite if a slew of mainboard IPOs hit the market. Let us now turn to the more practical issue of how to apply for the IPO of ESAF Small Finance Bank 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.

Financial highlights of ESAF Small Finance Bank Ltd

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

Data Source: Company RHP filed with SEBI (All ₹ figures are in crores)

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

1. In the last 3 years, revenue growth has been steady and also growing. That is evident from the expansion of the revenue pool of the bank in the last couple of years. Also, the digital back-end model for risk management and a feet on street front model has worked well for ESAF Small Finance Bank Ltd.
    
2. Profits and ROE are not really comparable due to the huge volatility due to the surge in the latest year of FY23. For the latest year, net margins of 9.62% and ROE of 17.7% is a very attractive number and should be able to justify the consistent capital expansion. Like other banks, ESAF also gained from rising NIIs and expanding NIMs.
    
3. The company has had below average sweating assets, but it may not too relevant to a bank. However, the ROA for the latest year at 1.5% is fairly attractive, but here again, the assumption is that the latest year data sustains.

On the latest year EPS of 6.71, the stock is available in the IPO at a P/E of 8.9 times, which is attractive if the current growth rate can be sustained in profits. That would make the stock a lot cheaper in relative terms. Also, the ROA at 1.5% is in a position to justify such valuations for the time being. But a quick look at qualitative factors is also warranted.

ESAF Small Finance Bank Ltd brings to the table deep insights into bottom of the pyramid funding, which can be invaluable to partner with larger players for last mile participation. Its portfolio NPAs in the rural and semi-urban have been consistently very low. Their technology driven back-end and risk management model makes it a lot more scalable in terms of future growth. The stock looks like a solid stock with something for shareholders on the table. A long term view and a higher risk appetite would be called for.