Suryoday Small Finance Bank IPO: Can this be a repeat of Bandhan Bank?

Staff Writer   /   March 17, 2021

Suryoday Small Finance Bank, one of leading small finance banks (SFB) in India and has been serving customers in the unbanked, underbanked segments, is coming out with its Rs 580-crore IPO on March 17. The IPO is slated for closure on March 19. The price band is Rs 303 to 305 per share. The bank has a dominant MFI business, just like Bandhan Bank. Given the stellar listing of Bandhan, will Suryoday Small Finance Bank IPO be a repeat? Read on to know more details.

About bank history, business

SSFB started operations as an SFB on January 23, 2017, before which it operated as an NBFC-MFI. Its gross loan portfolio (GLP) has witnessed a CAGR of 35% as of FY18 to nine months of FY21. Growth in the current year has been significantly impacted by Covid and 9 month FY21 disbursements were down 50% yoy.

SSFB’s key products are Microfinance loans (70% of GLP), CV finance (9%), Affordable Housing Loans (6%), Secured BLs (4%) and NBFC loans (5%).

Since becoming a bank, the deposits have been ramped up to 88% of advances (FY18-9m FY21 CAGR of 72%). Cost metrics has been controlled through addition of moderate-sized banking outlets, calibrated employee addition and lower average cost of employees.

Baskar Babu Ramachandran is MD & CEO.

Suryoday’s asset portfolio remains MFI dominant at 71% of loans (similar to Ujjivan), with urban-rural mix of 70:30 and geographically concentrated in Maharashtra (35%), TN (27%) and Odisha (15%).

Why the IPO

SSFB is floating the IPO to comply with the regulatory listing requirement. Suryoday Small Finance Bank (SSFB) is coming out with an IPO of Rs 580 crore which comprises a fresh capital raise of Rs 250 crore and an OFS of nearly Rs 330 crore.

What are the IPO details

Shares on offer – The IPO is for upto 19,093,070 equity shares. Fresh issue is upto 8,150,000 equity shares while Offer for sale is for upto 10,943,070 equity shares.

The issue shall constitute 17.99% of the post issue paid up equity share capital.

SSFB’s post issue implied market cap is Rs 3,216 crore to Rs 3,237 crore.

Face value of shares is Rs 10/share.

Listing will be on BSE & NSE.

The IPO price band is Rs 303 – 305 per share.

The minimum bid lot is 49 shares.

The IPO BRLMs are Axis Capital, ICICI Securities, IIFL Securities, SBI Capital Markets
Registrar: KFin Technologies Pvt. Ltd.

IPO factbox

CompanySuryoday Small Finance Bank
Face value₹10 per equity share
Open dateMar. 17
Close dateMar. 19
Allotment dateMar. 24
Listing dateMar. 30
IPO size â‚¹581 crore approx.
IPO band₹303 to ₹305 per equity share
Bid lot49 shares

Positive points

Well-diversified portfolio – Suryoday SFB has been able to diversify its product portfolio and proportion of net unsecured portfolio has reduced from 94.81% of net advances in FY18 to 74.59% as on Q3FY21. It has diversified into other products, which broadly include CV loans, affordable home loans, micro business loans, etc., according to ICICIdirect.

Track record of cost efficient operations -Operating expense ratio as percentage of its average balance of Gross Loan Portfolio has reduced from 10.72% in Fiscal 2018 to 7.99% in Fiscal 2020 and was 8.38% (annualized) / 6.29% (unannualized) in the nine months ended December 31, 2020. The relatively moderate size of Banking Outlets has led to reduction in the overall capital expenditure and operating expenditure per Banking Outlet, as per HDFC Securities.

Negative points

Sub-par liability profile and higher NPAs – The bank’s deposit-to-AUM ratio improved to 88%, but CASA remained abysmally low at 13% (12% of AUM), similar to Ujjivan. Deposits per branch too remain the lowest among peers at Rs 60 million vs. Rs 100 million-Rs 200 million for peers and thus need to be ramped up. We believe that the sub-par liability profile along with an expected surge in NPAs and changing asset mix to non-MFI could cast pressure on NIMs/core RoA in the long run, as per Emkay.

Overall stress inadequately addressed – SSFB’s proforma Gross and Net NPLs (adj. for Covid buffer) stood at 9.3% and 3.7% respectively as of Dec 2020. Besides this, the bank is likely to have a substantial portfolio in PAR 30-90 bucket which can be construed from the trends in paying customers (82% in Dec & 68% in Sept) and overall collection efficiency (111% in Dec & 77% in Sept). The above collection indicators are significantly lower in the states of Maharashtra and Tamil Nadu which together contribute 60%+ of SSFB’s GLP. Notably, other MFIs and SFBs under our coverage have reported significantly better collections in these states and for same products, according to Yes Securities.

To diversify its asset franchise, the bank has aggressively grown its portfolios of CV loans, Secured BLs and FIG (smaller NBFCs/MFIs/HFCs). In these segments, the growth was substantially driven by ramping-up the ticket size (ATS CAGR of 29%/61%/87% for CV/SBL/FIG over FY18-9m FY21). This will be the first adverse credit cycle for these products. Considering a moderate Covid buffer and likelihood of PAR 90 increasing in the near term, the credit cost could remain elevated for the next couple of quarters and thus weigh on bank’s profitability.  

IPO valuation

Suryoday SFB witnessed strong growth in advances along with maintaining asset quality. Unserved and underserved customers as target offer a vast opportunity for business growth. At Rs 305, the stock is available at 2.1 times Q3FY21 P/BV (post fresh issue).

“Factoring the good return ratios, FY20 ROA/ROE of 11.3%/2.5%, we believe that Suryoday Small Finance Bank Limited is worth subscribing. Thus we recommend SUBSCRIBE,” says LKP Securities.

Emkay says among SFBs, it rather prefer Equitas (Buy) for its healthy asset diversification, better liability profile and reasonable valuations.

“SSFB’s IPO pricing at 2.1x current P/ABV (post-money) is at par with listed larger peers, ESFB and USFB. However, considering the gaps in the franchise and execution capabilities (management depth), we believe that IPO valuation is relatively unattractive,” says Yes Securities.

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