ESAF Small Finance Bank IPO Opens Today: Should You Subscribe?

Get a detailed overview of ESAF Small Finance Bank’s IPO, including GMP, verdict, issue details, and the company's strengths and risks.

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The initial public offer (IPO) of ESAF Small Finance Bank Ltd opens for subscription on Friday, November 3. ESAF is a small finance bank specializing in serving the unbanked and under-banked demographics, predominantly in rural and semi-urban areas of South India. 

ESAF IPO Details: Everything You Need To Know

  • ESAF IPO Price: ESAF Small Finance Bank has announced a price band of Rs 57 to Rs 60 per share for the forthcoming IPO.
  • ESAF IPO Opening Date: Subscriptions for the IPO started today and will continue until Tuesday, November 07, 2023.
  • ESAF IPO Size: The firm seeks to raise Rs 463 crore through this public offering, which comprises an Offer for Sale (OFS) of Rs 72.30 crore.
  • How to Apply for ESAF IPO: Prospective investors can bid in lots, with each lot consisting of 250 shares of the company. To apply for the IPO, the minimum investment is set at Rs 15,000 (calculated as 250 x 60).
  • Allotment Timeline: According to the IPO schedule, the ESAF IPO share allotment is expected to be finalized on November 10, 2023. 
  • ESAF IPO Listing Date: The public offer is anticipated to debut on BSE and NSE on the 16th of November 2023.
  • ESAF GMP: According to market observers, shares of ESAF Small Finance Bank are trading at a grey market premium of Rs 22 (a premium of 37% over the IPO price) as of today.

ESAF Anchor Round

Before the IPO's launch, ESAF Small Finance Bank raised Rs 135.15 crore from anchor investors on Thursday, November 2. ACM Global VCC Fund, Founders Collective Fund, Kotak Mahindra Life Insurance, Edelweiss Tokyo Life Insurance, ICICI Prudential Life Insurance, SBI General Life Insurance, Ananta Capital Ventures Fund, Astorne Capital VCC, and Alchemie Ventures Fund were among the notable investors who participated in the anchor round. 

About ESAF Small Finance Bank 

ESAF offers a range of services, which include advances like Micro Loans, Retail Loans, MSME Loans, Loans to Financial Institutions, and Agricultural Loans. On the liability side, they offer products such as current accounts, savings accounts, fixed deposits, and recurring deposits. In addition, they cater to non-resident Indians by providing NRE and NRO current and savings accounts, as well as fixed and recurring deposits.

Financial Highlights 

  • Robust Track Record: From FY21 to FY23, ESAF displayed remarkable growth, with a 33% CAGR in Total Income and a 69% CAGR in Net Profit. Assets under Management (AUM) also showed impressive expansion, climbing at a 39% CAGR to Rs 16,331 crore by FY23. 
  • Improved Asset Quality: The firm also saw significant enhancements in the quality of its assets. There was a notable decline in the Gross NPA, dropping from 7.8% in FY22 to 2.5% in FY23, while the Net NPA fell from 3.9% to 1.1% in the same period.
  • Healthy Return Ratios: ESAF achieved a remarkable Return on Net Worth of 17.7% in FY23, outperforming many of its industry peers. The Return on Assets experienced a robust increase, rising from 0.4% in FY22 to 1.6% in FY23.
  • Expanding Retail Deposit Base: The growth in deposits was equally noteworthy. Total deposits escalated from Rs 8,999 crore in FY21 to Rs 14,666 crore in FY23, with a CAGR of 28%. Retail Deposits followed a similar upward trajectory, rising from Rs 8,796 crore to Rs 13,323 crore, registering a 23% CAGR over the same period.

Key Concerns

  • Geographic Concentration: The bank is predominantly active in South India, particularly in Kerala and Tamil Nadu, where over 62% of its branches and 73% of its loans are concentrated. Economic challenges in this region could adversely affect the bank's financials and operations.
  • High Attrition Rate: Employee turnover has escalated, rising from 13.03% in FY21 to 24.07% in FY23. Increasing attrition may force the bank to increase wages to retain talent, potentially straining its finances and operations.
  • Unsecured Advances: Around 75% of the bank's loans are unsecured as of June 30, 2023. Any recovery issues could negatively impact its financial condition and operations.
  • Regulatory Non-Compliance: The bank failed to comply with 17 out of 272 RBS Tranche III directives as of March 31, 2023. Potential RBI penalties for these infractions could harm the bank's reputation, operations, and financial performance.

Our Verdict: Subscribe 

ESAF Small Finance Bank showcases strong financials and sound management. Its 20.6% capital adequacy ratio indicates financial strength and a notable improvement in asset quality pointing to solid risk control. The robust growth in retail deposits also reflects the bank's established presence in the market and steady expansion.

From a valuation perspective too, the IPO seems attractively priced, with a P/E ratio of 6x on FY24's projected earnings and a P/BV ratio of 1.6. Additionally, the grey market premium (GMP) for the IPO suggests a premium listing.

Considering all these factors, investors may consider subscribing to this issue from a medium-to-long-term perspective.

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