ESAF Small Finance Bank IPO – Issue Details and Review (2024)

ESAF Small Finance Bank is coming up IPO that will open for subscription on 3rd November, 2023. ESAF Small Finance Bank mainly focusing on providing loans to rural and semi-urban customers. Bank has strong revenue growth in the last few years. In this article, we would provide ESAF Small Finance Bank IPO details, IPO Size, Grey Market Premium (GMP), positive aspects, risk factors and review.

ESAF Small Finance Bank IPO – Issue Details

About ESAF Small Finance Bank Limited

ESAF is a Small Finance Bank mainly focusing on providing loans to rural and semi-urban customers.

The Bank’s product portfolio consist of

(a) Micro Loans,

(b) retail loans,

(c) MSME loans;

(d) loans to financial institutions; and

(e) agricultural loans.

As of March 2023, ESAF Small Finance Bank has a network of 700 outlets, 743 customer service centers, 20 business correspondents and 481 business facilitators.

The Bank has 581 ATM’s located across 21 states of India.

Financial Summary of ESAF Small Finance Bank Limited

Objects of the IPO

The IPO size is Rs 463 Crores, which comprises both OFS and Fresh issue.

#1 – Offer for Sale (OFS) – Rs 72.3 Crores – Under OFS, the money goes to selling shareholders, and the company would not receive anything.

#2 – Fresh issue of Rs 390.7 Crores – The proceeds would be used for the following:

• The Net Proceeds are proposed to be utilized towards augmentation of the Bank’s Tier-I capital base to meet the Bank’s future capital requirements, which are expected to arise out of growth in the Bank’s assets, primarily the Bank’s loans/advances and investment portfolio, and to ensure compliance with regulatory requirements on capital adequacy prescribed by the RBI from time to time.
• The Bank expects to receive the benefits of listing the Equity Shares on the Stock Exchanges.

Valuation of ESAF Small Finance Bank IPO Price

Its IPO price band is Rs 57 to 60 per share

• If we consider last year FY23 EPS of Rs 6.71, P/E ratio works out to be 9x
• If we consider last 3 years weighted EPS of Rs 4.47, P/E ratio works out to be 13x
• The listed peers like Spandana Sphoorty Financial trading at P/E 471x (Highest) and Ujjivan Small Finance Bank is trading at P/E of 9.8x (Lowest) and industry average P/E is 94.7x. Hence, the IPO Price band at P/E of 9x to 13x is reasonably priced.

Positive Aspects in ESAF Small Finance Bank IPO

• The bank’s understanding of the microloan segment has enabled it to grow its business outside of Kerala (its home state). Its main focus is on the rural and semi-urban banking franchise, which is helping the company grow at a faster pace.
• The bank has shown strong growth in its retail deposits portfolio.
• There has been strong revenue and margin growth in the last 3 years.

Risk Factors in ESAF Small Finance Bank IPO

• OFS IPO proceeds would go to selling share holders and company would not get anything.
• As of June 30, 2023 and March 31, 2023, 2022, and 2021, 74.70%, 75.04%, 81.16%, and 84.80% of its Advances Under Management (AUM) were Micro Loans.
• As of June 30, 2023 and March 31, 2023, 56.52% and 63.66% of our AUM were Microfinance Loans, while 18.18% and 11.38% were Other Micro Loans.
• Any decrease in demand for its Micro Loans may have adverse effects on its business, financial condition, results of operations, and cash flows.
• As of June 30, 2023, and March 31, 2023, 2022, and 2021, 75.15%, 75.35%, 83.59%, and 85.50% of its advances (net of provisions) were unsecured advances. Failure to recover these unsecured advances in a timely manner may negatively impact its financial condition, results of operations, and cash flows.
• Its business is concentrated in South India, specifically Andhra Pradesh, Karnataka, Kerala, Tamil Nadu, Telangana, and the Union Territory of Puduch*erry.
• As of June 30, 2023, a significant portion of its banking outlets, gross advances, and deposits are from South India, with a focus on Kerala and Tamil Nadu. Adverse economic changes in South India, particularly in Kerala and Tamil Nadu, could adversely affect its financial condition, results of operations, and cash flows.
• They are subject to regular inspections by the RBI, and non-compliances have been observed in the past.
• They are currently addressing certain major observations by the RBI, and unresolved issues could lead to sanctions and penalties, materially affecting its reputation, business, financial condition, results of operations, and cash flows.
• Investors should read all internal and external risk factors from ESAF Small Finance Bank RHP.

ESAF Small Finance Bank IPO – Should you subscribe or not?

ESAF Small Finance Bank mainly focuses on providing loans to rural and semi-urban customers in South India. The bank has generated strong financials, both in terms of revenue and margins. Its IPO price is set at a reasonable valuation.

On the other hand, a majority of its loans are microloans, which are unsecured. Failure to recover these unsecured microloans can have a significant financial impact. Additionally, the bank’s exclusive focus on South India also poses a risk.

Investors who understand both these pros and cons can consider investing in such IPOs.