Equitas Holdings (Equitas) is a diversified financial services player with presence across microfinance, vehicle & MSE finance and housing finance. With a humble start in 2007, it has emerged as the fifth largest micro finance player in a short period of time. Equitas is amongst the ten players to have received a small finance bank license from the Reserve Bank of India (RBI). The company has a presence in 11 states through 539 branches, is backed by a strong Management team and with it being the second IPO in the micro finance segment, we expect strong subscription responses to the issue.
Expect a smooth transition towards being a Small Finance bank: The proposed small finance bank (SFB) will have access to low cost funds, ie below the current ~12% rate via deposits. However, there will be initial expenses to be incurred while transitioning to be a SFB as new processes will have to be implemented along with maintenance of CRR and SLR. Meeting 75% Priority Sector Lending (PSL) target will not be a challenge for Equitas as its entire portfolio qualifies for PSL and hence the migration from NBFC to SFB should be smooth. With leverage of only 4x, we believe there would be enough scalability without further dilutions.
Scalable business model with presence across growing verticals: Equitas’ microfinance business has grown at a CAGR of 45% over FY2012-9MFY2016 to `2,935cr. There is a huge untapped opportunity in this segment as microfinance is targeted to the lower income segment which often lacks access to formal financing sources. With a loan portfolio of only ~`43,300cr for the industry and given the government’s focus on financial inclusion together with better clarity on regulatory aspects, the microfinance industry is positioned for healthy growth going ahead. Within five years of operations Equitas’ used vehicle & MSE financing business has scaled up to an AUM to `2,341cr, growing at a CAGR of 125% over FY12-15.
Reducing dependence on microfinance: Equitas has successfully diversified its business; the share of microfinance in terms of its total AUM has declined to 53% in 9MFY2016 from 100% in FY2011, while that of vehicle finance and MSE has risen to 42.5% from nil over the same period. Despite aggressive growth, it has been able to maintain strong asset quality with the GNPA at 0.2% for Microfinance and 2.6% for vehicle & MSE finance as of Dec-15. Its NIM of 11.1% and 12.5% respectively for the two aforementioned segments should help mitigate against any serious deterioration in asset quality, going forward.
Outlook Valuation: At the upper band of the offer price `110 the issue is priced at 1.8x its diluted BV of `60 (pre-dilution 2.3x). The company has decent ROE and ROA of 13% and 3.1%. Though post conversion to a SFB the return ratios might be compressed, while we expect the same to scale up subsequently. We believe the issue is attractively priced looking at the growth options the company offers in the long run. We recommend SUBSCRIBE to the issue.

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