Listed small finance banks reported robust performance metrics for the June quarter, but barring AU Small Finance Bank Ltd, the stocks haven’t been reflecting the performance of the lenders.
That is so because both Equitas Holdings Ltd and Ujjivan Financial Services Ltd have a fast approaching listing deadline. On the other hand, AU Small Finance Bank does not have the holding structure problem its peers have.
As per rules, Equitas and Ujjivan have to list their banks within three years of setting up shop. Equitas will be the first up in this deadline game, as it will need to list its bank by September. Earlier this year, the company said it would list the bank without an initial public offering (IPO) by giving its existing shareholders a direct 47% stake in the small finance bank. Since the announcement of this scheme, the stock has lost 8%.
“We hence continue to factor in a 50% holdco discount to 50% of the firm, while current valuations already reflect a worst-case outcome, implying a holdco discount to 80% of the firm, in our view," said analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd.
In essence, once the bank is listed, shareholders will get direct exposure to the lender to the extent of about 50% of its value, while the rest would continue to be through the holding company (holdco) stake. The holdco discount Nomura refers to would apply to this exposure.
Ujjivan Financial Services, however, has more time, with a January deadline. It is still exploring its possibilities on listing and is willing to go the IPO way. “We are completely prepared for listing. If we go for an IPO, we will ensure all existing shareholders get a chance to get exposure to the bank," Samit Kumar Ghosh, chief executive and managing director of Ujjivan Small Finance Bank said in a phone interview.
Analysts are penciling in a dilution of 14-16% for the holdco shareholders once the IPO comes to the market. Analysts at Nomura have factored in a relatively high holdco discount. “Ujjivan will look to list the bank via the IPO route as, unlike Equitas, issuing bank shares will be limited to the bank’s free reserves. This would mean that the holding discount would apply to more than 50% of the firm," said a Nomura note.
On valuations, AU Small Finance Bank is a winner given the scorching growth the lender has shown. But the biggest strength stems from its deposit franchise, which doubled in the June quarter. The fact that the bank’s management has stated its aspiration to turn into a universal bank has also given investors reasons to grab the AU Small Finance Bank stock. It has gained 6.7% in the last three months and trades at a multiple of four times its estimated book value for FY21, which is seen as steep by analysts.