Capital Small Finance Bank Ltd IPO | News | Overview | Verdict

IPO listed on 14 Feb'24

Capital Small Finance Bank Ltd

Minimum Investment

₹ 14,976 / 32 shares

Grey market premium

₹ 43 (9% premium)

Issue price

₹ 468

Listing price

₹ 430

Listing day %

-7%

Listing on

Feb 14, 2024

Our Verdict:

Avoid

Despite some positive factors, there are a few notable concerns regarding this SFB. Capital Small Finance Bank, a modestly sized institution, has shown a 15% CAGR in advances between FY19 to FY23. This growth rate, however, is lower in comparison to larger peer SFBs. Its net interest margin is also lower than most of its peer SFBs, aligning more closely with commercial banks.
With a credit to deposit ratio of 83%, opportunities for significant credit growth are constrained in a scenario where deposits are limited. Further, with 86% of its 173 branches situated in Punjab, the bank's exposure to the economic state of a single state poses a risk.
In terms of valuation, the IPO seems fully priced with a price-to-earnings (P/E) ratio of 17x, based on FY23 earnings. This places Capital SFB at a higher valuation than most of its counterparts, except for AU SFB, which has demonstrated remarkable growth and higher return ratios in the past.
Given these considerations, investors are advised to observe the bank’s financial performance over the next two quarters before committing to any investments.

About the company

Founded in

31 May'99

Managing director

Sarvjit Singh Samra

Capital Small Finance Bank began its journey as a local area bank before transitioning into a Small Finance Bank in 2016. Serving the states of Punjab, Haryana, Delhi, Rajasthan, Himachal Pradesh, and the Union Territory of Chandigarh, it provides a comprehensive suite of banking services across both asset and liability categories.
The bank's asset offerings mainly encompass agricultural loans, loans for Micro, Small, and Medium Enterprises (MSMEs), trading loans, and mortgages, including housing loans and loans against property. Unlike most other SFBs, Capital SFB targets the middle-income demographic, with annual incomes ranging from Rs 4 to Rs 40 lakhs. It has established a relationship-based banking model, ensuring a predominantly secured asset portfolio.

STRENGTHS

Robust Profit Growth: Over the past three years, Capital SFB has achieved a significant compound annual growth rate of 51% in net profits, reaching Rs 93.59 crore in FY23. Furthermore, the net interest margin improved from 3.36% in FY21 to 3.74% in FY22, and then to 4.19% in FY23.
Predominantly Secured AUM: Approximately 99.85% of its Assets under Management are secured as of H1FY24, positioning it as the leader in security among similar SFBs.
Leading Liquidity Position: The bank maintained the highest liquidity levels on its balance sheet compared to its peers, with cash and bank balances making up 10.16% of total assets as of H1FY24. This indicates a minimal reliance on external financing for short to medium-term asset requirements and the ability to utilize surplus liquidity to expand its loan portfolio.
Enhanced Return on Equity: The bank experienced a notable improvement in its Return on Equity, which escalated from 9.51% in the fiscal year 2021 to 16.62% by fiscal year 2023.

RISK FACTORS

Geographic Concentration Risk: Capital SFB’s operations are heavily concentrated in North India, particularly in Punjab, where ~86% of its branches are located—149 out of 173 branches as of September 30, 2023. Any negative economic developments in North India could significantly impact the bank's financial performance and operational cash flows.
Declining Asset Quality: There has been a notable decline in the bank's asset quality, evidenced by an increase in the gross Non-Performing Assets (NPA) ratio from 2.08% in FY21 to 2.77% in FY23, and a rise in the net NPA ratio from 1.13% to 1.36% during the same timeframe.
Operational Cash Flow Challenges: The bank has faced challenges with negative cash flows from operations recently, largely due to an increase in advances, heightened investments, and the payment of direct taxes as part of normal business activities. Continuous negative cash flows could negatively impact the bank's operational performance and financial health.
High Indebtedness: As of December 31, 2023, the bank reported a total debt of Rs 529.51 crore, comprising Rs 265.78 crore in secured loans and Rs 263.73 crore in unsecured loans. Difficulties in obtaining financing on favourable terms or managing debt obligations effectively could negatively influence the bank's business operations, creditworthiness, reputation, future prospects, and overall financial stability.

Issue details

Issue type

Mainstream

Issue size

₹ 523.07 crore

Fresh Issue

₹ 450 crore

OFS

₹ 73.07 crore

Price range

₹ 445 - 468

Lot size

32 shares

Issue Objective

The company intends to utilise the proceeds from the net issue towards augmenting its Tier-1 capital base to meet future capital requirements.

Dates

Bidding open

7 Feb'24

Bidding close

9 Feb'24

Allotment date

12 Feb'24

Refund date

13 Feb'24

Listing

14 Feb'24

IPO Reservations

Qualified institutional buyers

<50%

Non-institutional investors

>15%

Retail individual investors

>35%

Read the Offer Document

This document has been issued by Liquide Solutions Private Limited for information purposes only. It does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek personal and independent advice regarding the appropriateness of investing in any of the funds, securities, other investment or investment strategies that may have been discussed or referred herein and should understand that the views regarding future prospects may or may not be realized. In no event shall Liquide Life Private Limited and / or its affiliates or any of their directors, trustees, officers and employees be liable for any direct, indirect, special, incidental or consequential damages arising out of the use of information / opinion herein.

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