MAS Financial Services IPO – Small but Ambitious

  • Date 9th Oct
  • IPO Opens 6-10th Oct at Rs. 456-459
  • Valuations: P/E 36.6 times TTM, P/B 4.4 times (Post IPO)
  • Small Cap: Rs. 2,500 cr. Mkt cap
  • Industry – NBFC
  • Advice: SUBSCRIBE with a 2 year perspective

Summary

  • Overview: MAS is a Gujarat-headquartered NBFC with the business products focused on middle and low income customer segments. Revenues and profit for FY17 were Rs. 365 cr. and Rs. 69 cr. The revenues, NII and PAT grew at 26.3%, 22.8% and 25.8% CAGR in 5 years.
  • At a P/B of 4.44 times (adjusted post IPO), the valuations of the IPO are on the upper side. However strong financials, good asset quality, experienced management and operations in high growth business segments make this issue attractive.
  • Risks: 1) Regional concentration: As of FY17 60% of the AUM was in the state of Gujarat 2) Small size of the firm exposes business to seasonal and employee exit risks.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Here is a note on MAS Financial Services (MAS) IPO.

IPO highlights

  • The IPO opens: 6-10th Oct 2017 with the Price band: Rs. 456-459 per share.
  • Shares offered to public are 0.98 cr. The FV of each is Rs. 10 and market Lot is 32. The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.

Exhibit 1 – IPO Selling Shareholders

  • The IPO in total will collect Rs 460 cr. while selling 18.3% of equity. The IPO include an OFS for Rs. 227 cr. (at UMP) and an issue of fresh shares of Rs. 233 cr.
  • The promoter group owns 80.6% in MAS which will fall to 73.1% post-IPO. Other selling share-holders are DEG, FMO and Sarva Capital. DEG and FMO are selling 100% of its stake, whereas Sarva Capital is selling 60% of its current stake in the company.
  • The unofficial/ grey market premium for this IPO is Rs. 170-180/share. This is a positive.
  • On day 2, the offering is subscribed 4.8 times, so it looks headed for a very successful listing.

Introduction

  • MAS is a Gujarat based NBFC with business focused on middle and low income customer segments.
  • Revenues and profit for FY17 were Rs. 365 cr. and Rs. 69 cr. It has 606 employees.
  • It offers (i) micro-enterprise loans (ii) SME loans (iii) two-wheeler loans (iv) Commercial Vehicle loans (which include new and used CVs, used cars and tractor loans) and (v) housing loans.
  • 59% of their gross AUM are micro enterprise loans (FY17). Also, 83.9% of their loans were secured.

JainMatrix Investments, MAS Financial Services IPO

Exhibit 2 (a) – Loan products 

JainMatrix Investments, MAS Financial Services IPO

Exhibit 2 (b) AUM in FY17 

JainMatrix Investments, MAS Financial Services IPO

Exhibit 2 (c) – AUM growth 

  • MAS operated across 6 States and the NCT of Delhi through 121 branches.
  • The gross AUM of MAS are displayed in Fig 2b and 2c. 60% and 20% of the AUM’s were from Guj. and Mah. in FY17. Hence there is a geographic concentration.
  • Borrowings were Rs 1,506 cr. (Q1 FY18) and the average cost of borrowings was 9.47% (FY17), an increase from 8.41% in FY13. But in Q1 FY18 cost of borrowings stood at 9.05% indicating a fall.
  • Leadership is Kamlesh Gandhi (CMD), Mukesh Gandhi (CFO) and Darshana Pandya (COO).

News, Updates and Strategies of MAS

  • MAS’s business strategy is as follows:
  • Strengthen marketing and sourcing channels while maintaining growth and quality of portfolio.
  • Expand product offerings –extend loans to the agricultural input and equipment segment.
  • Leverage existing network and customer base to develop their housing finance business.

JainMatrix Investments, MAS Financial Services IPO

Exhibit 3 – Acquisition Cost for selling shareholders

  • The average cost of acquisition of equity shares for selling shareholders is in Exhibit 3.
  • Motilal Oswal Financial Services invested a total of Rs. 135 cr. ($20.8 mn.) in pre-IPO placement of MAS in March 2017 at Rs. 338/share. The IPO valuations are 36% higher than this.
  • They have been in operation for more than two decades, and as of June 2017, they had 500,000 active loan accounts. The AUM has increased at 33.4% CAGR since FY13 and NNPAs have remained below 1% during this period. They have developed stringent credit quality checks and customized their operating procedures to regularly monitoring the loan portfolio.
  • Mukesh Gandhi (CFO) is also the chairman of the Gujarat Finance Companies Association and a director of the Finance Industry Development Council.

NBFC Industry Outlook in India

  • Financing needs in India have risen along with economic growth over the past decade. By complementing banks and other financial institutions, NBFCs help meet this need.
  • NBFCs that cater to the masses in rural and semi-urban reaches, who have limited access to formal financing channels, and lend to the informal sector and people without credit histories, enable the govt. and regulators to realise the mission of financial inclusion.
  • In the past, NBFCs gained market share at the expense of banks owing to focused lending, widening reach, and resource raising ability. However, going forward, the BFSI sector is on a revival path and competition will intensify given a slew of recent regulation changes.
  • About 80-85% of NBFC lending is secured. In contrast, banks secure 60-70% of their lending portfolio. Security collateral is as plant and machinery, or current assets. To add to this, secondary collateral is collected in the form of immovable assets such as commercial and residential property and shares. Approval rates vary across NBFCs at between 70% and 75%.
  • The loans of NBFCs grew at 20% between FY12-16. As of Mar 2016, they accounted for 15% of the overall credit. The loan book of NBFCs may post 17% CAGR between fiscals 2017-18.
  • The contribution of the MSME sector to India’s GDP currently stands at 8% for 2011-12, and is growing at a rate higher than the projected GDP. MSME in India has the potential to increase the share of contribution to GDP from the current 8% to about 15% by the year 2020.
  • MAS competes with Janalakshmi and Bharat Financial Inclusion in micro-finance, Shriram Finance and M&M Financial in auto finance; and Dewan Housing Finance and PNBHF in housing loans.

Financials of MAS

JainMatrix Investments, MAS Financial Services IPO

Fig 4 – Financials  

  • MAS’s revenues, NII and PAT grew at 26.3%, 22.8% and 25.8% CAGR in 5 years, see Fig 4.
  • MAS had a RoE of 18.8% in FY17 while the FY15-17 avg. was 23.7%. The RoCE stands at 28.1%.
  • In FY17, the disbursement growth was slow on account of demonetization.
  • MAS declared a low dividend in FY17, as compared to prior years, to maintain prudent asset quality.

JainMatrix Investments, MAS Financial Services IPO

Exhibit 5 – Loan disbursement growth and dividends declared 

JainMatrix Investments, MAS Financial Services IPO

Fig 6 – Financial Metrics

  • From Fig 6, we can see that the NIM’s, yield and spread have fallen from FY13-FY17. This is due to increased costs of borrowings and higher competition. However it is not a concern as the management has been able to maintain their asset quality combined with high growth numbers.
  • The NIM’s have fallen steadily from 10.4% in FY13 to 7% in FY17. Also the cost of borrowings has risen during this period. This is a sign of increasing competition.
  • The AUM growth and disbursement growth slowed in FY17 due to demonetization related issues.
  • MAS’s asset quality has been robust over the last 5 years at NNPA’s lower than 1%. This is excellent as asset quality is crucial. The asset quality was maintained in spite of change in the classification of NPA for NBFC’s as per RBI NPA norms for overdue payments.

Benchmarking

We benchmark MAS against other NBFC’s from the same sector. See Exhibit 7.

  • PE appears moderate at 36.5 times (diluted post IPO) compared to peers. But the P/B ratio appears high at 4.44 times (diluted post IPO). Established NBFCs like Shriram, Capital First and M&M Financial are in the 2.5-3.5 range. The highest is Bajaj Finance at 11.21 times. Thus the P/B is between above average and lower than some of the most expensively traded NBFC’s.
  • The D/E ratio at 2.87 (diluted post IPO) is in the lower range and hence gives MAS scope to aggressively lend. The CAR of MAS stood at 22.9% for FY17 as against RBI’s minimum of 15%, which indicates that it is adequately capitalized.
  • The RoE is the high at 20.6%. ROCE is the highest at 28.04%. This is a positive.
  • MAS has witnessed good sales and profit growth. The 3 year growth is high while not the best.
  • Dividend yield is low.

JainMatrix Investments, MAS Financial Services IPO

Exhibit 7 – Benchmarking

Positives for MAS and the IPO

  • MAS has a track record of consistent growth with quality loan portfolio.
  • The return ratios are high and amongst the best in the industry.
  • MAS has deep market knowledge through sourcing channels. They have developed an extensive operational network in Gujarat and Mah. They entered into commercial arrangements with a number of sourcing intermediaries including commission based DSAs as well as sourcing partners where part of a loan default is guaranteed by the sourcing partner.
  • MAS has an experienced management team. The promoters, Kamlesh Gandhi (CMD) and Mukesh Gandhi (CFO) have over 21 years of experience in financial services.
  • The asset quality of MAS is stable with NNPAs at 0.92% for FY17. The financials of the company are also good. This is a positive for long term investors.

Risks and Negatives for MAS and the IPO

  • As a very small player (revenues Rs 365 crores.) MAS may be affected by senior executive exits and seasonal fluctuations.
  • The valuations are on the higher side in terms of P/B at 4.44 times (adjusted post IPO). Additionally as a small company MAS is still asking for rich valuations associated with mid to large companies with good reputations. This is an anomaly.
  • Promoter shareholding is high at 73% post IPO. This can affect policies and decision making, and make MAS possibly prone to unilateral decisions not favoring small shareholders.
  • MAS is facing an increasingly competitive industry, that may affect margins, income and market share. Consumers are being served by a range of financial entities, including, traditional banks, captive finance affiliates, NBFCs and SFB’s approved by RBI to enhance credit penetration.
  • Geographic concentration: MAS’s business is primarily in Gujarat and Maharashtra. As of FY17, roughly 80% of AUM was located in such states, with Gujarat accounting for 60%.

Overall Opinion and Recommendation

  • The BFSI sector has done well over the last few years (barring pockets like PSU Banks) with underpenetration in financial services, a fast growing economy and new emerging sectors and opportunities. In the private sector NBFC space, well managed firms have seen good growth.
  • MAS has a good record in the regional markets of Guj. and Mah. There is ample scope for growth in these affluent regions.
  • Strong financials, good asset quality, experienced management and operations in high growth business segments make this issue attractive.
  • High geographical concentration of AUM and high valuations are key risks for MAS.
  • At a P/B of 4.44 times (adjusted post IPO), the valuations of the IPO are on the upper side. However strong financials, good asset quality, experienced management and operations in high growth business segments make this issue attractive.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or known financial interests in MAS or any group company. Punit Jain intends to apply for this IPO in the Retail category. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

BSE IPO: Put this Exchange on Hold

  • Date 20th Jan 2017 
  • IPO Opens 23-25th Jan at offer price range: Rs. 805-806
  • Its a Mid Cap with Rs 4,400 crore Mkt cap
  • Industry – Stock Exchange 
  • P/E 35.9 and P/B 1.80 times (based on FY16)
  • Advice: the IPO is rated AVERAGE

bse_logo

Overview: BSE is a stock exchange platform which is the first stock exchange in Asia and the world’s largest exchange by number of companies. Income for FY16 was Rs 658 cr. and profits Rs 123 cr. It offers a wide range of trading related services and monitors the listed companies, Sensex index and market activities. New product offerings, start of operations at GIFT city and stake divestment via CDSL IPO are likely to boost financials in the medium term. However it is an OFS, so BSE doesn’t benefit in IPO. Market shares are low at 39% in currency derivatives and 14% in equity cash. At FY16 P/E of 35.9, and a FY17E forward PE of 21.0, the valuations are high. NSE is a fierce competitor, and is ahead in terms of volumes, growth and profits, reducing BSE to a niche player.

Opinion: This offering is rated AVERAGE, and investors may look elsewhere for long term gains.

We present here a short video on the BSE IPO.

A VIDEO on BSE IPO 

Here is a note on the Bombay Stock Exchange Ltd. (BSE) IPO.

IPO highlights

  • This IPO opens: 23-25thJan 2017 with the Price band: Rs.805-806 per share.
  • Shares offered to public number 1.54 cr. The FV of each is Rs. 2 and market Lot is 18. These shares are 28.26% of equity. The IPO will collect Rs 1,243 cr. (UMP) under the OFS route.
  • The IPO shares are available to institutional, non-institutional and retail in ratio of 50:15:35.
  • Trading Members hold 44% stake of BSE, and 56% is held by institutions & investors. Singapore Exchange, Atticus Mauritius Ltd and Quantum Ltd. are completely exiting through this IPO offering.
  • BSE would not benefit from the IPO as it is an offer for sale (OFS).

Introduction

  • BSE is a stock exchange platform, the first stock exchange in Asia, formed in 1875. It is the world’s largest exchange by number of listed companies, and India’s largest and the world’s 10th largest exchange by listings market cap, with US$ 1.7 tn. in total market cap of listed companies.
  • Total income for FY16 was Rs 658 cr. and net profit Rs 123 cr. It has 513 employees.
  • As a platform, it regulates listed issuers and provides a market for listing and trading in various types of securities as allowed by SEBI. The primary operating businesses of BSE are as follows: (See Fig 1)
    • Listing business: called the primary market, which relates to the issuance of new securities. It also has a platform for listing and trading in equities of small-and-medium enterprises (SME).
    • Market business: which consists of trading of listed securities, MFs, OTC corporate bonds, membership of depository participants in CDSL depository and providing post-trade services.
    • Data business: which consists of the sale and licensing of information and trading products.
    • Their operations also include IT services and solutions, the setting up of indices and training. They offer equity and currency derivatives, securities lending and borrowing, and platforms to facilitate buyback and sale of securities by substantial shareholders of listed companies.
  • BSE has listed 5,868 companies and 1,446 members across all segments, and in FY16 it took 28.49 crore orders and executed 15.5 lakh trades in equity shares average per trading day, making it the 12th most active trading exchange in the world.
  • BSE extensively monitors the listed companies and market activities to minimize the risk of default, promote market transparency and integrity, contributing to growth of the Indian capital markets.
  • Deutsche Borse, Singapore Exchange, SBI, LIC, and GKFF Ventures hold 4.75%, 4.75%, 4.75%, 4.68% and 4.58% respectively.
JainMatrix Investments, BSE IPO

Fig 1 – BSE FY16 Segment Revenues

JainMatrix Investments, BSE IPO

Fig 2 – BSE revenue growth

  • BSE has a market share of 39% in the currency derivatives segment and 14% in equity cash segment whereas NSE remains the leader with shares of 56% and 86% respectively. In the profitable equity derivatives segment, BSE market share has dropped to almost zero.
  • In April 2012, the SEBI board passed regulations limiting stock exchanges from owning more than 24% of the share capital of a depository and gave 3 years to comply. BSE was not compliant and SEBI extended its deadline to FY17. To meet this requirement, BSE divested 4.15% stake in CDSL to LIC in Oct 2016, but still holds 50.05%. BSE will dilute the excess stake in CDSL in the IPO of CDSL.
  • Leadership Sudhakar Rao-Ch’man, Ashish Kr. Chauhan-MD/CEO, Nehal Vora-CRO, Nayan Mehta CFO

News and Updates for BSE

  • BSE’s index – the S&P BSE Sensex is India’s most widely tracked stock market benchmark index.
  • India International Exchange (IIE), a subsidiary of BSE, commenced trading at Gujarat International Finance Tech (GIFT) city on 16th Jan, 2017. Tech offerings by IIE will facilitate co-location of members in its center at GIFT IFSC as well as algo trading including high frequency traders. The high speed platform will provide cross-border opportunities of investment with a supportive regulatory framework, and many infra and tax benefits. NSE is also expected to launch here soon.
  • SEBI announced a reduction of 25% in the fee payable by brokers and also decided to amend regulations to enable them to make payments through digital mode. This is a positive for the sector.
  • BSE discontinued lump sum transactions through paperless SIP facility for MF investors in Jan 2017. It introduced iSIP to help set up a SIP without documents, and ‘BSE StAR MF’ mobile app for android.
  • BSE was caught in two legal disputes just before the IPO. A contempt of court petition was filed in the high court because of irregularities in the Corporate office building, where a legal notice has challenged the launch of the IPO for BSE. The contempt petition has been filed by Yogesh Mehta against city officials, highlighting their inaction against illegalities in the building. The stock exchange lost the case right up to the Supreme Court, while another PIL in the case was dismissed by the HC.
  • BSE introduced new interest rate futures (IRF) contracts from Dec 30, 2016 on 6-year govt. bonds. The contract is based on 6.84% central govt. security maturing in 2022. An IRF contract is an agreement to buy or sell a debt instrument at a specified future date at a pre-determined price.
  • BSE announced in Jan 2017 that it will conduct periodic call auction for illiquid securities of 335 illiquid stocks. The auction would be based on trading activity during the period July–Dec 2016.
  • BSE shares 85% of profits as dividend, and plans to continue with high dividend in future
  • Subsidiary CDSL has filed papers for IPO with SEBI. BSE would dilute 26% stake in this IPO.
  • The unofficial/ grey market premium for this IPO is in the range of Rs. 128-130. This is a positive.

STOCK Exchange Sector OVERVIEW

  • Globally, there are over 70 major stock exchanges with a listings market cap of more than US$5 bn each. The total global market cap of WFE member exchanges (World Federation Exchanges) aggregated to US$68 tn. Of these stock exchanges, 16 had a market cap of above US$1 tn. each. Market cap of these stock exchanges taken together account for 86% of the total global market cap.
  • The NYSE dominates with a market cap of about US$18.2 tn. In terms of turnover, Shanghai SE topped the list with a turnover of about US$21.3 tn. in 2015. BSE was the largest in the world in terms of number of listed companies at the end of Oct 2016, with 5,868 companies.
  • Global exchanges derive revenue from transaction fees, listing, clearing and depository services. For both exchanges, BSE and NSE, revenue mainly comes from securities. Services to corporates, like listing income makes a significant contribution to revenues.
  • Equity as a percentage of financial savings in India is just 5%, compared with 14% China, 15% (Brazil), 20% (Indonesia) and 42% in USA. Growth for equity should grow and BSE will surely gain from this.
  • The key growth drivers for the exchange sector in India are as follows:
    • Demographic: India’s working age population is more than 60% of the population. A rising working age population results in a boost to consumer spending in the economy.
    • Awareness and participation by retail investors: In recent years, equity investments by Indian investors is slowly increasing due to specific tax breaks for equity investors and financial awareness programs conducted by MF houses and stock exchanges.
    • Initiatives by the GoI: Last year, GoI allowed the Employee Provident Fund Organisation (EPFO) to invest in equity markets. The state-run pension fund had a retirement corpus of Rs 8.5 lakh crore in 2015. It made a small investment of Rs 6,577 cr. in FY16, which may increase.
    • FIIs: The FIIs are significant players in Indian capital markets, and constitute 18% of turnover in cash market, and 10% of client turnover in derivatives. FII flows will be a key driver of growth.
  • From FY12 to FY16, the no. of shares traded on BSE & NSE combined grew by 30%. However, in H1 FY17, the shares traded on BSE declined by 9% YoY, while those traded on NSE increased by 22%.
  • Information and data services contribute just 4-5% compared to 10-25% in other economies. They grew at 14% CAGR over 5 years. However, the base is low, so they should grow annually by 15-20%.
  • India had an IPO revival recently, driven by strong economic fundamentals, favorable policy climate and strong investor confidence. Listing fees should grow at 15-20% over the next 5 years.
  • Revenues from index services can further grow for the Indian market by expanding product offerings beyond equities. Revenues from index services should grow at 15-20% over the next 5 years.
  • Source: BSE –RHP, NSE – DRHP

Financials of BSE

  • BSE’s revenues, EBITDA and PAT have grown at 3.28%, -4.4% and -8.2% resp. CAGR from FY12 to FY16, see Fig 3. (Note: FY17 data is a simple doubling of H1 FY17 financials). Thus revenue growth is flat while profits have fallen, with NSE fast gaining market share in various segments. But we can see there is a recovery in earnings in H1 FY17.
  • BSE has an ROE of 5% and ROCE of 8.2% for FY16 which is poor.
JainMatrix Investments, BSE IPO

Fig 3 – BSE Financials

JainMatrix Investments, BSE IPO

Fig 4 – BSE Cash Flow

  • BSE has robust margins that are improving. Even a small revenue growth will see improvements.
  • The current dividend yield is 1.86% which is moderate. BSE distributes 85% of its profits as dividend and plans to continue with the high dividend in the future.
  • The top 5 subsidiaries of BSE are CDSL, ICCL, Marketplace Technologies, CDSL Venture and BSE Institute. It has 50.1%, 100%, 100%, 100% and 100% stake in them resp. and all are profitable.
  • BSE has a bank balance of Rs. 1,692 cr. which translates into Rs 310 as cash/share. With an IPO pricing of Rs 806, we can buy the operations of BSE for Rs 496. BSE has been generated free cash flows from FY12 through FY16. This is a positive. However it may be negative in FY17. See Fig 4.

Benchmarking

We benchmark BSE against NSE, MCX and other listed global stock exchanges. See Fig 5.

JainMatrix Investments, BSE IPO

Exhibit 5 – Financial Benchmarking (click on image to enlarge)

  • The FY16 based PE for BSE appears to be high. P/B is lower and looks reasonable.
  • BSE has the witnessed low sales and PAT growth compared to its peers. NSE has performed far better in the same macroeconomic conditions. BSE is debt free which is good. However low/no debt is common across all exchanges globally. BSE margins are high, which is a positive. However it appears low compared to its peer group. BSE has low return ratios, but moderate dividend yield.

Notes to financial benchmarking: Revenues, EBITDA and PAT values have been ascertained using the latest financial data/information available for global exchanges (CY15, Jun 16). Operating Margin (EBIT)/Operating Income has been used interchangeably with EBITDA Margin/EBITDA for global stock exchanges. Exchange rate of 1USD = Rs. 68, 1HKD = 8.77, 1SGD = 47.8, 1Euro = 72.5, 1AED = 18.51

Positives for BSE and the IPO

  • BSE has strong brand recognition with a track record of innovation. According to CARE Research, BSE ranks third globally in terms of currency options and futures contracts traded in 2015.
  • BSE has a diversified & integrated business model and good relationships with market participants. Revenues are more broad based with lower risk. With the largest number of listed firms, BSE provides critical listing infra for many firms.
  • The valuations are moderate in terms of P/E and P/B. The company is debt free and has generated free cash flows from FY12 through FY16. This is good for investors looking for stable companies.
  • Due to a good cash position, we can buy the operations of BSE for Rs 496, which is quite low.
  • The IT platform of BSE is robust and high speed, which can be a valuable asset.
  • BSE is nimble in its offerings and services, and has grabbed new opportunities, including the IIE.
  • There has been a spate of IPOs in Indian markets in recent times, and they have almost all sailed through, some with massive over subscriptions. Listing revenues segment can be quite positive.
  • In H1FY17, margin improved due to healthy growth in transaction charges and higher other income. In the near term, earnings may be boosted by changes in settlement guarantee fund (SGF) norms.

Risks and Negatives 

  • The IPO is an OFS, so BSE does not benefit. It is a liquidity event for past investors.
  • The BSE is very weak in the profitable equity derivatives segment.
  • Stock exchanges are the basic infrastructure for the trading industry. With higher volumes there can be a sharp rise in profits. However we see a flat revenue growth and falling profits at BSE. Even though H1FY17 results were good, we cannot say that this trend has been reversed yet. It’s likely that NSE will dominate the high volume and profitable segments, and BSE will remain a niche player.
  • BSE operates in a highly regulated industry and may be subject to censures, fines and other legal proceedings if they fail to comply with their legal and regulatory obligations.
  • BSE has received certain complaints from the public after filing of the DRHP with SEBI, with many allegations. Any litigation arising on account of such complaints, if adversely determined, could materially affect its businesses and financial condition.
  • BSE isn’t loss making per se, however there hasn’t been real growth in the last 3 years. In spite of double digit margins, the bottom-line may not improve if there is no sales growth.
  • Unconfirmed reports suggest that investors in BSE over the past few years are exiting with flat gains.

Overall Opinion and Recommendation

  • Post demonetization, we feel Indian households will increasingly channel savings to equity markets, as will FIIs and DIIs. BSE should benefit from this.
  • Not just historically but also in terms of market breadth, BSE is a leader and should be able to consolidate its position financially over the next few years.
  • More product offerings, commencement of operations at GIFT city and stake divestment via CDSL IPO are likely to keep BSE financials healthy in the medium term.
  • However NSE is a fierce competitor, and is way ahead in terms of volumes, growth and profits.
  • At a FY16 P/E of 35.9, and a FY17E forward PE of 21.0, the valuations are average.
  • This IPO offering is rated AVERAGE, and investors are advised to look elsewhere for long term gains.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. CPSE ETF FFO – An Energizing Offer
  2. Balmer Lawrie – An Update
  3. Why Stocks, and Investment Outlook – Dec 2016
  4. Investment Outlook – Short Term Pain, Medium Term Gain
  5. The Natural Quotient: A Sustainability Metric for Business
  6. PNB Housing Finance IPO: A Transformed Lender
  7. Endurance Technologies IPO 
  8. ICICI Prudential Insurance IPO – An Expensive BUY
  9. GNA Axels IPO
  10. RBL Bank IPO 
  11. New Banks: Big Changes in Small Change 
  12. Equitas IPO – Leader in SF Banks
  13. Do you want to be a value investor?
  14. Mahanagar Gas IPO 
  15. A Repurpose for our PSUs
  16. How to Approach the Stock Market – A Lesson from Warren Buffet
  17. Announcement – SEBI approval as a Research Analyst

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in BSE Ltd. or any group company. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

PNB Housing Finance IPO: A Transformed Lender

  • Date: 25th Oct 2016; IPO Period: 25-27th Oct
  • IPO Price: Rs. 750-775; P/E 39.2 and P/B 2.45 times
  • Mid Cap: Rs 12,800 crore Mkt cap
  • Industry – Housing Finance NBFC
  • Advice: Investors may BUY with a 1 year perspective

Summary

  • Overview: PHF is the 5th largest housing finance company by loan portfolio. Over 5 years, PHF has implemented a business process transformation and re-engineering program, which contributed to them becoming the fastest growing large HFC in India. PHF’s revenue and PAT have grown 55.6% and 43.4% CAGR from FY12 to FY16. PHF’s loan portfolio also grew at 61.8% CAGR in this period. The operations have become broad based and cover North, West and South India quite equally.
  • At a FY16 P/B post IPO of 2.45 times, the valuations are reasonable. The P/E at 39 (ttm) does look stretched but with good growth and margin expansion, this will stay in a good range.
  • The risks that must be understood include high competition and a flat housing market.
  • Opinion: As an investment, the PHF IPO is rated a medium risk, high return type of offering. Investors may BUY PHF with a 1 year perspective.

Here is a note on PNB Housing Finance (PHF).

IPO highlights

  • This IPO opens: 25-27thOct 2016 with the Price band: Rs.750 – 775 per share.
  • Shares offered to public number 3.87 cr. (UMP). The FV of each is Rs. 10 and market Lot is 19.
  • Shares offered are 23.4% of equity. The IPO will collect Rs 3,000 cr. with a fresh issue of shares. The IPO shares are available to institutional, non-institutional and retail in ratio of 50:15:35.
  • PNB Bank holds 51% stake of PHF, and 49% is held by Destimoney Enterprise Ltd (DEL). DEL got sold to Quality Investments Holding in Feb2015, an affiliate of the Carlyle Group, a global investment firm. Post IPO s’holding will be PNB 39%, DEL 38%, QIB 12%, retail 8% and NIB 3%
  • PHF would benefit from the IPO as it is a fresh issue of shares. The IPO proceeds of Rs 3,000 cr. would improve capital adequacy of PHF and help fund the growth for the next few years.

Introduction

  • PHF is the 5th largest HFC in India by loan portfolio and 2nd largest by deposits. PHF offers “housing loans” for the purchase, construction, extension or improvement of residential properties or for the purchase of residential plots, and “non-housing loans” in the form of loans against property.
  • Over 5 years, PHF has implemented a business process re-engineering (BPR), and transformation program, which helped them become the fastest growing large HFC in India.
  • Total income for FY16 was Rs 2,697 cr. and profit Rs 326 cr. The HFC’s AUM was Rs. 27,000 cr.
  • PHF’s loan portfolio was at Rs 27,177 cr. in FY16, a 61.8% CAGR in 4 years. By June 2016, it further increased to Rs 30,900 cr.
JainMatrix Investments, PNB Housing Finance

Fig 1 – Loan Portfolio / Fig 2 – Housing Loan Portfolio / Fig 3 – Non Housing Loan Portfolio

  • PHF’s has an operating model which includes branches (47) across the north, west and south of India, processing hubs (16) which include three co-located zonal offices and one central support office in New Delhi.
  • Branches act as the primary point of sale and assist with origination, collection processes, sourcing deposits and enhancing customer service. The processing hubs and zonal offices provide support functions, such as loan processing, credit appraisal and monitoring, and their CSO supervises their operations nationally. There are totally 847 employees.
  • In FY16, the sources of funds were NCD’s (33.5%), deposits (27.2%) and comm. paper (19.2%).
  • Regional: the loan portfolio origination is from north – 39.7%, west 30.4% and south 29.9%.
  • Leadership: Sanjay Gupta is MD; Jayesh Jain (CFO) and Shaji Varghese (Business Head).

Promoter (Punjab National Bank) – Snapshot and Financials

  • PNB is a full service public sector bank. It provides a wide range of banking services such as digital banking, personal banking, social banking, micro, small and medium enterprises banking, etc.
  • PNB operates through 4 segments: Treasury, Corporate/Wholesale, Retail and others.
  • Income grew by 8.5% CAGR over 5 years. But PAT and EPS fell due to losses in Q4 FY16.
  • Major cleansing had happened in the NPA books of PNB. The gross NPA of the bank increased by Rs. 30,000 cr. in 2015-16 to Rs. 55,818 cr., which was 12.9% of its gross advances. Net NPAs jumped to 8.61% as against 4.06%. The share price also corrected sharply. See Fig 4.
  • There was a weakening in the balance sheets of many banks over FY11-15. Some of this was RBI driven, as the policy focus was to clean the books of all banks.
  • However post this IPO PHF will no longer be a subsidiary of PNB, so we downplay the influence and effects of PNB as a promoter. In fact PNB products portfolio does overlap with that of PHF already.
JainMatrix Investments, PNB Housing Finance

Fig 4 – PNB financials

News and Updates for PHF

  • The BPR undertaken by PHF over 4-5 years included investments in a scalable operating model, an integrated infotech platform, centralization and standardization of back-end processes, the hiring of experienced personnel and subject matter experts, hikes in salaries and other employees benefits, the refurbishment of offices, and repositioning of the “PNB Housing” brand.
  • PHF has a strong distribution network with over 7,110 channel partners across different locations in India, including the in-house sales team, external direct marketing associates, deposit brokers and national aggregator relationships with reputed brands. In recent months they sourced 56.5% of new loans from their in-house channels and the rest from external sources.
  • Currently PHF’s housing loans constitute 70.3% of total loan portfolio and retail constituted 86.5% of the housing loan portfolio. The average loan size (at origination) of the retail housing loans was Rs 31.8 lakh, with a weighted average loan-to-value ratio of 66.1%. The loan size of retail non-housing loans is Rs 56.8 lakh, with a weighted average LTV ratio of 46.5%.
  • Total borrowings are Rs 30,045 cr. and average cost of borrowings was 8.65%. During the same period the spread was 1.93% and the cost to income ratio stood at 25.03%.
  • PHF’s gross NPAs as % of total loan portfolio were 0.2% in FY15 and 0.27% as of June 2016, which was the lowest among the leading HFCs in India. Also the overall Capital to Risk (Weighted) Assets Ratio (“CRAR”) and Tier I Capital CRAR were 13.04% and 8.4%, resp.
  • PHF is planning to grow in Indian tier-II and tier-III. From the present 48 branches at 28 locations, they will expand to 60 more locations with a population of more than 80-90 lakhs.
  • PHF received high credit ratings for deposits, long-term loans, NCDs (secured & unsecured) and commercial paper from agencies like CRISIL, ICRA, CARE and India Ratings (Fitch). This helped raise low cost deposits in high volumes.
  • PHF had raised Rs.500 cr. in April 2016 from International Finance Corporation (IFC) by issuing secured fixed rate non-convertible debentures (NCDs) to fund green residential projects.
  • As of June 2016, 12.6% & 87.4% of the portfolio were fixed & variable interest rate loans, resp.
  • PHF selected AuthShield in Aug 2016 as a security installation to safeguard customers accounts. With hacking cases, better security has become vital for financial service providers.
  • The unofficial/ grey market premium for this IPO is in the range of Rs 50 – 52. This is a positive.

Indian Housing Finance Industry Outlook

  • In India, the housing industry is significant contributor to the country’s development and GDP.
  • Total outstanding housing loans in FY15 were Rs 11.3 lakh crores, a 17.7% increase since FY11.
  • Still, India has a low mortgage-to-GDP ratio. As of FY15, India’s mortgage-to-GDP ratio was 9% compared to China 18%, Thailand 20%, Germany 45% and USA 62%. (CRISIL/ RHP).
  • Banks held 63% of the housing finance market in FY15, based on loan assets. The higher market share of banks is due to big networks, broad customer bases and relationships.
  • The key growth drivers in the housing finance industry in India include:
    • Low mortgage penetration and housing shortage;
    • Urbanization; Population growth and changes in demographics.
    • Slowing average loan ticket size growth; Tax benefits and
    • Government implemented schemes (including Smart Cities and Housing for All by 2020)
  • The NHB was established pursuant to the NHB Act to operate as a principal agency and statutory body to promote housing finance institutions and to provide financial and other support to such institutions. The NHB is wholly-owned by the RBI. Under the provisions of the NHB Act, it regulates how HFCs conduct business in India. Through its refinance schemes, the NHB has made cumulative disbursements (from its inception until June 2014) of Rs 1,204 bn.
  • In the last 15 years, the total outstanding housing loans of HFCs and banks has increased at a CAGR of 23.4% from Rs 439 bn in FY00 to Rs 10,205 bn in FY15.
  • Among lenders, HFCs have better capitalised on the demand in non – metro cities, and grew their disbursements by 20.1% YoY. By contrast, banks’ advances grew at 14% YoY.
  • The distinguishing feature of the housing loan portfolio in India is the low NPA level, which is partially the result of financiers’ adequate appraisal systems and effective recovery mechanisms, as well as greater information availability. In FY15, the gross NPA level for HFCs in housing loans was estimated at 0.5% while it was slightly higher for banks, at 1.6%.
  • NPAs are likely to decline marginally in FY16 and FY17 owing to economic recovery, lower interest rates, better control, system checks, follow-ups, and improvement of job security.
  • The housing finance market in India is forecast to grow 20-22% over FY15 to FY20.

Financials of PHF

JainMatrix Investments, PNB Housing Finance

Fig 5 – PHF Financials

  • PHF’s revenue and PAT have grown 55.56% and 43.41% CAGR from FY12 to FY16. (Note: The projected FY17 data is a simple extrapolation from the Q1 FY17 results, see Fig 5).
  • The revenue growth is high, as is absolute PAT over FY12-16. We can see that the diluted EPS has grown at a slower pace. This is because of a flat to falling NII and Profit Margins in this period. In addition, there have been several dilutions to the equity base since FY12.
  • PHF has a ROE of 17.6% (FY16) which is good, however not the best in the industry.
  • We have assumed an IPO dilution of equity base to 16.56 crore shares to recalculate EPS in Fig 5. In addition, since the IPO premium will flow into the balance sheet of PHF, we recalculated the Book Value post IPO at the upper end of price band. The BV increases to Rs 316/share. Basis these, the P/E will be 39.19 times FY16 earnings and the P/B will be 2.45 times.
  • The dividend has been rising – PHF declared dividend of Rs 3.4 in FY16, a yield of 0.44% which is low. The dividend growth rate has been moderate at 11.5% CAGR from FY12 to FY16.
  • Net interest margin has improved from 2.93% (FY14), 2.94% (FY15) to 2.98% (FY16).
  • The NHB directions require HFCs to comply with a CRAR where an HFC’s Tier I and Tier II capital may not be less than 12% of sum of HFC’s risk-weighted assets and the risk adjusted value of off-balance sheet items. As of June 30, 2016, PHF’s CRAR was 13.04%. This is low, but will be boosted by the IPO.

Benchmarking

We benchmark PHF against listed housing finance, microfinance and BFSI peers. See Fig 6.

JainMatrix Investments, PNB Housing Finance

Exhibit 6 – Benchmarking

  • PHF appears to have high valuations in terms of PE. But in terms of P/B, the IPO will add to the net worth of the company and make the P/B very reasonable at 2.45 times.
  • PHF has the highest sales and PAT growth among peers, a positive. EBITDA margins are high.
  • But profit margins are on the lower side. RoE too looks low. Dividend yield is low too.
  • PHF will use the IPO to augment its capital base so post IPO capital adequacy will improve.
  • PHF has moderate margins. PHF has a low RoE in the industry. PHF has a low dividend yield (0.44%) amongst its peers which is a negative.

Positives for PHF and the IPO

  • High growth in revenues & profits for PHF combined with low NPAs is a wonderful combination.
  • PHF is the 5th largest HFC in India and the fastest growing among large HFCs. It has also broad based its growth equally across North, West and South India.
  • The Punjab National Bank brand is strong and rubs off feelings of confidence and trust. PHF has a PSB brand but is a well-managed private sector HFC, so it may have the best of both worlds.
  • PHF has a strong distribution network with penetration of key Indian urban centers. It also has a very efficient employee workforce with just 847 employees.
  • It has a scalable operating model and centralized and streamlined operational structure.
  • It is managed by experienced and qualified professionals with strong industry expertise. Many from top management have held senior positions at leading banks and NBFCs.
  • The 5 year financial performance of the company is outstanding with strong revenue, EPS and PAT growth. Clearly it is a growth stock and is placed well in a high potential industry.
  • The RBI has reduced interest rates in recent quarters. In this scenario, with transmission to home loan customers, the loan products become more attractive and demand grows rapidly.
  • The weak performance by PSBs in the last year was due to high NPAs and an attempt by the regulator to clean the books of banks. PSBs look weak, loss making and undercapitalized, and GoI is not in a position to fund them back to health. We may actually be seeing a massive permanent loss of market share by PSBs to private – banks, HFCs and NBFCs. This of course benefits PHF.

Risks and Negatives for PHF and the IPO

  • The recent crackdown by GoI on black money and tax evaders has resulted in housing prices going flat to negative across India. Its possible that housing prices are artificially high in relation to income levels and the related housing rental market. We may be at the start of a multi-year price correction. This could affect housing loan demand for PHF.
  • The pricing and valuations of PHF look stretched in comparison to peers. The P/E of 39 times (of post IPO capital base and FY16 EPS) is high. However a more critical parameter is P/B and at 2.45 times post IPO, this is reasonable. See Exhibit 6.
  • The growth rate of PHF over the past 5 years may be difficult to continue over the next 5 due to high competition from banks and HFCs, and the natural high base effect.
  • Margins appear low for PHF compared to peer group. This is acceptable with high revenue growth rates, but if growth slows down, PAT will slow sharply and affect perceived valuation.
  • The banking sector offered limited competition to HFCs with few new licenses given by RBI. However this is changing with RBI doling out 20+ new licenses to Payment Banks and Small Finance Banks. See article New Banks: Big Changes In Small Change. RBI is also moving towards Bank licenses on tap in future. This can intensify competition over the years for PHF.
  • A slowdown in economic growth in India or global economic instability could result in an adverse effect on their business, financial condition and results of operations.

Overall Opinion and Recommendation

  • India’s housing sector will remain high growth for many years given low penetrations. The best way for investors to play this opportunity has been through HFCs. Their stocks have done exceedingly well over the last decade. Regulatory, tax and interest environments are also benign for HFCs.
  • The BFSI industry is a proxy to the overall economy, and one can expect, as a thumb rule, the industry to grow at 2-3 times the GDP growth. The Indian economy is growing at 7-7.5%, so the HFC sector may see a 20%+ p.a. growth over the next few years.
  • In this space, PHF has over the last five years implemented a business process transformation and re-engineering program with very strong growth from a small base. The firm looks quite capable of expanding to new locations and continuing the high growth momentum.
  • At a FY16 P/B post IPO of 2.45 times, the current valuations are reasonable. The P/E parameter at 39 does look stretched but with good growth and margin expansion, this will stay in an acceptable range.
  • There are a few risks that must be understood, like higher competition and flat housing prices.
  • We feel this offering is attractive for investors. As an investment, the PHF IPO is rated a medium risk, high return type of offering.
  • Investors may BUY PHF with a 1 year perspective.

JAINMATRIX KNOWLEDGE BASE 

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in PNB Housing Finance Ltd. or any group company. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

RBL Bank IPO – A Grand Revival

  • Date: 18th August 2016
  • IPO price range Rs 224 – 225, Apply from 19-23rd Aug 2016
  • Advice: BUY with a 2 year holding perspective
  • Mid Cap: Rs 7,700 crore Market Capitalization
  • Industry: Bank – Private Sector
  • PE 25.9 times and PB 2.45 times

JainMatrix Investments, RBL Bank IPO

Summary

  • Overview: RBL is a Kolhapur (Mah.) based private sector, universal, full service bank.
  • Total Income in FY16 was Rs 3,235 cr. Topline and PAT grew 57% and 45.6% CAGR over 5 years.
  • RBL occupies several valuable niches such as (50%) Maharashtra operations; agriculture, rural and microfinance focus; a startup focus in Bangalore.
  • The strategy of high growth, aggressive deposit & loan rates, and low margins is sustainable.
  • With new management since 2010, RBL is in a Grand Revival and a good business trajectory.
  • Why BUY: 1) RBL has a good record of business so far in terms of growth, nimble business focus, and differentiation. 2) In terms of valuations, RBL has priced the shares moderately.      3) High quality institutional & PE investors and good management.
  • Key risks: Rural slowdown in Maharashtra and intense competition in BFSI sector.
  • Retail Investors can BUY this IPO with a 2 year holding perspective.

Here is a note on RBL Bank Limited (RBL).

IPO highlights

  • The IPO is open from 19-23rd Aug 2016 with Issue Price band: Rs. 224-225 per share
  • The IPO will raise Rs 1,213 crore totally, as Offer for Sale (Rs. 380 cr.) and fresh issue (Rs 833 cr.)
  • Shares offered to public are 5.39 cr. of Face Value: Rs.10. The IPO offers 14.58% of the post IPO equity base, including OFS from shareholders (1.69 cr. shares) and fresh issue (3.7 cr.). Fig 4.
  • Market Lot: 65 shares and in multiples of 65 shares thereof
  • Objects of the issue are – 1) Two existing PE funds and several smaller investors exit with Rs 380 crores 2) Rs 833 cr. will augment RBL’s Tier-I capital base to meet future capital requirements, loans/advances & investment portfolio, and compliance with Basel III norms and RBI guidelines.
  • Valuations are P/E 25.9 times and P/B 2.45 times at the upper end of price band.
  • The Grey Market Premium for this IPO is Rs 40-50 (on 17th Aug).

Introduction to RBL Bank

  • RBL is a Kolhapur (Mah.) based private sector bank with operations in 16 states and UTs.
  • Total Income in FY16 was Rs 3,235 cr. and Profits were Rs 292 cr. RBL topline and PAT has grown CAGR 57% and 45.6% respectively over the last 5 years.
  • It offers banking to companies, SMEs, agricultural, retail and low-income customers, Fig 1.
RBL Bank IPO, JainMatrix Investments

Fig 1 – Business Segments (FY16) and Fig 2 – Segments Growth (click to view)

RBL Bank IPO, JainMatrix Investments

Fig 3 – RBL Branch Network  and Fig 4 – RBL post IPO shareholding (click image to view)

  • It has 3,871 employees, 201 bank branches & 365 ATMs. See Fig 3.
  • Leaders are N. Ramachandran (Ch’man), Vishwavir Ahuja (MD-CEO) & Naresh Karia CFO
  • RBL has a 73-year operating history. They have transformed in the past 6 years with a new management, from a traditional to a ‘new age’ bank. RBL has expanded presence across India through a new network of branches and ATMs, and upgraded the delivery channels with modern tech-enabled channels like phone banking, internet banking and mobile banking.
  • RBL’s business segments consist of corporate and institutional banking (C&IB), commercial banking (CB), branch and business banking (BBB), agribusiness banking (AB), development banking and financial inclusion (DB&FI) and treasury and financial markets operations.
  • RBL’s capital adequacy ratio (CAR) was 12.94% compared to the RBI mandated CAR of 9.625%. The minimum CAR will increase from 9.625% (FY16) to 11.5% (FY19); an increase of 0.625% every fiscal.
  • In addition RBI requires banks to have an additional capital buffer for absorbing risks so the capital requirement for FY17 would be around 12-12.5%.

Business News and Updates

  • SEBI had provided a conditional go-ahead for the IPO of RBL. It had violated the Companies Act when it made 2 rights issues, allotting shares to 2,591 investors (Feb 2003), and 1,969 (Mar 2006). As per the earlier Companies Act of 1956, an unlisted company is not allowed to allot securities to more than 49 investors in a financial year. In order to fast track the IPO process, RBL has given the exit option to its existing shareholders via buyback offer.
  • RBL is looking to grow 10% above the industry average. Under the new leadership during the last 5 years, deposits and loan book rose 20 and 8 times to Rs 17,099 cr. and Rs 14,450 cr. resp. The operating profit rose 19 times from Rs 19 cr. to Rs 360 cr., and the customer base jumped from 1.5 lakhs to 17+ lakh currently. RBL Bank is aiming for a 1 crore customer base by 2020.
  • RBL launched an exclusive branch for start-ups in Bangalore. It was launched to assist entrepreneurs in setting up new companies/enterprises and offer banking services like FOREX, remittances, cash management and other value-added services with affiliates and partners.
  • Beacon and GPE are the only category 2 (PE) selling shareholders in the proposed IPO.
  • In FY14, RBL bought the credit card & home loan groups of RBS India, with 1.2 lakh customers.
  • The loan portfolio is Rs 21,229 crores. We can see that RBL has a diversified loan book. Fig 5.
JainMatrix Investments, RBL Bank IPO

Fig 5 – Loan Book Industry wise

  • RBL had signed up with IBM for their MobileFirst Platform to build, deploy and manage applications to improve the customer experience & stickiness, and employee engagement.
  • Strategy: RBL, with 60% branches in rural and semi-urban areas, is well-suited to serve the bottom of the pyramid where a slew of new payments banks and small finance banks are also expected to operate. In the past, RBL hired talent from microfinance companies for self-help group, joint liability lending and micro-lending businesses. It also has an expert team for rural agriculture, which involves lending for drip irrigation, cultivation, warehousing and transportation.
  • Personal Visit: A visit to RBL Bank branch was useful. The bank was on a main road, and visibility & location were excellent. The branch layout was good. The sales rep. was polite and helpful. All queries were addressed and there was an effort to cross sell other related products. The bank FD rates were attractive, and overall the urban bank branch had a high-end appeal. Perhaps in future we may become customers …..

Industry Outlook

  • The Indian banking sector remains under-penetrated in comparison to other countries. Even though banking industry has increased reach and scope, there is unmet demand for services.
  • Only 40% of the adult population (45% urban and 32% rural) had bank accounts in 2014.
  • Indian banking grew at a healthy pace, as deposits with banks grew at 16.6% CAGR during FY 07-15 to reach Rs 89 lakh cr. But growth slowed to 10.9% (Mar’15) from 14.6% in Mar’14.
  • Deposit accounts with banks per 1,000 adults increased from 734 in 2012 to 1,358 in 2014. Banking assets increased 14% CAGR from Rs 40.7 lakh cr. (Mar’11) to Rs 68.7 lakh cr. (Mar’15).
  • There was a slow growth in the balance sheets of banks witnessed over FY11-15, mainly due to tepid growth in loans and advances at below 10%. Investments also slowed. The decline in credit growth reflected a slowdown in industrial growth, poor corporates earnings growth, risk aversion from banks due to rising bad loans and governance related issues.
  • RBI & GoI are setting up new policies to expand and strengthen banking infra. Banks in India need to capitalize on these to support economic activity and meet financial needs of all sections of society.
  • PSB’s NPA problem: The PSB loans write-offs jumped sharply in recent years, with the state-owned banks writing off the highest-ever amount of Rs 59,547 cr. in FY16. State-owned banks’ gross NPAs by end FY16 were Rs 4.77 lakh cr. or 9.32% of the total advances. RBI has estimated that this ratio may rise to 10.1% by Mar 2017. PSB’s have recorded NPAs across the board, with corporate loans having for NPA of 11.95%, MSE had 11.13% and agriculture and allied were 6.39% of advances.
  • Recapitalisation of PSBs: The govt. proposed a recapitalization plan for the PSB’s to infuse Rs 25,000 cr. in FY16-17, followed by Rs 10,000 cr. each in FY18-19. This is aimed at shoring up the PSBs lending capacities, currently restricted by poor asset quality and weak capitalization. Moody’s has said that the 11 PSBs would need capital of about Rs 1.2 lakh cr. until 2020.
  • Market share: PSBs account for about 70% of the total banking system assets, down from 75% a few years ago. Robust growth for aggressive private banks happened in parallel to weakening of PSBs.
  • Payment Banks: The RBI in Aug 2015 granted approval to 11 entities to open PBs. PBs are tech enabled new stripped-down banks that will reach customers mainly through mobile phones rather than bank branches. PBs will provide basic savings, deposit, payment and remittance banking services, and will target like migrant workers, low-income households and tiny businesses.
  • SFBs: In Sep 2015, the RBI granted approval to 10 entities to convert to small finance banks.  The aim was to upgrade microfinance firms. SFBs would be similar to the existing commercial lenders and can undertake basic banking activities of accepting deposits and lending. The GoI and RBI have created a policy and regulatory framework for MFI to operate in the country, by setting up MUDRA for refinancing and regulating the MFI sector.
  • All universal banks (including RBL) are of course free to offer similar services as PBs and SFBs.
  • Given the large market share of PSBs, their structural issues, capitalization challenges and high NPAs we feel there is a permanent market share shift taking place to private sector banks & NBFCs. Dynamic banks & NBFCs are seeing ample scope to grow business and provide banking services.
  • The banking industry is a proxy to the overall economy, and one can expect, as a thumb rule, the industry to grow at 2-3 times the GDP growth. The Indian GDP is growing at 7% and  this should improve over the next few years. Basis this, the sector should grow at 14-16% p.a.

Financials of RBL

JainMatrix Investments, RBL Bank Financials

Fig 6 – RBL Financials

  • RBL Total Income, Net Interest Income (NII) and PAT/EPS have grown 57.0%, 56.1% and 45.6% CAGR over the last 5 years. These are very high growth rates. See Fig 6.
  • Profit margins have not suffered during this growth, and have recovered to 9%.
  • RBL has been paying dividend and also increasing this every year, a good sign. The dividend rate has improved over the years from 3% to 15% on FV Rs 10. The dividend yield is still low at 0.07%.
JainMatrix Investments, RBL Bank IPO

Fig 7 – Key Financial Metrics

  • In Fig 7 we map financial metrics of RBL over 3 years. NIM’s have improved marginally and the CAR has fallen marginally. The IPO proceeds should arrest the fall in CAR ratio.
  • ROA and RoNW is low. However RoNW has improved sharply in the last few years. The Gross NPAs to advances were 0.98% and Net NPAs were 0.59% for FY16, these look OK. CASA is low.

Benchmarking

We compare RBL with peers in the banking space (See exhibit 8).

JainMatrix Investments, RBL Bank IPO

Exhibit 8 – Benchmarking

  • RBL leads on 3 year sales growth and 3 year PAT growth.
  • The P/E, P/B and net NPA’s are in the mid-range amongst its peers.
  • RBL has the lowest margins among peers. It also has the lowest RoE in the industry. But this has risen sharply in 2 years. Dividend yield is low, but growth in dividend rate is also good.
  • PAT margin at 9.04% is the lowest among its comparable peers.

Our conclusion is that RBL is combining high growth and low margins. This is in sync with reports that RBL is addressing the semi urban and rural markets. It can prosper as a low-cost leader.

Positives for RBL Bank and the IPO offering

  • RBL is focusing on niche high growth areas. In the semi-urban and rural areas it has a MFI, agro and small business approach. In Bangalore, it has a start-up focused branch for new entrepreneurs.
  • The greatest potential sector within Indian BFSI is microfinance. RBL has focused sharply on the rural sector to combine high growth and low cost leadership. This is a sustainable success strategy.
  • The financials growth rates have been good over the last 5 years. Given this growth rate, the valuations of the IPO of a P/E of 25.9 and P/B of 2.45 do not look excessive.
  • With almost 50% of its 202 branches in Maharashtra, it has a high regional focus and visibility. Mah. is one of the fast progressing, high potential states and RBL is well placed in this region.
  • RBL has a good management team of experienced banking executives built since its 2010 revival. Mr. Vishwavir Ahuja is a post-graduate diploma from IIM-A and has about 35 years of experience in BFSI. The second rung of management too is impressive.
  • RBL uses M&A to grow rapidly. This can be a good means as long as they do not overpay for assets. Successful acquisitions lead to faster growth and improvement in bottom-line.

Internal Risks

  • Banking sector is competitive, with 120+ banks – PSBs, MNC & private Banks, SFBs, PBs, etc.
  • RBL has a concentration risk with exposure to certain industries, and if such sectors experience any sustained difficulties then RBL business would suffer. There are 3 sectors with >5% exposure, see Fig 5.
  • RBL has a concentration risk in loans to customers. Loans advanced to 20 largest borrowers were Rs 4,635 cr., representing 14% of advances. However this to be expected in a small bank.
  • Inorganic growth involves a number of risks. Additionally many M&A opportunities may be overpriced or of over-hyped assets, something RBL has to be careful about.
  • The 45-57% CAGR growth in financials over last 5 years may be unsustainable over the next 3 years as RBL has transitioned from small to midcap. Post IPO we expect a 28-40% growth.

External Risks

  • Our economic outlook is that India is recovering from a 2013 bottom in terms of GDP growth, with lower inflation, lower CAD & fiscal deficit and stable rupee against foreign currencies. However a continued recovery depends on the government policies, good execution and governance by RBI.
  • RBL is an aggressive player that has entered several new potential sectors and can make mistakes that can affect the growth trajectory and brand.
  • RBL is quite rural focused. India is recovering from 2 consecutive drought years that slowed rural demand. This year so far the rains have looked good. However good rains for the rest of this season remains an uncertainty that can affect rural farming output and demand.
  • RBL operates in a highly regulated banking industry and any changes in the regulations or enforcement initiatives may adversely affect their business.
  • RBL is operating in a good environment of falling interest rates. However recently CPI and WPI index rose to outside the comfort zone of RBI, which may trigger a reversal of this environment.
  • RBI has performed well over 3 years under the leadership of Raghuram Rajan. With his term at an end, we worry that in future RBI may not continue successfully on the reform & improvements, rupee defending and inflation control path seen so far.

Overall Opinion

  • India remains underbanked and in fact a number of NBFCs, MFIs and dynamic private banks are seeing an amazing growth in recent years, trying to fill these spaces. Private banks will grow fast and gain market share over PSB’s in a growing economy.
  • RBL has a good record of business so far in terms of growth, nimble business focus, and differentiation. The strategy of high growth, aggressive rates and lowest margins is sustainable.
  • Given the high growth, in terms of valuations, RBL is not expensive. However there is not much on the table for immediate gains.
  • Since the new management took over in 2010, RBL has seen A Grand Revival and entered a good business trajectory.
  • The key risks are rural slowdown in Maharashtra and high competition in the BFSI industry.
  • The IPO is rated a medium risk, medium return offering.
  • Retail Investors can BUY this IPO with a 2 year holding perspective.

JAINMATRIX KNOWLEDGE BASE 

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in RBL Bank or any related group. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Source for Data – RBL Bank Ltd – RED HERRING PROSPECTUS dated August 4th, 2016, company website, news reports, etc.