The ₹1,025-crore initial public offering (IPO) of non-banking finance company SBFC Finance opened for subscription on Thursday, August 3 and will close on August 7. The price band for the offer has been set at ₹54-57 per share. This will be the first IPO to be launched in the month of August 2023.
About the issue: The issue comprises of a fresh issuance of shares worth ₹600 crore and an offer for sale (OFS) of ₹425 crore by promoters. Arpwood Partners Investment Advisors LLP will sell shares worth ₹306.25 crore, Arpwood Capital ₹75.16 crore, and Eight45 Services LLP ₹43.59 crore via the OFS.
The actual fresh issue size was ₹750 crore, of that, ₹150 crore was raised via the allotment of 2.72 crore equity shares to Amansa Investments in a pre-IPO placement. Hence, the fresh issue size has been reduced to ₹600 crore from ₹750 crore.
Subscription status: The IPO saw a decent response and was subscribed 25 percent till 11:15 am on Day 1. Its retail portion was subscribed 38 percent, while non-institutional investors (NII) quota was subscribed 31 percent, however, qualified institutional buyers (QIBs) part did not receive any subscription so far. Employee portion was subscribed 26 percent.
GMP: The company's shares in the grey market are trading at a healthy premium of ₹40, indicating a strong response for the issue.
However, one must note that grey market premium is only an indicator of how the company's shares are performing in the unlisted market and can change quickly.
Anchor investors: Ahead of its IPO, SBFC Finance has raised ₹304.42 crore by allocation of 5.34 crore equity shares to 37 anchor investors at ₹57 per share. Abu Dhabi Investment Authority, Amansa Holdings, Neuberger Berman, Ashoka India, Steadview Capital Master Fund, Carmignac Portfolio, Think India Opportunities and Natixis International were the marquee investors that participated in the anchor book.
Objectives of issue: The company will utilise fresh issue proceeds, excluding IPO expenses, mainly for augmenting its capital base to meet future capital requirements arising out of the growth of the business and assets, while the offer for sale money will go to selling shareholders.
Lot size: Investors can buy a minimum of 260 equity shares in the IPO and in multiples of 260 shares thereafter. Accordingly, retail investors have to make a minimum investment of ₹14,820 per lot.
Reservation: About 50 percent of the offer is reserved for qualified institutional buyers (QIBs), 15 percent for non-institutional investors (NII) and the rest 35 percent for retail investors.
About the firm: Incorporated in 2008, SBFC Finance is a non-banking finance company that provides secured MSME loans and loans against gold primarily to entrepreneurs, small business owners, self-employed individuals, and salaried and working-class individuals. The company has an extensive pan-India network with over 157 Branches in 105 cities in 16 states and two union territories. By March FY23, it had provided loans to over 1.02 lakh customers. It focuses on disbursing loans with a ticket size in the range of ₹5 lakh to ₹30 lakh and as of March 2023, 87.27 percent of its AUM had a ticket size within this range.
Among MSME-focused NBFCs in India, it has one of the highest assets under management (AUM) growth, at a CAGR of 44 percent during FY19-FY23, to ₹4,942.82 crore in FY23, while the disbursement growth during the same period was at a CAGR of 40 percent, as per CRISIL report.
Financials: SBFC Finance recorded a massive 132 percent growth in its net profit at ₹150 crore for the year ended March FY23, with other income rising 50 percent YoY to ₹86.2 crore during the same period.
Its net interest income also grew by 49 percent to ₹378.9 crore, with disbursement for the secured MSME segment growing 71 percent YoY to ₹2,277 crore and loan against gold rising 17.4 percent YoY to ₹1,323.4 crore for the year. Assets under management, as well, increased sharply by 55 percent YoY to ₹4,943 crore during the same period. However, its net interest margin dropped to 9.32 percent for FY23, down from 9.39 percent for FY22, while return on assets rose to 2.92 percent from 1.48 percent during the same period.
Asset quality of the firm has also seen consistent improvement, with the gross non-performing assets in FY23 falling 31 bps YoY to 2.43 percent, and net NPA declining 22 bps to 1.41 percent compared to the previous year.
Allotment and listing dates: The basis of allotment of IPO shares will be finalised by the NBFC on August 10. Equity shares will be credited to the demat accounts of eligible investors by August 14. Unsuccessful investors will get refunds in their bank accounts by August 11.
The company is likely to list on the BSE and NSE on August 16.
Book-running managers: ICICI Securities, Axis Capital, and Kotak Mahindra Capital Company are the merchant bankers on the issue, while KFin Technologies is the registrar of the offer.
What brokerages say
Most brokerage firms suggest subscribing to the issue of its pan India network, strong return ratios, robust business model and lower cost of funds. However, some have flagged risks of higher valuations and probable pressure on margins as the key risks for the company. Let's see what analysts said about SBFC Finance's IPO:
Geojit Financial Services: Subscribe
At the upper price band of ₹57, SBFC is available at a P/B of 2.6x (FY23), lower than industry peers' valuations. Considering the lower valuation, consistent improvement in asset quality, and decent business performance, we assign a “Subscribe” rating for the issue on a short-to-medium-term basis.
LKP Securities: Subscribe
At a higher price band ( ₹57), the stock is valued at 2.4(x) P/BVPS with a current book value per share of ₹23. Factoring the superlative return ratio, FY23 ROA of 3 percent and further improvement post fund raise; we believe that SBFC Finance Limited is worth subscribing. Thus we recommend "SUBSCRIBE".
SBICAP: Subscribe for listing gains
The company focuses on loans with ticket sizes ranging from ₹5 lakhs to ₹30 lakhs, benefiting underserved customers. As of March’23, 87.27 percent of the AUM falls within this range, with a Gross NPA to AUM ratio of 1.97 percent. The company has a strong pan-India presence, with a network in 120 cities across 16 states and 2 union territories. Their diverse distribution allows them to reach underbanked populations in tier II and tier III cities. While comparing the stock with its close peers on similar valuation parameters, the company is fairly valued. We recommend investors to subscribe to the IPO for listing gains at a CUT-OFF price.
InCred Equities: Cautious view
Considering the subdued ROE profile of the company as well as high post-issue adequacy of 50 percent, return ratios are expected to remain under pressure in the coming years. We have a cautious view on the issue.
Choice Broking: Subscribe with caution
We view the SFL to sustain a strong growth trajectory given the ample growth opportunities in the MSME segment and adequate capital. Though, rising competition in self-employed, secured MSME segments, high risky nature of focused segments, geographical risk and economic uncertainties are the key risks to the business. The demanded valuation seems on the higher side. Mentioned peers in RHP are mainly affordable housing finance companies that can’t be compared on an apple-to-apple basis. Ugro Capital, having a similar business to SFL, is currently trading at P/BV of 1.9 times. We have a 'subscribe with caution' rating considering the above parameters.
Hensex Securities: Subscribe
A diversified pan-India presence with an extensive network, 100 percent in-house sourcing, comprehensive credit assessment, underwriting and risk management framework, extensive on-ground collections infrastructure, lower cost of funds and consistent performance are key positives for the company.
However, the risk of nonpayment or default by the borrowers, volatility due to interest rate changes, downgrade in the credit ratings and potential threat of unsustainable growth target are key risks for the company, which may dent its performance.
