Home / Markets / Mark To Market /  Lessons for Equitas Small Finance Bank from Ujjivan’s stellar debut

Mumbai: Small is beautiful, at least in the banking space. Small finance banks are capturing the attention of investors, which is evident from the robust listing of Ujjivan Small Finance Bank Ltd earlier this month.

The microlender-turned-bank listed at a steep premium of 50% to its initial public offering (IPO) price of 37 on 12 December. Since then, the shares have held on to their listing gains.

However, can Equitas Small Finance Bank expect a similar response from investors?

The bank has filed its draft prospectus with the capital market regulator for an IPO and aims to list before March. It expects to raise around 1,000 crore, but the main objective clearly is to meet regulatory rules.

According to the Reserve Bank of India’s (RBI’s) prudential rules for small finance banks, lenders will have to list themselves within five years of starting operations.

Recall that Equitas Small Finance Bank has already been penalized by RBI for missing its listing deadline in September. The bank cannot open any more branches and its chief executive officer’s remuneration was frozen.

Equitas boasts a low-cost deposit ratio of 25% as against Ujjivan’s 11%.
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Equitas boasts a low-cost deposit ratio of 25% as against Ujjivan’s 11%. (Naveen Kumar Saini/Mint)

Once Equitas Small Finance Bank lists, the restrictions will be lifted and that could give a fillip to the stock price. After all, branches are one way of growing. What’s more, the bank has a superior liability franchise than its competitor, Ujjivan. Equitas boasts a low-cost deposit ratio of 25% as against Ujjivan’s 11%.

The listing pop for Ujjivan also comes against the background of the valuations being modest compared with closest peer AU Small Finance Bank Ltd.

While it is too early to explore that, Equitas Small Finance Bank had raised 250 crore through a private placement of shares earlier this month. The shares were issued at 52.88 apiece, at a valuation of about 5,500 crore for the bank. At that valuation, the shares would be at a multiple of two times its estimated book value for FY20, according to analysts.

In comparison, AU Small Finance Bank trades at a steeper multiple of five times its estimated book value of FY20 and Ujjivan Small Finance Bank at a multiple of around three times.

That said, the overhang of dilution would be there for both Equitas and Ujjivan.

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