Taking stock . Why has Equitas Holdings taken a knock?

Equitas Holdings — the holding company of Equitas Small Finance Bank — has fallen by a sharp 15-odd per cent in the past week. The stock has come under pressure after SEBI returned the company’s draft scheme of arrangement, wherein shareholders of Equitas Holdings would be issued shares in Equitas Small Finance Bank by capitalising the free reserves of the bank. SEBI’s communique follows RBI’s refusal to grant the company extension of the listing deadline (on or before September 5, 2019) for its subsidiary — Equitas Small Finance Bank.

Equitas Holdings has stated that it would now take necessary steps to get the shares of Equitas Small Finance Bank listed through an IPO. Since listing through the IPO route would hurt investors of Equitas Holdings by creating a pricing discount for the holding company and possible dilution for existing shareholders, the stock has taken a knock.

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, despite its strong operational performance.

What’s spooking investors?

To ease the pain for shareholders of Equitas Holdings — on account of listing of the banking subsidiary through the IPO route — the board had approved a scheme of arrangement in January-February this year, wherein shareholders of Equitas Holdings would be issued shares in Equitas Small Finance Bank in proportion to their holding in Equitas Holdings by capitalising the free reserves of the bank. The company has been awaiting SEBI's approval on this arrangement, and had also sought an extension from the RBI on the listing deadline.

The RBI recently refused to grant the extension, and barred the company from opening new branches and froze the remuneration of its MD and CEO.

With SEBI returning the draft scheme, Equitas Holdings has said that it would take necessary steps to list shares of the Equitas Small Finance Bank through IPO, which is expected to be completed by March 2020.

Equitas Holdings — that got listed in April 2016 —- is the holding company of Equitas Small Finance Bank. The RBI’s norm requires the company to list its banking subsidiary within three years and maintain minimum promoter shareholding in the bank (at least 40 percent) for a period of five years from the date of commencement of its business.

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

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

The second issue from 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.

Strong performance

Equitas Holdings began operations in September 2016, just 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 to some extent.

In the June quarter, the bank’s loan book grew by a strong 38 per cent. At the current price, the stock of Equitas Holdings trades at 1.2 times the 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 has already been factored into the stock.

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