Suryoday IPO- Business Review and Financial Analysis
Suryoday Small Finance Bank is coming up with an IPO of 19,093,070 equity shares amounting to Rs 582 crore. The offer comprises of fresh issue of 8,150,000 shares (Rs 248 crore) and offer for sale (Rs 333 crore) of 10,943,070 shares. Up to 5,00,000 equity shares are reserved for employees. The issue opens on 17th March 2021 and closes on 19th March 2021. The offer comes with a price band of Rs 303-Rs 305 per share. The BRLM to the offer is Axis Capital, ICICI Securities, IIFL Securities, SBI Capital Markets.
Surypoday has raised Rs 154 crore in its pre-IPO placement round of 5,208,226 shares. These shares were issued to SBI Life Insurance, Axis Flexi Cap Fund, Axis Equity Hybrid Fund, and Kiran Vyapar at Rs 291.75 per share.
⇒ Suryoday started operations as an SFB in the year 2017. Prior to the commencement of operations as an SFB, it operated as NBFC – MFI, carrying out microfinance operations and operated the joint liability group lending model for providing collateral-free, small ticket-size loans to economically active women belonging to weaker sections. Suryoday IPO- Business Review and Financial Analysis
⇒ Suryoday operates across 13 states and union territories, as of December 31, 2020, with a customer base of 1.44 million. Over the past 2 years, the bank has opened a cumulative of 237 branches. Of this, ~64% of the branches have been opened in Maharashtra, Tamil Nadu, and Odisha where Suryoday has a long-standing working history. Among the newer states, the bank has opened branches in UP, Karnataka, and MP where its operational history is shorter.
⇒ Loan products comprise commercial vehicle loans, affordable housing loans, micro business loans, unsecured micro and small enterprise and small and medium enterprise loans, secured business loans, financial intermediary group loans, and other loans.
⇒ As of December 31, 2020 GNPA accounted for 0.78% of our gross advances, while our NNPAs accounted for 0.33% of our net advances.
⇒ The cost-to-income ratio is the lowest among SFBs in India. The cost-to-income ratio has reduced from 64.44% in Fiscal 2018 to 47.05% in Fiscal 2020 and was 55.39% in the nine months ended December 31, 2020. The operating expense ratio as a percentage of our average balance of Gross Loan Portfolio has reduced from 10.72% in Fiscal 2018 to 7.99% in Fiscal 2020. The relatively moderate size of banking outlets has led to a reduction in the overall capital expenditure and operating expenditure per banking Outlet. The cost-efficient operations are attributable to automation and digitization of various processes including loan sourcing in the inclusive finance business.
Total Income posted by the SFB is Rs 626.36 crore for 9 months ending 31st Dec 2020 against a profit of Rs 54.87 crore. The profits reduced by 50% as compared to the corresponding 9 months of FY19. An increase in provisions and contingencies by 21% driven by the pandemic resulted in a decrease in profits.
Financial performance for FY20 has been reasonable with an increase in income by 43% to Rs 854 crore from Rs 597 crore in FY19. Net Profit was Rs 111 crore in FY20 as compared to Rs 90.40 crore in FY19. Provisions and contingencies increased by 55% due to COVID19.
Valuation and Peer Comparison
At the upper price band of Rs 305 and annualized EPS of 8.25 for 9 months ending 31st Dec 2020, P/E is 36.95x while the average P/E for the sector is 25.15 as per the RHP. Comparing with the sector P/E, the offer seems to be slightly overvalued. P/BV is 2.28 calculated at the upper price band and at NAV of Rs 133.54 as of 31st Dec 2020.
Ujjivan SFB limited, AU SFB, Bandhan Bank, and Credit Access Gramin Limited are some of the listed peers as per the RHP. The peers are larger in terms of revenue and have a higher Return on net worth as compared to Suryoday SFB.
Future Outlook and Conclusion
Following the grant of SFB license, the bank has taken several initiatives to diversify its portfolio both geographically as well as product-wise. On the product side, the focus has been on increasing the share of a secured portfolio of the bank.
Provisions have been made to cushion the covid impact however, there can be no assurance that customers impacted due to COVID-19 will continue to make payments on a continuing basis. Higher NPAs might be anticipated driven by deterioration in asset quality due to the borrower’s reduced ability to make timely repayments. Suryoday may have to recognize higher loan loss provisions in future periods, on account of the uncertainty in the external environment due to COVID-19. Hence looking at the above factors and overvaluation of the offer, investors may consider buying from the secondary market when prices come down