ESAF Small Finance Bank Limited IPO Review: Apply or Not?

The ESAF Small Finance Bank Limited IPO has garnered significant attention from investors, and for good reason. The IPO opened on November 3 and is set to close on November 7, with a price band of ₹57 to ₹60 per equity share. The offering has reserved shares for Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs), and Retail Investors, and eligible employees are offered a discount of ₹5 per share. In this comprehensive review, we’ll delve into the IPO’s details, examine the grey market premium, and analyze the recommendations of brokerage firms to help you make an informed decision on whether to apply for ESAF Small Finance Bank’s IPO.

ESAF Small Finance Bank IPO Overview

The ESAF Small Finance Bank IPO presents an opportunity to invest in a rapidly growing financial institution. ESAF Small Finance Bank is the fifth-largest Small Finance Bank in India in terms of Assets Under Management (AUM) as of June 30, 2023. It has posted an impressive AUM Compound Annual Growth Rate (CAGR) of 39% over the FY2021-23 period. The bank also boasts a robust capital adequacy ratio of 20.6%, making it a standout among its peers. The net proceeds from the IPO will further strengthen its Tier-I capital base.

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The price band of ₹57 to ₹60 per equity share is competitive and has generated substantial interest among investors. The lot size for the IPO is set at 250 equity shares, with multiples of 250 shares thereafter.

Grey Market Premium (GMP) Analysis

The GMP for the ESAF Small Finance Bank IPO is a notable factor to consider when evaluating the potential performance of the IPO. GMP reflects the premium at which the shares are trading in the unofficial market, indicating investor sentiment. As of the latest data, the GMP stands at +22, which is consistent with the previous session.

See Current ESAF Small Finance Bank IPO GMP

This suggests that investors are willing to pay a premium of ₹22 for ESAF Small Finance Bank shares in the grey market. Considering the upper end of the IPO price band and the current GMP, the estimated listing price of ESAF Small Finance Bank shares could be ₹82 per share. This represents a 36.67% premium over the IPO price of ₹60.

The GMP provides insight into investor readiness to invest at a higher price, which can be indicative of the potential post-listing performance of the stock.

Brokerage Recommendations

Several prominent brokerage firms have provided their assessments and recommendations for the ESAF Small Finance Bank IPO. Here’s a summary of their viewpoints:

  • BP Equities Pvt Ltd:
    BP Equities Pvt Ltd believes that small finance banks (SFBs) have a significant market opportunity, particularly in the rural and semi-urban segments. ESAF SFB’s strong AUM growth, impressive capital adequacy ratio, and plan to enhance its Tier-I capital base make it an attractive investment. At a current Price-to-Book Value (P/BV) multiple of 1.6x, the brokerage advises investors to “Subscribe” from a medium to long-term perspective.
  • LKP Securities Ltd:
    LKP Securities Ltd recommends subscribing to the ESAF Small Finance Bank IPO, particularly at the higher price band of ₹60. With a P/BVPS of 1.46x and a strong Return on Assets (ROA) and Return on Equity (ROE) of 1.6% and 19.4%, respectively, in FY23, the IPO offers attractive valuation and return potential.

Should You Apply for the ESAF Small Finance Bank IPO?

Based on the recommendations of these brokerage firms and the analysis of the IPO’s fundamentals, here are some key reasons to consider subscribing to the ESAF Small Finance Bank IPO:

  1. Strong Fundamentals: ESAF SFB has demonstrated robust growth and profitability. It ranks among the top Small Finance Banks in India, with the fastest AUM CAGR and a strong capital adequacy ratio.
  2. Attractive Valuation: The IPO is priced at a reasonable P/BV multiple of 1.6x, which is competitive compared to other Small Finance Banks.
  3. Growth Potential: ESAF SFB has a significant addressable market in the rural and semi-urban segments. Its strong fundamentals and attractive valuation position it well for future growth.

However, it is crucial to remember that all investments come with inherent risks, and the IPO market can be volatile. There is no guarantee that ESAF SFB shares will list at a premium or continue to perform well post-listing. Therefore, before deciding to apply for the IPO, investors should consider the following factors:

  • Asset Quality: While ESAF SFB currently maintains good asset quality with a gross Non-Performing Asset (NPA) ratio of 2.62% as of June 30, 2023, investors should closely monitor the bank’s asset quality in the future, especially in the context of the broader economic environment.
  • Management Team: ESAF SFB has an experienced management team with a positive track record. Evaluating the management’s ability to execute the bank’s growth plans is essential.
  • Competition: The bank faces competition from other Small Finance Banks, microfinance institutions, and commercial banks. It is essential to assess ESAF SFB’s competitive landscape and its ability to differentiate itself from rivals.

In conclusion, ESAF Small Finance Bank appears to be a promising investment opportunity, particularly for investors with a medium to long-term horizon. However, it is advisable to conduct thorough due diligence and consider your individual investment goals and risk tolerance before applying for the IPO. Consulting with a financial advisor or expert is also recommended to make an informed investment decision.

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