ESAF Small Finance Bank makes strong debut, lists at 20% premium

ESAF Small Finance Bank (SFB) made a strong stock market debut on Friday with its shares getting listed at Rs 71.90 on the BSE, a 20 per cent premium over its issue price of Rs 60 per share. On the National Stock Exhcnage (NSE), the stock opened at Rs 71, 18 per cent higher against its issue price.

Post listing, the stock moved higher to Rs 74.15 on the BSE, and to Rs 74.30 on the NSE. At 10:01 AM, ESAF SFB was quoting at Rs 73.65, 23 per cent higher over its issue price. Around 25 million equity shares have, thus far, changed hands on the NSE and BSE.

"ESAF SFB's issue is coming at a P/BV of 1.5x, which seems fairly priced. Thus, considering this valuation and its better performance in terms of its CIR, NNPA, and NIM, investors who applied for the public offering for listing premium are advised to maintain their stop loss at Rs 60 and wait for further upside. Those who have a medium- to long-term perspective can also hold the stock," said Shivani Nyati, Head of Wealth, Swastika Investmart. The initial public offer (IPO) of ESAF SFB got huge response from investors with the issue getting subscribed 77 times. The portion for Qualified Institutional Buyers (QIBs) received 182.66 times subscription, while the quota for non-institutional investors got subscribed 88.81 times. The part reserved for retail individual investors received 17.86 times subscription.

ESAF SFB is one of the leading small finance banks in India in terms of client base size, yield on advances, net interest margin, assets under management, Compound Annual Growth Rate (CAGR), total deposit CAGR, loan portfolio concentration in rural and semi-urban areas, and ratio of micro loan advances to gross advances. ESAF SFB provides micro, retail, and corporate banking, and para-banking activities like debit cards, and third-party financial distribution, in addition to Treasury and permitted foreign exchange business. The bank's assets under management have nearly doubled between March 2021 and 2023 and stand at Rs 17,204 crore as of June’23. They have 700 banking outlets and 767 customer service centres across 21 states and 2 union territories, with 62 per cent of their banking outlets being in southern India.

"ESFA SFB enjoys a healthy market share in the south with robust financials and healthy return ratios. The issue is priced at 1.8x FY23 BV (on fully diluted basis), which seems comfortable. Given the current buoyancy in the micro finance sector, ESAF is attractively priced," said Motilal Oswal Financial Services in their IPO note, assigning 'Subscribe' rating to the issue. ESAF SFB has the best asset quality among compared peers. It is favorably placed with portfolio share of 63 per cent from rural and semi-urban, which is the highest among the comparable. Further, it has managed to improve its non-MFI mix from 15 per cent in FY21 to 25 per cent in FY23 which has derisked its business model.

Analysts at Nirmal Bang Securities expect this trend to continue. Over FY21- 23 period, ESAF has reasonably done well on all fronts - loan growth, return ratios and asset quality. Its valuation on P/B basis is at a significant discount compared to peers, at 1.5x FY23 post issue BVPS. Considering that the micro finance industry has come out of severe crisis over 2020-22, with most of the bad loans having weeded out of the system, the brokerage firm expects growth and healthy profitability to resume for the sector as well as for ESAF.