IPO listed on 30 Nov'23
Fedbank Financial Services Ltd
Minimum Investment
₹ 14,980 / 107 shares
Grey market premium
₹ 5 (3.5% premium)
Issue price
₹ 140
Listing price
₹ 138
Listing gains
-2 (-1%)
Listing on
Nov 30, 2023
Our Verdict:
Avoid
- Although FedFina has demonstrated significant growth in its financials and AUM, there are certain risks that investors should be aware of. The decreasing Capital Adequacy Ratio indicates a diminishing financial safety net, which is crucial for both stability and regulatory compliance. Concerns also arise from the fluctuating Asset Quality and a NIM that is lower than its competitors. Furthermore, the continuous negative operating cash flow over the last three years raises doubts about its capacity to generate profits and maintain financial health in the long run.
- From a valuation perspective, the IPO seems fully priced with a P/E ratio of 24x on FY24's projected earnings. Additionally, the grey market premium for the issue suggests a tepid listing.
- These factors collectively suggest that it might be prudent for investors to observe the company's performance and strategies in the ensuing quarters post-IPO, to better gauge its long-term viability and growth prospects before making investment commitments.
About the company
Founded in
17 Apr'95
Managing director
Anil Kothuri
- Fedbank Financial Services Ltd (FedFina), a subsidiary of Federal Bank, operates as a non-banking finance company (NBFC) primarily serving MSMEs and the emerging self-employed individuals (ESEIs) sector. The organization offers a diverse range of products tailored to meet customer requirements. This includes various mortgage loans like housing loans, both small and medium ticket loan against property (LAP), unsecured business loans, and gold loans.
- Ranking among the top five NBFCs promoted by private banks, FedFina boasts the third lowest borrowing cost. Its geographical footprint extends across 17 states and union territories in India, with a particularly strong presence in the Southern and Western regions.
STRENGTHS
- Robust Financial Growth: From FY21 to FY23, FedFina displayed impressive growth, with a 31% CAGR in Revenue from Operations, 35% CAGR in EBITDA and 71% CAGR in Net Profit.
- Growth in AUM: Assets under Management (AUM) witnessed a significant increase, growing at a 37% CAGR over the past two years, reaching a substantial Rs 9,069.6 crore in FY23.
- Improving Return Ratios: FedFina saw a notable improvement in its return ratios, with Return on Total Average Assets rising from 1.29% in FY21 to 2.31% in FY23. Concurrently, the Return on Average Equity escalated from 8.08% to 14.36% during this period.
- Collateralized Lending Focus: The firm primarily concentrates on a collateralized lending model within the retail finance sector. A substantial 86.24% of its total loan assets are secured against tangible assets, maintaining an average loan ticket size of Rs 1.3 lakh in Q1FY24.
RISK FACTORS
- Decreasing Capital Adequacy: There has been a steady decline in the Capital Adequacy Ratio, decreasing from 23.52% in FY21 to 23.04% in FY22, and further to 17.94% in FY23.
- Inconsistency in Asset Quality: The net non-performing assets (NPA) experienced a substantial increase, rising from 0.71% in FY21 to 1.75% in FY22, then slightly decreasing to 1.59% in FY23. However, as of June 30, 2023, the net NPA climbed again to 1.76%.
- Geographic Concentration: A significant portion of gross AUM, 93.65%, is concentrated in six states and two union territories. Additionally, a major portion of the customer base is from the low to middle income group, potentially more vulnerable to economic fluctuations compared to large corporate borrowers.
- Lower NIM: In comparison to its peers, FedFina reported a relatively low net interest margin of 8.2% for FY23. This contrasts with higher margins reported by competitors such as Five-Star Business Finance (20.6%), Aptus Value Housing Finance (13.1%), Manappuram Finance (11.5%), SBFC Finance (9.5%), Muthoot Finance (9.3%), and IIFL Finance (8.5%).
- Cash Flow Concerns: Over the past three years, the firm has experienced negative operating cash flow. Persistent negative cash flow or significant liquidity issues could hinder the company's operational sustainability.
Issue details
Issue type
Mainstream
Issue size
₹ 1,092.26 crore
Fresh Issue
₹ 600.77 crore
OFS
₹ 492.26 crore
Price range
₹ 133 - 140
Lot size
107 shares
Issue Objective
The company proposes to utilize the net proceeds from the fresh issue towards the following objects:
- Augmenting its Tier I capital base to meet future capital requirements, arising from the growth of the business and assets;
- Meeting offer expenses.
Dates
Bidding open
22 Nov'23
Bidding close
24 Nov'23
Allotment date
27 Nov'23
Refund date
28 Nov'23
Listing
30 Nov'23
IPO Reservations
Qualified institutional buyers
<50%
Non-institutional investors
>15%
Retail individual investors
>35%
Read the Offer Document
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