Suryoday Small Finance Bank- IPO Detailed Review

Detailed Analysis of Suryoday Small Finance Bank IPO

One of the leading Small Finance Bank-Suryoday is raising Rs. 582 Crores through public offering. What should the investors do? Should they subscribe or not? Here is the detailed analysis of Suryoday Small Finance Bank IPO to help you out.

Introduction:

• IPO Window of Suryoday Small Finance Bank has opened from Wednesday 17^th March and will probably become the 4^th Small Finance Bank to get listed on stock exchange after AU Small Finance, Ujjivan and Equitas.
• Suryoday Small Finance Bank Limited is among the leading small finance banks (SFBs) in India in terms of net interest margins, return on assets, yields, and deposit growth, and had the lowest cost-to-income ratio among SFBs in India in FY20.
• Earlier, Suryoday operated as Non-Banking Finance Company (NBFC)- Micro Finance Institution. Suryoday started its operation on 2017 as Small Finance Bank after it received RBI final approval.
• As per the current GMP of Suryoday IPO, which ranges between Rs. 20-30, indicates that it is not much appreciated by the investors.

Detailed Analysis of Suryoday Small Finance Bank IPO

1) IPO DETAILS:

1. Suryoday SFB issue has opened for subscription from 17^th of March 2021 and will last till Friday, 19^th March 2021.
2. Size of Initial Public Offering of Suryoday Small Finance is Rs. 582.3 Cr. aggregating both fresh issuance of shares as well as offer for sale.
3. IPO comprises of fresh issue of equity share of Rs. 248.5 Cr. and Offer for sale by Promoters and Promoter’s Group of Rs. 333.8 Cr.
4. International Financial Corporations, Gaja Capital, HDFC Holdings, IDFC First Bank, Kotak Mahindra Life Insurance Company, DWM (International) Mauritius and Americorp Ventures Ltd. are the investors which will be selling their stake in this offer for sale.
5. Main promoters of the Bank are Baskar Babu Ramachandran, P. Surendra Pai, P. S. Jagdish and G. V. Alankara
6. The price Band of the IPO is Rs. 303- Rs. 305. The Face value is Rs. 10 per equity share.
7. Suryoday SFB will be listing on both BSE as well as NSE.
8. Lot Size of the IPO includes 49 shares in single lot and in multiple thereof upto 13 lots.
9. Of the Total Issue, 50% is reserved for Qualified Institutional Buyers (QIB), 15% for Non-Institutional Bidders (NIB) and 35% for Retail Investors. Upto 5 Lakh Equity Shares are reserved for Employees.
10. In Feb. 2021, private placement of Rs. 152 Cr. was done at the price of Rs. 291.75 per equity share. In this pre-IPO placement, SBI Life Insurance invested Rs. 90 Cr. for 30.84 Lakh Shares, Axis Flexi Cup acquired 17.13 lakh shares in consideration of Rs. 50 Cr. Axis Equity Hybrid Fund and Kiran Vyapar Ltd. also invested Rs. 10 Cr. & Rs. 2 Cr. respectively. This participation by big investors is a green signal for the company.
11. The Objective of issue of public offering are:

i) To comply with RBI’s norm of listing the bank within 3 years of commencement (in 2017)

ii) To utilize the Net Proceeds from the Fresh Issue towards augmenting the Bank’s Tier-1 capital base to meet the Bank’s future capital requirements.Company is having Capital Adequacy Ratio as on Dec-20: 41.17% & Tier-I Capital: 34.3%

2) Company Overview:

• Suryoday SFB was Incorporated in 2008 as a NBFC in Micro Finance category.
• This small finance bank Commenced operations as a Small Finance Bank in January 2017 (after receiving SFB license from RBI).
• For over a decade, it has been serving customers in the unbanked and under-banked segments in India and promoting financial inclusion.
• Company offers a variety of assets and liability product and services which is particularly designed for finance and general banking customers.
• Suryoday key product and services are in relation with Micro Business Loans, MSME Loans, Secured Business Loans, Commercial vehicle loan and Affordable housing loans,
• Suryoday Small Finance Bank is having 554 Banking outlets as of December 2020 including 153 unbanked rural centers.
• This bank is basically operating on B2C business model and as of Dec. 2020, bank is having 14.4 Lakh customers.

3) Financial Performance:

i) Asset Under Management:

• Bank has witnessed a phenomenal growth in its Assets Under Management (AUM). It has grown at CAGR rate of 45.4% between FY18 to FY20.
• In value terms, AUM of the bank has increased from Rs. 1,760 Cr. In FY18 to Rs. 3,719 Cr. In FY20.
• Discussing further about the Market share of SFB industry in terms of AUM, then there are 3 strong listed players which are AU Small Finance Bank with the largest market share of 33% and Ujjivan & Equitas possess 15% each market share.
• AUM market share of other players is: Jana SFB (10%), Utkarsh (6%) and ESAF (7%).
• Suryoday SFBs has mere 4% market share in regards with Assets Under Management as of now, which is quite low, but the management is taking required steps in order to increase its market share.

ii) Advances and Deposits Growth:

• 50% CAGR growth has been recorded by this bank in last 3 fiscal years in their Advances.
• Advances or Loan Disbursed has increased from Rs. 1,569 Cr. In FY18 to Rs. 2,680 Cr. In FY19 and to Rs. 3,532 Cr. In FY20.
• Growth in advances of the bank has halted due to effect of Covid-19. Advances as per 9MFY21 remains 3,782 Cr.
• Deposit Growth of Suryoday has outperformed its advances growth. The deposit growth of the bank has increased at a CAGR rate of 95% between FY18 to FY20.
• Deposits has rosed from Rs. 750 Cr. In FY18 to Rs. 2,849 Cr. In FY20. In the 9MFY21, bank has deposit of Rs. 3,344 Cr.
• Now, if we look at the Credit-to-Deposit ratio of this bank, it has decreased from 209% in FY18 to 113% in 9MFY21. Ideally, this ratio should remain below 100%, but generally SFBs and Micro financial institutions have Credit-to-Deposit ratio of more than 100%.
• Notably, Credit-to-deposit ratio of this bank  has fallen down over the fiscal years and hence with increasing deposit share company will be able to keep tis ratio at required level.

iii) Advances and Deposit Mix:

a) Advance Mix:

• The majority % of the advance mix of this banks owes to Micro Loans i.e., 72.9%. Such types of advances are normally considered unsecured.
• Commercial Vehicle loans accounts to 9.8% of the total advance mix.
• Stats of other types of advances in Bank’s advances mix are: Affordable Housing Finance (6.5%), Financial Intermediaries (5%), Secured Business Loans (3.8%), MSME Loans (1.1%) and Micro Business Loans (1%).
• Overall, 25.4% of the Advances of this bank are secured loans and rest 74.6% are unsecured loans. Bank is consistently focusing on reducing dependency on unsecured loans and therefore Bank is effectively carrying diversification of advances.

b) Deposit Mix:

• Of the total deposit of Suryoday SFB, 86.7% is Term Deposit and only 13.3% is CASA deposit. Bank is also concentrating on improvement of this section as well.
• Over the last 3 fiscal years, there is consistent rise in retail share (%) in terms of Total Deposit.
• In FY18, out of the total deposit, only 34% was retail deposit, in FY19 it was 38% and in FY20 it stood at 48.5%, but in 9MFY21, this has increased to 68.2%, which is a positive sign for the bank.
• The increasing retail share in the total deposit of the bank signifies the diversification of risks. And, hence increasing retail share acts in favour of the bank.

iv) Profitability Trend:

a) Net Interest Income and Net Interest Margin:

• Suryoday has efficiently managed to increase the Net Interest Income from level of Rs. 166 Cr. In FY18 to Rs. 340 Cr. In FY19 and further to Rs. 490 Cr. In FY20.
• Net Interest Margin has also smoothly uplifted from 10.4% to 12.8% and 11.9% in FY18, FY19 & FY20 respectively. Typically, SFBs and MFIs enjoys high interest margins.
• But company’s Net Interest Margin was heavily affected by Pandemic on account of NPA creation possibilities. In 9MFY21, Net Interest Margin of the bank nose-dived 6.4%. At this stage Net Interest Income stood at Rs. 353 Cr.
• High Interest rate of 7.5% on deposits has definitely benefitted the deposit but had also its impact on Net Interest Margins of the bank.

b) Net Interest Income/Earned/Expended & PAT:

• Interest earning has increased from Rs. 287 Cr. in FY18 to Rs. 766 Cr. in FY20. As of latest 9MFY21, Interest earning of the bank is Rs. 624 Cr.
• Owing to higher interest rate on deposits, interest expenditure of the bank has also recorded increase. It has elevated from Rs. 171 Cr. in FY18 to Rs. 271 Cr. in 9MFY21.
• Pre-Provisioning Operating Profit of this bank has also increased exponentially from Rs. 73 Cr. in FY18, which went up to Rs. 216 Cr. in FY 19 and Rs. 305 Cr. in FY20. Currently, as of 9MFY21, pre-provisioning operating profit of the company stands at Rs. 187 Cr.
• Suryoday SFB Profit after Tax has increased significantly over the years. PAT was Rs. 12 Cr. in fiscal 18, which rose up to 90 Cr. in FY19 and Rs. 111 Cr. in FY20.
• Currently, as per 9MFY21, PAT of the bank is Rs. 55 Cr. and hence by the year-end company can add more Rs. 20- Rs. 25 Cr. to its profits.

v) Key Ratios:

• As discussed in above financials, Net Interest Margin has gone down. As of 9MFY21, Net Interest Margin is at 6.4%.
• Cost to Income Ratio of Suryoday SFB is one of the best in the industry at 55.4%.
• CASA has remained stable over the following period and is at 13.3%. As the bank is primarily focusing on retail sides, this figure may rise in future.
• Capital Adequacy Ratio of the bank is quite good. In FY18, this ratio was at 43.4% and currently it is at 41.2% and post-IPO it may touch the mark of 45%.

vi) Asset Quality:

• According to the latest result declaration by the bank, Company has posted Gross NPA of 0.78% in 9MFY21 and Net NPA of 0.33% for the same period.
• But, if we look at the Proforma figures, then Gross NPA of the bank will be 9.28% and Net NPA could have been at 5.38%.
• This is the main risk of the micro financial institutions or small finance banks as they more focused to micro and small business.
• For this reason, also, such banks maintain high Capital Adequacy Ratio in order to mitigate these risks.

4) Peer Comparison (Listed Entities):

• In terms of market capitalisation, AU Small Finance Bank is the largest bank with M-Cap of Rs. 38,389 Cr. Next to AU SFB, Equitas has the highest Market cap. of Rs. 6,624 Cr. and then Ujjivan SFB with Rs. 5,833 Cr. Suryoday has the lowest M-cap of Rs. 3,732 Cr among the peers.
• With respect ot AUM also, AU Small Finance reocrds the highest AUM of Rs. 30,890 Cr. In this criterion alsom Suryoday has the lowest AUM among its peers of Rs.3,711 Cr.
• In Micro Loans (%) share, Ujjivan has the highest micro loans share of 73.2%. Suryoday SFB here have micro loans share of 72.9%. While AU Small Finance & Equitas has the lowest Micro Loan % Share of 12% & 20% respectively. High Micro loan (%) share indicates high risks.
• Equitas reports the highest CASA ratio of 24%. While AU Small Finance has 2^nd most highest CASA ratio of 22%.
• In context of Net Interest Margin, Ujjivan has the highest NIM of 9.7% wheras NIM of Suryuoday stays around 6%.
• AU Small Finance reports the lowest Cost to Income ratio of 51.9% among peers, while Ujjivan has the highest figure of 62%.
• Among the listed peers, Suryoday gains the first position on account of high capital adequacy ratio of 41.2%.
• Suryoday has the highest Proforma Gross NPA and Proforma Net NPA among its peers of 9.28% & 5.38% respectively.
• While, Ujjivan has the highest Provision Coverage Ratio of 95% and next to it comes Suryoday with PCR of 89.6%.
• Compairing the number of Branches, Equitas has the largest branch network of 861 outlets while Suryoday has only 554 outlets, lowest among the listed market players.

Industry Outlook:

• Between FY1-FY20, Small Finance Bank industry grew at 29% CAGR, while Suryoday SFB grown at CAGR rate of around 46%.
• This presents the capacity of Suryoday SFP to outperform the bank.
• The expectation of growth between FY20-FY23 of SFB industry is estimated to groat at CAGR rate of 20%-24%. If Suryoday manages to continue its outperformances and efficiently manages its risk, a strong growth rate can be witnessed by the bank.
• Here, compay have to minutely give attention towards their secured and unsecured loans in order to sustain their business for longer horizon.

5) Key Strength:

• Robust Capital Adequacy Ratio 41.2% as on Dec-20
• Strong Balance sheet with ample liquidity (37% of Assets in Liquid Investments)
• SSFB Limited has a diversified portfolio of assets with a strong focus on retail operations.
• Customer-centric approach to ensure maximum financial inclusion. Innovative product has been launched such as Smile OD (an overdraft facility for micro-borrowers).
• Building Retail-Liability Profile by offering higher interest rates. Retail share on total deposits have increased over the period which is a good sign.
• Strong credit assessment processes and a robust risk management framework.
• An experienced leadership team and professional management

6) Key Risks:

• 73% of Loan Portfolio are Micro Loans posing higher Risk. Any adverse developments in the microfinance sector could adversely affect their business.
• COVID-led Risks: Increase in NPA, Subdued Credit Growth. Proforma Gross NPA & Net NPA are worrisome.
• Stringent regulatory requirements of Banking Regulation Act.
• Interest Rate risk, which can affect its Net Interest Margins
• Pending litigations against Nominee Director from Gaja Capital) amounting to Rs. 4,380 Cr. There is no direct effect of these, but indirect risk persists from viewpoint of Corporate Governance.

7) Valuation:

• Based on TTM Earnigs, Suryoday is currently trading at PE of 82.2. Considering the forward earnings, this valuation may further settle and become reasobale.
• PE ratio of its Peers are: AU Small Finance: 34.1; Equitas: 27.2 & Ujjivan: 0 (due to loss).
• Suryoday is having P/B ratio of 2.3%.

Conclusion:

While comparing to the peers, Suryoday SFB valuation appears to be highly priced. But future outlook of the industry might favour the bank in future. As of now, there is not heavy GMP for this IPO. There is possibility of minimal expecting gains of Rs. 25- Rs. 30. For those looking for nominal listing gains, can look forward to this IPO.