Equitas Holdings could be in for a rough ride; stock down over 6%

Radhika Merwin | Updated on September 09, 2019 Published on September 09, 2019

BL Research Bureau

Equitas Holdings---the holding company of Equitas Small Finance Bank—could be in for a rough ride. The RBI last week refused the company’s proposal seeking an extension of the listing deadline (on or before September 4, 2019) for its subsidiary-- Equitas Small Finance Bank—and barred it from opening new branches and put a freeze on the remuneration of its MD & CEO.

In a bid to ease the pain for existing shareholders of Equitas Holdings--- on account of listing of the banking subsidiary through the IPO route--- the board had instead approved a scheme of arrangement in Jan-Feb this year wherein shareholders of Equitas Holdings are issued shares in Equitas Small Finance Bank in proportion to their holding in Equitas Holdings by capitalising the free reserves of the bank. As the company has been awaiting SEBI's approval on this arrangement, it had sought an extension from the RBI on the listing deadline. With the RBI refusing to grant the extension, there is uncertainty over the company's future course of action.

The management has stated that it would await SEBI's approval. If the scheme fails to get the regulator's approval, it would take immediate steps for an IPO and get the bank's shares listed.

Listing through the IPO route would hurt investors of Equitas Holdings, as it would create a pricing discount for the holding company and could lead to dilution for existing shareholders.

Much like its peer Ujjivan Financial Services that came under pressure after it announced the IPO of its banking subsidiary, Equitas too could see some pain in the near term. However, the small finance bank’s strong operational performance is a key positive that could hold it in good stead over the long run.

What’s the worry?

Equitas Holdings -- that got listed in April 2016-- is the holding company of Equitas Small Finance Bank. A key overhang on players such as Equitas and Ujjivan has been the RBI’s norm which requires them to list their banking subsidiary within three years and maintain minimum promoter shareholding in the bank (at least 40 per cent) for a period of five years from the date of commencement of their business.

Listing of the banking subsidiary through IPO would have an unfavourable impact on the existing shareholders of the already listed holding company---Equitas Holdings. This is mainly on two counts.

Read also: Equitas’ request for extension of listing deadline rejected

One, the double listing of the holding company and the small finance bank, could add pricing pressure at the holding company level---Equitas Holdings. This is because a pricing discount gets created for the holding company.

In case of Ujjivan Financial Services, that filed a draft red herring prospectus for its proposed IPO of its banking subsidiary---Ujjivan Small Finance Bank--the company sought RBI’s approval for the merger of Ujjivan Financial into Ujjivan Small Finance Bank (reverse merger) to ease the blow. But clarity on this is awaited.

The second issue from the listing of banking subsidiary stems from the possible dilution for existing shareholders. Take the case of Ujjivan Financial that holds 100 per cent in Ujjivan Small Finance Bank. According to the management, the new shareholders in the small finance bank, post the IPO, may hold about 15 per cent. The actual dilution for existing shareholders would ultimately depend on the IPO price.

In the case of Equitas, until there is more clarity on how the listing of the banking subsidiary will happen, the stock could be under pressure.

Scheme of arrangement

In a bid to minimise this pain for existing shareholders, Equitas had approved a scheme of an arrangement instead of an IPO to list the bank shares. The board of Equitas Small Finance Bank and Equitas Holdings had in Jan-Feb this year, approved a scheme wherein shareholders of Equitas Holdings are issued about 89.2 crore shares in Equitas Small Finance Bank by capitalising the free reserves of the bank. This would have led to the reduction of the stake of Equitas Holdings in the bank to 53 per cent with the remaining 47 per cent held by public shareholders (the holding company would still need to bring down its stake to 40 per cent in another two years).

Equitas Holdings has been awaiting the approval for the scheme from SEBI and stock exchanges. Given that it would take another 5-6 months post-SEBI’s approval to get approval from the NCLT, the company had sought an extension from the RBI for extending the listing deadline (on or before September 4, 2019).

Strong operational performance

Equitas Holdings came out with its IPO in April 2016 and commenced operations on September 2016, only two months before the Centre’s demonetisation move. Demonetisation led to a sharp rise in delinquencies, slowdown in growth and fall in earnings. However, the company’s relatively better-diversified loan portfolio helped mitigate the risk somewhat.

In FY18, the bank went on to de-risk its portfolio, with MFI loans constituting about 28 per cent of the portfolio, down from about 53 per cent in FY16. In FY19, MFI loans constituted 26 per cent of loans. Equitas grew its loans book by a robust 44 per cent in FY19. The bank’s GNPAs moved up to 3.36 per cent in the September 2018 quarter due to change in recognition of NPAs (from month end to daily). It has been trending lower since then.

In the latest June quarter, the bank’s loan book grew by a strong 38 per cent, led by robust traction in small business loans, vehicle finance and MFI loans. For Equitas, as is the case for other small finance banks, how well it can leverage its branch network to garner low-cost deposits is critical. While the bank’s CASA deposits as a proportion of customer deposits have been inching lower, the share of term deposits has been moving up.

At the current price, the stock of Equitas Holdings trades at 1.4 times FY20 book. Given the healthy operational performance, the valuations appear attractive, but the small finance bank listing could be a dampener. The market, in general, applies a 40-50 per cent holding company discount, though some of this is already factored into the stock. Still, until further clarity emerges, the stock could be under pressure.

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Published on September 09, 2019
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