Investment Opportunity: Equitas Holdings IPO
After a turbulent phase in Jan-Feb, the stock markets have stabilized and IPOs have started hitting the shelves. One interesting IPO in the coming days is Equitas Holdings. At 1.7x post money book, the issue is reasonably priced and could deliver around 15% returns over the medium term.
Equitas Holdings – Serving those who Serve You
Ever wondered about the financial lives of our drivers, maids, delivery boys, security guards and domestic help? Like us, they too have their share of social & financial emergencies (hospitalization, child’s education, marriage, house repair, etc). While we have the luxury of swiping our credit card or availing a personal loan at 15% rate of interest when financial emergency strikes, the same is not available to them. This is because they lack banking habits and have no credit history, although they may have no intention of defaulting.
The easiest source of credit for this segment of the society is the local money lender, who charges interest rates in excess of 30%. At these interest rates, it’s highly likely that they end up spending a lot more money in repaying their debt. A few enterprising companies spotted an opportunity in this and started lending to such individuals at 20%. Equitas Holding is one such company that lends to 25 lac such customers while being profitable at the same time.
Investment Arguments
- Presence in under-served segments to ensure strong growth ahead –
Equitas is present in microfinance, vehicle, MSE and affordable housing segment, all of which have huge unmet demand for credit. They have traditionally been ignored by the banks on account of lower ticket sizes, high operating costs and difficulty in accessing the credit worthiness of the borrower. This gives an opportunity to players like Equitas which have developed business models to profitably operate in these segments and will ensure strong loan growth over years to come.
- Cross-sell capabilities to ensure operating leverage benefits ahead –
Having started as a pure microfinance company, Equitas later diversified into vehicle, SME and affordable housing finance. It leverages the customer relations built through the microfinance business to grow the new businesses. As an illustration, most of its SME borrowers are relatives of existing microfinance customers, who have completed at least two loan cycles with the company. Such cross selling will help improve operating efficiency, especially after conversion to small finance bank when it will have a gamut of products to offer.
- Credible management & transparent operations help win customer & shareholder trust –
Key management personnel have been associated with reputed lending companies like Cholamandalam in the past. Even before RBI issued stringent operating guidelines for the Microfinance sector, Equitas followed transparent lending practices with regard to loan pricing, loan recovery and loan limits. Equitas also offers commission-free insurance to all its microfinance borrowers. This has enabled the company to win trust of not only its customers but also global DFIs like IFC, CDC, FMO and DEG who are now investors in the company.
- Small Finance Bank license improves business longevity –
Equitas is one of the ten winners of small finance bank licenses awarded by the RBI. While there are regulatory and liability side challenges involved in the conversion to a small bank, Equitas will be free from the restrictions imposed under the NBFC-MFI regime. It will also be free from all the state level laws that could potentially interfere with MFIs. Equitas has developed cross-sell capabilities as well as a large book of secured products, both of which are essential for being a successful small bank.
GreenEdge Wealth Services’ View
At the higher price band of Rs. 110, the stock will trade at ~1.7 times post money book. This is reasonable when compared to other retail focused banks or NBFCs. However, one needs to take into account the fact that conversion to bank will drag down profitability during the initial years.
Issue Details
| Issue Open/ Close Date | 5th April to 7th April, 2016 |
| Issue Price (Rs.) | 109 to 110 |
| Market Lot | 135 shares |