Suryoday Small Finance Bank IPO - Hit or Miss?

IPOs are up for sale, and this sale will last for a long. Call it listing gains or long-term returns; investors seem to be really excited this IPO season. Starting from the Rossari Biotech IPO in July, we have come a long way with 25 mainline IPOs in this Financial Year. Isn't it enormous?

Anyway, we are back with another IPO blog, this time from the banking and financial sector. It's Suryoday Small Finance Bank. Its IPO will open on March 17 2021.

We know you have a number of questions regarding the details of the IPO and whether to opt-in or opt-out. Lets' get all of them answered. 

About Suryoday Small Finance Bank

Established in 2008 in Chennai, Suryoday Small Finance Bank Ltd is a leading Small Finance Bank (SFB) in India. The company started offering SFB services in January 2017. Before operating as a SBF, the company was a micro-financing NBFC. They serve customers in the unbanked and underbanked segments. In 2020, the company had 482 Banking Outlets with a customer base of 14.3 lakh.

Its services include:

• Offering digital banking through NPCI payment systems and mobile technologies with banking through traditional channels.
• Offering credit products like MFI loans, Vikas Loans, Shopkeeper Loans, etc.
• Innovating the banking practices to focus on the unserved and the underserved. 
• Offering a diversified asset portfolio with a focus on retail operations.

Promoters: Mr Baskar Babu Ramchandran, P Surendra Rai, P.S. Jagdish and G.V. Alankara. They held 30.35% of total equity pre-IPO, which will be reduced to 28.02%.

Financials of Suryoday

Detailed Analysis

Let's start with a detailed analysis of this IPO. 

Competitive Strengths

• A customer-centric approach to ensure maximum financial inclusion.
• Fast growth rate.
• Leveraging emerging technologies to fulfil their objectives.
• Strong credit assessment processes and a robust risk management framework.
• Cost-efficient operations.
• An experienced leadership team and professional management.
• Strong corporate governance.

Financial Analysis

After understanding the competitive strengths, let's analyze their financial performance as well.

• The loans and advances have been increasing at a CAGR of 44%. It is a positive indicator of high growth in business operations.
• The Cost to Income Ratio has reduced from 73% in FY 16-17 to 47% in FY 19-20, signifying the efficiency in operations.
• The Net NPAs are also very low at 0.4%, showing that it is efficient in collecting its debts, even though it focuses on rural sector lending.
• Although the NPAs are low, the Bank has made heavy provisioning of 84.7% to minimize the sudden impact of NPAs.
• The Capital to Risk-Weighted Assets Ratio (CRAR) is also the 2nd highest among SFBs with 29.6%. It ensures that the Bank can withstand negative shocks.
• Considering the issue price to be the list price, the P/E Ratio will be around 23x, close to the industry average. So the IPO is correctly priced.

Survoday IPO Timetable

Key Details of IPO

Application Range

Objects of the Issue

The Bank proposes to utilize the Net Proceeds from the Fresh Issue towards augmenting the Bank's Tier-1 capital base to meet the Bank's future capital requirements.

Risk Factors

• The impact of Covid-19 is highly unpredictable as the economic recession led to an increase in NPAs, reduction in collections, and a decrease in advances due to reduced economic activity. It led to a decline in half-yearly profit, despite good revenue growth.
• Their business is significantly dependent on advances to inclusive finance (JLG) customers, which account for 76% of their total loan portfolio. Any adverse developments in the microfinance sector could adversely affect their business.
• Banks are subject to stringent regulatory requirements under the Companies Act and Banking Regulation Act. Inability to comply with such laws may harm their business.
• It is subject to Interest Rate risk, which can affect its Net Interest Margins.
• There are pending litigations against the company and its directors, aggregating to Rs 4380 Cr.

Final Words

As the name suggests, Suryoday Small Finance Bank is a bank focussing on the inclusion of small borrowers. It also innovates its technology and offers a diversified portfolio. It has high growth in revenue and business operations, besides being cost-efficient. Although the loans are in the rural sector, it has efficiently managed its debts to reduce NPAs. But it does not compromise with the provisions made. The capital is also adequate, which will be enhanced with this IPO. The P/E Ratio and Return on Net Worth are similar to that of its peers. 

But like a coin has two sides, there are some risks which this Bank has to face. The COVID-19 pandemic has affected the financial sector companies in general, whose impact can be seen in it as well. India is popularly known as the "Land of Laws" and has the longest written constitution. Inability to comply with all laws also poses a risk.

In the end, every company has to face some or the other risk. But the financials of the company are very impressive. So, analyze these facts and take your investment decision wisely.