Portfolio News

Strong listing | Utkarsh Small Finance Bank debuts with 60% premium

As published in moneycontrol on July 21, 2023

The attractive valuations along with healthy financials, improving asset quality, and reduction in exposure to unsecured micro banking segment seem to be key reasons that boosted confidence among participants.

Utkarsh Small Finance Bank opened with a massive 60 percent premium over issue price on July 21, the listing day, attributing to the strong IPO subscription numbers and bullish market conditions. The benchmark indices hit historic highs this week with the Nifty reaching 20,000 mark.

The stock started off first day first trade at Rs 40 on the NSE, against the issue price of Rs 25 per share, while the listing price on the BSE was Rs 39.95.

The initial public offering of the small finance bank recorded the second highest subscription numbers after Ideaforge Technology in current calendar year, subscribing 101.91 times during July 12-14.

Qualified institutional buyers were at the forefront with buying shares 124.85 times the allotted quota, followed by high networth individuals and retail investors who had bid 81.64 times and 72.11 times the part set aside for them. Employees, too, were aggressive in bidding, who part was booked 16.58 times.

The attractive valuations along with healthy financials, improving asset quality, and reduction in exposure to unsecured micro banking segment seem to be key reasons that boosted confidence among participants.

The Varanasi-based small finance bank raised Rs 500 crore which barring issue expenses will be used for augmenting its Tier-1 capital base to meet the future capital requirements which are expected to arise out of growth in its advances. The price band for the offer was Rs 23-25 per share.

The issue had received a subscribe rating from most of brokerages considering the fairly valued issue.

The small finance bank (SFB) sector is growing rapidly in India, and Utkarsh Small Finance Bank is one of the leading players in the market. It is well-positioned to benefit from the growth of the SFB sector, as it has a strong focus on underserved segments of the population, Swastika Investmart said, adding the company has a strong track record of growth, and its financial performance has been improving in recent years.

Utkarsh Small Finance Bank has registered gross loan portfolio growth at a CAGR of 34 percent in its gross loan portfolio during FY18-FY23, reaching Rs 13,957 crore, while the total deposits grew at a CAGR of around 44 percent to Rs 13,710 crore in the same period, backed by expansion of outlets, recovery post-Covid, diverse products, and customer acquisitions.

Profit for the year ended March FY23 grew by 558 percent to Rs 405 crore compared to previous year, while net interest income increased 44 percent to Rs 1,529 crore with net interest margin improving from 8.8 percent in FY22 to 9.6 percent in FY23.

On the asset quality front, gross non-performing assets (NPA) as a percentage of gross advances falling to 3.2 percent in FY23 from 6.1 percent in FY22 and net NPA declining to 0.4 percent in FY23 from 2.3 percent in FY22, driven by normalisation of business activities post pandemic.

"The IPO is priced at a reasonable valuation, and the company has a strong balance sheet. However, there are some risks to consider, such as the competitive landscape and the potential for asset quality problems. Overall, we believe that the IPO is a good opportunity for investors who are looking for exposure to the growth of the SFB sector. So, we have subcribe rating for this IPO," Swastika Investmart had said.

Considering its resilient performance post COVID, consistent growth in loan book and deposits, healthy return ratios, best cost to income ratio, pan India presence and promising industry outlook, Geojit Securities had also assigned a subscribe rating to the issue, on a short to medium term basis.

Over FY21-23 period, Utkarsh has outperformed its peers on all fronts - loan growth, return ratios and asset quality. It’s valuation on P/B basis is at a significant discount compared to peers, at 1.1x 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, we expect growth and healthy profitability to resume for the sector as well as for Utkarsh. We recommend subscribing to the issue," Nirmal Bang said.