Suryoday Small Finance Bank Limited IPO

Suryoday Small Finance Bank Limited IPO Tentative Timetable

About the Company – Suryoday Small Finance Bank Limited

Suryoday Small Finance Bank Limited is among the leading small finance banks (SFBs) in India in terms of net interest margins, return on assets, yields, and deposit growth, and had the lowest cost-to-income ratio among SFBs in India in Fiscal 2020. Currently, the bank offers a variety of asset and liability products and services designed for inclusive finance and general banking customers. Its products consist of an inclusive finance portfolio (comprising loans to JLG customers), commercial vehicle loans, affordable housing loans, micro business loans, unsecured micro and small enterprise and small and medium enterprise loans, secured business loans, financial intermediary group loans, and other loans. Since commencing its operations Suryoday Bank has focused on growing a stable, sustainable, and well-penetrated CASA (Current Account Savings Account) base. 

In addition to the loan and deposit products, the bank also offers other banking facilities, products, and services to generate non-interest income, and cater to the additional needs of its customers. These facilities, products, and services include debit cards, internet banking, mobile banking, online bill payment services, and the distribution of third-party life and general insurance products, and mutual fund products. Suryoday Small Finance Bank Limited has leveraged the use of technology across all aspects of its operations. In particular, it uses digital technology for customer acquisition and also customer lifecycle management. The employees use tablets to service customers in the unbanked and underbanked segments which it believes has led to greater customer convenience and improved operational efficiency. It also has a robust back-end operating system supported by its core banking system and document management system.

Growth Story of Suryoday Small Finance Bank Limited

Suryoday Small Finance Bank Limited was originally incorporated as Suryoday Micro Finance Private Limited at Chennai, Tamil Nadu on November 10, 2008. Within one year, it received a license from the Reserve Bank of India (RBI) to establish a non-banking finance company (NBFC) and start microfinance operations. The same year, the bank also received an investment by Aavishkaar Goodwell India Micro Finance Development Company Limited.

Within the next three years, HDFC Holdings Limited and HDFC Standard Life Insurance Company Limited had invested in Suryoday Small Finance Bank Limited too. Over the next two years, the bank had received investments from Lok Capital II LLC and IFC. It also received permission from the Bombay Stock Exchange (BSE) to list in the wholesale segment and start issuing debt securities.

In 2015, it was converted into a public limited company having 159 branches and nearly half a million customers. The same year, it received an investment from DWM (International) Mauritius Ltd and in-principle approval from the RBI to establish a small finance bank (SFB).

In 2016, the RBI gave its final approval to Suryoday Bank to commence its operations as an SFB. It also received a rating of A (-) for its non-convertible debentures by ICRA. Also, in 2016, the bank received investments from IDFC FIRST Bank Limited (previously known as IDFC Bank Limited), Polaris Banyan Holding Private Limited, ASK Pravi Capital Advisors Private Limited, Dr. Aravind Srinivasan, and Kiran Vyapar Limited.

The bank finally started its SFB operations in January 2017 and received more investments by Evolvence India Fund II Ltd, ResponsAbility Participations Mauritius, Jhelum Investment Fund I, Gaja Capital Fund II Limited, TVS Shriram Growth Fund, and New Tech Investments Limited. From 2017 to 2020, the bank has established itself in the small finance space and had 477 branches and around 1.5 million customers by March 31, 2020.

Financials of Suryoday Small Finance Bank Limited

Here is a quick look at the financial performance of Suryoday Small Finance Bank Limited over the last three years:

All amounts in INR Crore

A quick glance at the financial performance of Suryoday Small Finance Bank over the last 3 years offers the following insights:

• The total revenue of the bank grew at a CAGR of 62.13% between 2018 and 2020.
• The total assets grew at a CAGR of 57.74%.
• The profit after tax (PAT) also grew at a CAGR of 211.09%. This was primarily because, in 2018, there was a dip in the bank’s performance. The PAT had dropped around from Rs.15 crore to Rs.11.49 crore.

SWOT Analysis

In India, the small finance bank market is thriving since 2017 and has registered growth at a CAGR of 29% between 2017 and 2020 in terms of assets under management (AuM). Currently, the SFB segment is dominated by three banks – (i) AU SFB; (ii) Ujjivan SFB; and (iii) Equitas SFB. They account for around 63% of the total SFB AuM in Fiscal 2020. While Suryoday Small Finance Bank is a smaller player in the segment, it has been growing at an impressive pace since it offers higher interest rates as compared to most of its peers.

SFBs are expected to continue growing over the next few years since the government is trying to increase financial inclusion in the country. The rural parts of India offer a great opportunity for SFBs to establish a market. While the pandemic has affected SFBs too, banks that can successfully keep their NPAs in control are expected to emerge market leaders.

1. Strengths of Suryoday Small Finance Bank (SSFB) Limited

• Suryoday Small Finance Bank Limited is a commercial bank focused on serving customers in the unbanked and underbanked segments in India and considers its customers to be the most significant stakeholders of its operations. 
• SSFB Limited has a diversified portfolio of assets with a strong focus on retail operations.
• SSFB has the fastest-growing granular deposit franchise compared to its peers.
• The bank has leveraged technology to enable a smooth and seamless customer experience. It has had digital channels like internet banking and mobile banking since the commencement of its SFB operations. The bank extensively uses digital technologies for the entire customer lifecycle in its inclusive finance business.
• Suryoday Bank has strong credit processes and a robust risk management framework.
• SSFB’s distribution and service channels comprise its banking outlets, ATMs, phone banking, mobile banking, tablet banking, and internet banking services. As of March 31, 2020, it operated 477 Banking Outlets including 133 URCs across 12 states and union territories.

2. Weaknesses of Suryoday Small Finance Bank Limited

• While the product portfolio of SSFB is diversified, its customers are concentrated across a few states in India. Hence, the risk of concentration can impact its operations.
• The top 20 clients of the bank contribute to around 38-39% of the bank’s total deposits. If one or more of these depositors pulls back, the bank’s operations could suffer.

3. Peer Comparison

Here is a quick look at the performance of Suryoday Small Finance Bank in comparison to its peers (according to the DRHP) on some key aspects for FY 2020. 

All amounts in INR Crore

As you can see, compared to its listed peers, Suryoday Small Finance Bank is smaller but has been growing at a good rate. With strong financials and the government’s thrust for financial inclusion, SSFB can establish itself as a noteworthy player in the segment.

4. Opportunity to investors – valuation of the IPO

Let’s look at the valuation factors of Suryoday Small Finance Bank in comparison with its peers:

As per the peer group selected by Suryoday Small Finance Bank in the RHP, the average PE Ratio is 20.97. If we look at the price band of Suryoday Small Finance Bank IPO and calculate the P/E Ratio at the higher price of Rs.305, then we get a value of P/E Ratio of 22.93. This is slightly higher than the industry average. Therefore, the IPO is a little overvalued.

5. Risk Factors

• The continuing impacts of COVID-19 are highly unpredictable and could be significant, and may have an adverse effect on SSFB’s business, operations, and future financial performance.
• The bank’s business is currently significantly dependent on advances to inclusive finance (JLG) customers and any adverse developments in the microfinance sector including any regulatory changes could adversely affect its business, financial condition, results of operations, and cash flows.
• Banks in India, including Suryoday Small Finance Bank, are subject to stringent regulatory requirements and prudential norms and its inability to comply with such laws, regulations, and norms may have an adverse effect on its business, results of operations, financial condition, and cash flows.
• SSFB’s business is vulnerable to interest rate risk and any volatility in interest rates or inability to manage interest rate risk could adversely affect its net interest margins, business, financial condition, results of operations, and cash flows.
• SSFB was granted a license by the RBI in 2016 and it commenced operations as an SFB in 2017. Hence, it has a limited operating history as an SFB and its future financial and operational performance cannot be evaluated on account of its evolving and growing scale of operations. Accordingly, its future results may not be reflective of its past performance.
• The bank relies extensively on its information technology systems and any disruptions in such systems, or breach of data could adversely affect its operations and reputation. Further, its success depends on its ability to respond to new technological advances.
• SSFB is exposed to operational and credit risks which may result in NPAs. If it is unable to control the level of NPAs in its portfolio or improve its provisioning coverage as a percentage of gross NPAs, its business, financial conditions, results of operations, and cash flows could be adversely affected.
• In the event of any noncompliance with the SFB licensing guidelines, SSFB may be subject to various sanctions and penalties by the RBI, and its business, financial condition, results of operations, and cash flows could be adversely impacted.
• A significant portion of SSFB’s advances are towards customers located in the states of Tamil Nadu, Maharashtra, and Odisha, and any adverse changes in the conditions affecting these regions can adversely impact its business, financial condition, and results of operations.
• The bank’s deposits depend on a limited number of customers and a loss of such customers could materially and adversely affect its deposit portfolio, funding sources, financial condition, results of operations, and cash flows.
• SSFB has introduced new products and services and it cannot assure that such products and services will be profitable in the future. Further, it may not be able to successfully diversify its product portfolio or enter into new lines of business, which may materially and adversely affect its business prospects and impact its future financial performance.
• The majority of SSFB’s advances are unsecured. Its inclusive finance (JLG) loan portfolio, micro business loans (T-Nagar), and unsecured MSME/ SME loan portfolio are not supported by any collateral. In the event of non-payment by a borrower of one of these loans, the bank may not be able to recover unpaid amounts in a timely manner or at all, which may affect its financial condition, results of operations, and cash flows.
• SSFB relies heavily on the reputation of its brand. Any failure to maintain and enhance awareness of its brand could adversely affect its ability to retain and expand its base of customers.

6. Objects of the Offer

Suryoday Small Finance Bank Limited proposes to utilize the net proceeds from the fresh issue for:

• Augmenting its Bank’s Tier – 1 capital base; and
• Meeting future capital requirements

7. Promoter/s of Suryoday Small Finance Bank Limited IPO

1. Baskar Babu Ramachandran;
2. P. Surendra Pai;
3. P. S. Jagdish; and
4. G. V. Alankara.

How can you apply for the Suryoday Small Finance Bank Limited IPO?

You can apply for the Suryoday Small Finance Bank Limited IPO by using one of these two methods of payment:

1. ASBA – available via the net banking interface of your bank account. Almost all banks offer this facility
2. UPI – available with brokers who do not offer banking services. 

Things to keep in mind before investing in the Suryoday Small Finance Bank IPO

Here are some things that you need to keep in mind before investing in the Suryoday Small Finance Bank IPO:

1. The IPO seems to be slightly overvalued based on peer comparison. You might want to analyze the intrinsic value of the company before making a decision.
2. The primary financial parameters of SSFB are promising. However, over the last six years, the bank has recorded a positive operating cash flow in only two years.

FAQs

Q1. What is the Suryoday Small Finance Bank Limited IPO?

The Suryoday Small Finance Bank Limited IPO is a Main Board IPO for the issue of 19,093,070 equity shares having a face value of Rs.10 totalling up to Rs.582.34 crores. The registrar for the IPO is KFintech Private Limited and the shares are proposed to be listed on the BSE and NSE.

Q2. What are the open and close dates of the Suryoday Small Finance Bank Limited IPO?

The Suryoday Small Finance Bank Limited IPO opens on March 17, 2021, and closes on March 19, 2021.

Q3. What are the lot size and minimum order quantity of the Suryoday Small Finance Bank Limited IPO?

The lot size of the Suryoday Small Finance Bank IPO is 49 shares. Also, the minimum order quantity is 49 shares.

Q4. What are the allotment and listing dates of the Suryoday Small Finance Bank Limited IPO?

According to the DRHP, the basis of allotment will be finalized by March 24, 2021. Further, investors can expect to receive the credits in their demat accounts by March 25, 2021.