ESAF Small Finance Bank Limited IPO
ESAF Small Finance bank provides a range of financial services and follows a triple bottom line impact approach, aiming to create positive outcomes for people, the environment, and prosperity. Here’s an overview of the key elements of this business model:
1. Customer Segments: The bank primarily targets unbanked and under-banked customer segments, especially in rural and semi-urban centers. As of June 30, 2023, a significant portion of the bank’s gross advances and banking outlets are concentrated in these areas, indicating their commitment to financial inclusion and serving underserved communities.
2. Product Offerings:
a) Advances (Asset Products): The bank’s primary products include various types of advances, such as micro loans (including microfinance loans and other micro loans), retail loans (including gold loans, mortgages, personal loans, and vehicle loans), MSME loans, loans to financial institutions, and agricultural loans.
b) Deposits (Liability Products): The bank offers various deposit products, including current accounts, savings accounts, term deposits, and recurring deposits.
c) Asset and Deposit Growth: The bank has witnessed substantial growth in assets under management (AUM) and deposits. AUM grew from ₹84,259.30 million to ₹163,312.65 million between March 31, 2021 and 2023, with a compound annual growth rate (CAGR) of 39.22%. Deposits increased from ₹89,994.26 million to ₹146,656.25 million during the same period, with a CAGR of 27.66%.
3. Diverse Services: In addition to traditional banking products, the bank offers a range of services, including safety deposit lockers, foreign currency exchange, access to the Bharat Bill Payment System, money transfer services, and Aadhaar Seva Kendra services. They also distribute third-party life and general insurance policies and government pension products.
4. Geographic Reach: The bank has a significant presence across India, with a network of 700 banking outlets, 767 customer service centers, business correspondents, banking agents, business facilitators, and ATMs. While their operations are spread throughout the country, a substantial portion of their business is concentrated in South India, particularly in Kerala and Tamil Nadu.
5. Social and Environmental Focus: The bank’s business model is built on principles of responsible banking and a social business strategy. They aim for a triple bottom line impact, focusing on people, the planet, and prosperity. This approach involves creating synergies between social, environmental, and economic outcomes to benefit stakeholders. The bank has adopted various policies, including an Environmental, Social, and Governance (ESG) policy, to implement this approach.
6. ESG Commitment: The bank’s ESG policy commits to protecting the environment, promoting financial inclusion and gender equality, and establishing a governance framework for accountability, transparency, and compliance with internal and external ESG standards. They have received recognition and awards for their sustainability and ESG efforts.
Objects of the ESAF Small Finance Bank Limited IPO:
ESAF Small Finance Bank Limited IPO Details:
| Open Date: | Nov 03 2023 |
| Close Date: | Nov 07 2023 |
| Issue Type: | Book Built Issue IPO |
| Issue Size: | 463 Cr. |
| Lot Size: | 250 Shares |
| Issue Price: | ₹ 57 to ₹60 Per Equity Share |
| Listing At: | NSE,BSE |
| Listing Date: | Nov 16 2023 |
Financials of ESAF Small Finance Bank Limited IPO:
| Particulars ( In Crore ) | 2021 | 2022 | 2023 | 3M-FY24 |
| CAPITAL AND LIABILITIES | ||||
| Capital | 449 | 449 | 449 | 449 |
| Employee Stock Options Outstanding | 0 | 5 | 6 | 6 |
| Reserves and Surplus | 903 | 957 | 1,260 | 1,390 |
| Deposits | 8,999 | 12,815 | 14,666 | 15,656 |
| Borrowings | 1,694 | 2,953 | 3,354 | 2,739 |
| Other Liabilities and Provisions | 293 | 528 | 489 | 556 |
| Total | 12,339 | 17,708 | 20,224 | 20,796 |
| ASSETS | ||||
| Cash and Balances with Reserve Bank of India | 1,618 | 1,301 | 740 | 821 |
| Balances with Banks and Money at Call and Short Notice | 201 | 211 | 28 | 66 |
| Investments | 1,932 | 4,070 | 4,889 | 4,882 |
| Advances | 8,168 | 11,637 | 13,924 | 14,322 |
| Fixed Assets | 139 | 159 | 188 | 187 |
| Other Assets | 281 | 329 | 456 | 518 |
| Total | 12,339 | 17,708 | 20,224 | 20,796 |
| Particulars ( In Crore ) | 2021 | 2022 | 2023 | 3M-FY24 |
| Interest Earned | 1,641 | 1,940 | 2,854 | 899 |
| Other Income | 127 | 208 | 288 | 93 |
| Total Income | 1,768 | 2,148 | 3,142 | 992 |
| Interest Expended | 720 | 793 | 1,017 | 313 |
| Operating Expenses | 632 | 863 | 1,231 | 378 |
| Provisions and Contingencies | 312 | 437 | 591 | 171 |
| Net Profit | 105 | 55 | 302 | 130 |
| No.of Shares | 51.45 | 51.45 | 51.45 | 51.45 |
| Particulars ( In Crore ) | 2021 | 2022 | 2023 | 3M-FY24 |
| Operating Activities ( Before working capital change ) | 431 | 517 | 1,024 | 304 |
| Adjustments for:- | ||||
| (Increase)/ Decrease in Investments (other than HTM Investments) | 408 | -1,198 | -398 | -24 |
| (Increase)/ Decrease in Advances | -1,808 | -3,790 | -2,903 | -526 |
| (Increase)/ Decrease in Fixed Deposit with Bank (Original Maturity greater than 3 months) | 226 | -0.3 | 0 | 0 |
| (Increase)/ Decrease in Other Assets | -42 | -50 | -169 | -73 |
| Increase/ (Decrease) in Deposits | 1,971 | 3,816 | 1,851 | 990 |
| Increase/ (Decrease) in Other liabilities and provisions | 52 | 138 | 83 | 61 |
| Direct taxes paid | -109 | -17 | -61 | -26 |
| Net Cash Flows from/(used in) Operating Activities | 1,127 | -585 | -573 | 706 |
| Cash Flows Used in Investing Activities | ||||
| Purchase of Fixed Assets | -50 | -54 | -72 | -12 |
| Proceeds from Sale of Fixed Assets | 0.2 | 0.3 | 1 | 0.4 |
| (Increase)/ Decrease in Held to Maturity Investments | -589 | -928 | -503 | 41 |
| Net Cash Used in Investing Activitie | -638 | -982 | -573 | 29 |
| Cash Flows from Financing Activities | ||||
| Proceeds from Issue of Share Capital (including Share Premium) | 163 | 0 | 0 | 0 |
| Increase/(Decrease) in Borrowings | 491 | 1,259 | 401 | -615 |
| Cash Flows from Financing Activities | 653 | 1,259 | 401 | -615 |
| Net Cash Flow | 1,143 | -308 | -745 | 120 |
Recommendation on ESAF Small Finance Bank Limited IPO:
A) ESAF Small Finance Bank's IPO: A Strategic Move Towards Sustained Growth
ESAF Small Finance Bank, a seasoned player with 30 years in the microfinance sector, has opened its Initial Public Offering (IPO) for subscription. The IPO aims to raise approximately INR 463 Crores, comprising a fresh issue of INR 391 Crores and an offer for sale. The primary issue is expected to bolster the bank's capital adequacy, enhancing it by at least 3 to 3.75%.B) Business Correspondence Model for Growth
ESAF Small Finance Bank strategically employs the Business Correspondence (BC) model, a regulation adopted in 2005, to extend its reach to the Last Mile. By sourcing and servicing customers through this model, the bank ensures comprehensive financial inclusion.C) Consistent NIM and Financial Stability
The bank has consistently maintained a Net Interest Margin (NIM) at a commendable 10%. Despite the pandemic, ESAF has shown resilience and adaptability. With 75% of the microfinance business initially held by the Cooperative acting as a BC, diversification since 2019 is expected to reduce concentration.D) Sustainable Growth Indicators
ESAF has demonstrated significant improvement in key financial metrics such as NIM, Return on Equity (ROE), and Return on Assets (ROA) in Q1 FY24. These improvements are sustainable and not merely preparatory for the IPO. The bank has also successfully cleaned its books and reduced Non-Performing Assets (NPA), ensuring enhanced financial stability.E) Confidence in Future Prospects
With a rich history in the microfinance business, ESAF is confident in its ability to maintain a sustainable NIM level of 10%. The bank's belief in its customers and the geographies it serves has been unwavering, even through challenging cycles.F) Weakness in the Business
1. Regional Concentration: ESAF Small Finance Bank has a substantial focus on Kerala, leading to a geographically concentrated portfolio. This can be a risk as economic or political changes specific to the region can have a significant impact on the bank's operations and profitability. 2. High Unsecured Book: The bank has a large proportion of unsecured loans in its credit portfolio. While unsecured loans can contribute to higher Net Interest Margins (NIMs), they also come with increased credit risk as there is no collateral to fall back on in case of defaults. 3. Forceful Listing Mandated by RBI: The Reserve Bank of India (RBI) has repeatedly urged ESAF Small Finance Bank to get listed on stock exchanges and has issued several warnings to the bank. The warnings include the possibility of taking necessary actions due to the violation of license conditions if the bank fails to list its shares. 4. Dependence on Business Correspondences: ESAF relies heavily on business correspondents for its growth. While this model helps in reaching out to unbanked areas, it can also lead to over-dependence on external entities for business expansion and customer acquisition. 5. High Dependency on Promoter Group Entity: The bank is significantly dependent on its promoter group entity for business, with 74.75% of its business (including promoters and promoter group entity) in Q1 FY24 and 61.16% directly from the promoter. Such concentration can lead to potential risks associated with governance and business continuity.G) Valuation
As of June 30, 2023, the total net worth of ESAF Small Finance Bank stands at INR 1838 Crores. Through the IPO, the bank intends to raise an additional INR 390 Crores. This infusion of capital would elevate the bank's total net worth to approximately INR 2228 Crores post-IPO. Given the roughly 51 Crore outstanding shares, this translates to a book value of INR 43 per share. When compared with the IPO price of INR 60 per share, the Price-to-Book (P/B) ratio is calculated to be 1.39x. This valuation appears reasonable, especially when benchmarked against other Small Finance Banks. For instance, Ujjivan SFB is valued at a P/B of 2.63x, Equitas SFB at 2.11x, and Suryoday SFB at 1.04x. In conclusion, ESAF Small Finance Bank's IPO is a testament to its strategic growth initiatives and commitment to financial inclusion. Investors may find this offering an opportunity to invest in a bank with a strong foundation and a clear vision for the future.Lead Manager of ESAF Small Finance Bank Limited IPO:
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