Suryoday Small Finance Bank IPO opens today: Should you invest?

New Delhi: Suryoday Small Finance Bank plans to raise around Rs 582 crore through an initial public issue (IPO) that opens today (March 17. Out of the total issue size, Rs 249 crore is through fresh issue of shares to augment its capital base while another Rs 334 crore is an offer for sale. The issue is priced in a band of Rs 303-Rs 305 and can be applied in lot sizes of 49 shares. Ahead of the launch of the IPO, the small finance bank (SFB) on Tuesday raised Rs 170 crore by allotting shares to 13 anchor investors. Let us understand its business to know if it suits your risk profile.

Business & Financials

Suryoday Small Finance Bank started as a microfinance lender in 2009 and after getting SFB licence from the RBI it began operation as a SFB in January 2017. It has 554 banking outlets across 13 states and union territories with a concentration in Maharashtra, Tamil Nadu and Odisha.

Microfinance, which is a highrisk lending segment, accounts for two-thirds of the company’s loan book. At the end of December 2020, microfinance contributed over 70% to the loan book while the rest was attributed to other loan categories including commercial vehicles, affordable housing, secured and unsecured business loans.

Its capital adequacy ratio was 41.2% at the end of December 2021, the highest among peers. It is expected to increase to 54% after the IPO. However, the proportion of current and savings accounts (CASA) in the deposits remains the lowest among peers. But Suryoday Small Finance Bank displays a better net interest margin (NIM) and return on assets (RoA) than listed peers.

Its loan book grew by 47% annually between FY18 and FY20 to Rs 3,710.8 crore. It stood at Rs 3,908.2 crore at the end of December 2021. Meanwhile, its deposits grew by 95% annually during the period to Rs 2,848.7 crore and increased to Rs 3,343.8 crore at the end of the December quarter.

CASA deposits contributed 13.3% to its overall deposit base,  the lowest among the listed peers. The NIM (net interest margin) was 11.9% while RoA (Return on Assets) was 2.5% in FY20; both were the highest among peers.

Worth mentioning here is that investing in a small finance bank at this stage will be a risky affair as the banking sector in general has not recognised gross nonperforming assets (GNPA) since August 31, 2020, following an interim order by the Supreme Court. This has kept the GNPA ratio low. The proforma GNPA takes into account the deterioration in the asset quality since August. In the case of Suryoday, it is at 9.3% compared with 3-5% for its peers. This may put pressure on the margins and return ratios in the coming quarters.

Valuation

Despite being the smallest SFB among listed peers, Suryoday’s IPO valuation is on par with some of the larger players. The company demands a price-book (P/B) multiple of two considering the book value after the IPO, pre-IPO placement, and preferential allotment to promoters. This is similar to that of Ujjivan SFB and Equitas SFB, who are three-four times bigger in terms of the loan book with a better CASA ratio and lower proforma GNPA ratio. Analysts say investors should monitor Suryoday’s performance over the next few quarters to see the company’s performance and asset quality trends over the next few quarters before taking an exposure.