A flurry of IPOs, from still-nascent and emerging sectors, have hit the capital markets recently, with most drawing positive response. Seven of the 10 public offers in 2016 have been oversubscribed — the highest being Teamlease at 65x. Is this simply bull market exuberance or are these sectors really worth the valuation?
Considering that they offer high growth opportunities, hopes sure are high. But what about the risks? Are the valuations factoring them in? Prithvi Haldea, chairman and managing director, Prime Database says, “Just because these IPOs are from new sectors, they are not necessarily good long-term stories that will just keep growing. Investors would do well to continuously monitor their investments as valuations of these stocks would be sensitive to any mid-term disturbance.”
For now though, Haldea’s warning may seem unwarranted given the kind of returns these companies have clocked post-listing. Except for three companies — Coffee Day Enterprises, Quick Heal Technologies and Healthcare Global Enterprises — that are trading 18-23% below their issue price, rest of the pack has amassed varying gains (See: Healthy overdose).
Microcredit brigade
Take the case of small finance bank (SFB) licence holders Equitas Holdings and Ujjivan Financial Services. The MFI duo launched their IPOs to bring down the ownership of FIIs below 49% as mandated by the Reserve Bank of India (RBI).
In September 2015, the RBI had issued in-principle licences to 10 entities including Equitas and Ujjivan to set up SFBs, with the objective of furthering financial inclusion. However, analysts believe the transition from MFIs to SFBs may not be that straightforward. “Some of the known challenges are regulatory cost in the form of CRR and SLR, building liability franchisee, and more importantly changing the DNA of the organisation from a mono line to a multi-specialty financial service company,” say analysts at PhillipCapital.
This is partly taken care of at Equitas. While it started off as a micro-finance player in 2007, it has since diversified. In 2010, it set up Equitas Housing Finance (EHL) to provide micro-housing and affordable housing loans. Next year, Equitas Finance came into being, dealing with used transport and commercial vehicle finance besides micro and small enterprise financing. All these entities will now be consolidated under the banking entity.
But Pritesh Bumb, banking analyst at Prabhudas Lilladher points out another issue. “While moving from bank funds to building one’s own deposit base would help in bringing down the cost of funds, building a strong CASA base or attracting bulk deposits from corporates will not be an easy task. Investments will be upfront and the benefits of having a CASA base will come in years later.”
At the consolidated level, Equitas’ AUM has compounded at 50% between FY11-15, net earnings at 39% and net interest income at 28% respectively. When it comes to valuation, at the upper price band of 
110, the issue was valued at 1.9x its December 2015 book value on a post-dilution basis. In comparison to Ujjivan (1.8x price to book), Equitas’ valuation seems fair.
But Ujjivan scores when it comes to geographical presence. A regional break up shows 27% presence in the South, 22% in the East and just under 20% presence in the West and the North. Even in terms of AUM, Ujjivan boasts a diversified mix, with no state contributing more than 15%, something that would make it easier for it to transform into an SFB.
Additionally, its profit and net interest income have grown at a faster clip — 60% and 35% CAGR between FY11 and FY15, respectively. While its business is primarily based on the joint liability group-lending model for economically active women, it is now looking at disbursing more individual loans.
At the current market price, Equitas is trading at 2.9x its FY16 book value, and Ujjivan at 2.4x. With the RBI saying SFB licences would be given “on tap”, there could be more IPOs from this sector in the coming days.
This is the first of a four-part series
