What you must know about Capital Small Finance Bank?

Capital Small Finance Bank Ltd – About the company

Capital Small Finance Bank Ltd was incorporated in the year 1999. As the name suggests, it is a niche small finance bank (SFB) and was also the first non-NBFC microfinance outfit to get a SBF license. Capital Small Finance Bank Ltd has a very strong presence in semi-urban and rural areas with a predominantly branch-based operating model. The target customer for the SFB is the middle income & upper middle income segment with annual income of between Rs4 lakhs and Rs50 lakhs. Capital Small Finance Bank Ltd has a financial supermarket approach and intends to offer its customers a mix of product offerings, customer service through its physical branches and digital channels. The bank is based out of Jalandhar, Punjab and has already expanded its branch and operations network across the northern states of India like Punjab, Haryana, Rajasthan, Delhi, Himachal Pradesh, and Chandigarh. It operates through a network of 172 branches and 174 ATMs.

The bank's branches are essentially focused in rural and semi-urban areas, and has a coverage of 24 districts. Out of the total customer base, nearly 76% of the customers are serviced through credit and deposit related solutions. As of the last quarter, the bank had nearly 99.84% of the loan book as secured, while 84.66% of the loan book was secured by hypothecation of immovable properties. Amont the niche that Capital Small Finance Bank Ltd caters to; agricultural borrowers have an average ticket size of Rs12.30 lakhs. In addition, the MSME borrowers have an average ticket size of Rs18.2 lakhs while the trading customers have an average ticket size of Rs11.6 crore. The Capital Small Finance Bank Ltd has a total of 1827 employees on its regular rolls; apart from external agents.

The fresh funds will be used to shore up its capital base, which is a basic necessity for small finance banks to be able to expand their loan books to be compliant with capital adequacy regulations. Promoters currently hold just 24.01% in the company, which will get diluted post the IPO. The IPO will be lead managed by Nuvama Wealth Management, DAM Capital Advisors (formerly IDFC Securities), and Equirus Capital. Link Intime India Private Ltd will be the registrar to the IPO.

Highlights of the IPO issue of Capital Small Finance Bank Ltd

Here are some of the key highlights to the public issue of Capital Small Finance Bank IPO.

• Capital Small Finance Bank IPO will be open from February 07th, 2024 to February 09th, 2024; both days inclusive. The stock of Capital Small Finance Bank Ltd has a face value of ₹10 per share and the price band for the book building IPO has been set in the range of ₹445 to ₹468 per share.
   
• The IPO of Capital Small Finance Bank Ltd will be a combination of a fresh issue of shares and offer for sale (OFS) component. As you would be aware, a fresh issue tends to bring in fresh funds into the company, but is also EPS and equity dilutive. On the other hand, OFS is just a transfer of ownership.
   
• The fresh issue portion of the IPO of Capital Small Finance Bank Ltd comprises the issue of 96,15,384 shares (96.15 lakh shares approximately), which at the upper price band of ₹468 per share will translate into a fresh issue size of ₹450.00 crore.
   
• The offer for sale (OFS) portion of the IPO of Capital Small Finance Bank Ltd comprises the sale of 15,61,329 shares (15.61 lakh shares approximately), which at the upper price band of ₹468 per share will translate into an OFS size of ₹73.07 crore.
   
• The OFS size of ₹15.61 lakh shares will be entirely offered by investor shareholders. Among the investor shareholders offering shares in the OFS are Oman India Joint Investment Fund II (8.37 lakh shares), Amicus Capital Private Equity LLP (1.51 lakh shares), Amicus Capital Partners India (0.17 lakhs hares) and others (5.56 lakhs shares).
   
• Thus, the total IPO of Capital Small Finance Bank Ltd will comprise of a fresh issue and an OFS of 1,11,76,713 shares (111.77 lakh shares approximately) which at the upper end of the price band of ₹468 per share aggregates to total issue size of ₹523.07 crore.

The IPO of Capital Small Finance Bank Ltd will be listed on the NSE and the BSE on the IPO mainboard.

Promoter holdings and investor quota allocation quota

The company was promoted by Sarvjit Singh Samra, Amarjit Singh Samra, Navneet Kaur Samra, Surinder Kaur Samra and Dinesh Gupta. As per the terms of the offer, not more than 50% of the net offer is reserved for the qualified institutional buyers (QIBs), while not less than 35% of the net offer size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors. The table below captures the gist of the allocation to various categories.

It may be noted here that the Net Offer above refers to the quantity net of employee, as indicated above. There is no employee quota that has been communicated by the company in the RHP filed. The anchor portion, will be carved out of the QIB portion and the QIB portion available to the public will be reduced proportionately.

Lot sizes for investing in the IPO of Capital Small Finance Bank Ltd

Lot size is the minimum number of shares that the investor has to put in as part of the IPO application. The lot size only applies for the IPO and once it is listed then it can be even traded in multiples of 1 shares since it is a mainboard issue. Investors in the IPO can only invest in minimum lot size and in multiples thereof. In the case of Capital Small Finance Bank Ltd, the minimum lot size is 32 shares with upper band indicative value of ₹14,976. The table below captures the minimum and maximum lots sizes applicable for different categories of investors in the IPO of Capital Small Finance Bank Ltd.

It may be noted here that for the B-HNI category and for the QIB (qualified institutional buyer) category, there are no upper limits applicable.

Key dates for Capital Small Finance Bank Ltd IPO and how to apply?

The issue opens for subscription on 07th February 2024 and closes for subscription on 09th February 2024 (both days inclusive). The basis of allotment will be finalized on 12th February 2024 and the refunds will be initiated on 13th February 2024. In addition, the demat credits are expected to also happen on 13th February 2024 and the stock will list on 14th February 2024 on the NSE and the BSE. Capital Small Finance Bank Ltd will test the appetite for new age financial stocks. The credits to the demat account to the extent of shares allotted will happen by the close of 13th February 2024 under ISIN (INE646H01017). Let us now turn to the practical issue of how to apply for the IPO of Capital Small Finance Bank Ltd.

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. Investors can apply in the retail quote (up to ₹2 lakh per application) or in the HNI / NII quota (above ₹2 lakh). Minimum lot sizes will be known after pricing.

Financial highlights of Capital Small Finance Bank Ltd

The table below captures the key financials of Capital Small Finance Bank Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI (FY refers to Apr-Mar period)

There are few key takeaways from the financials of Capital Small Finance Bank Ltd which can be enumerated as under

1. In the last 3 years, revenue growth has been steady and robust, which shows the maturing of the top line growth. Even the growth in the PAT has been steady, more than doubling in the last 2 years. As a result, the PAT margins have been robust in double figures in the latest year.
    
2. The ROE has been attractive at double digits and at 15.33%, it is likely to hold the P/E ratio of the stock. ROA is above banking average at 1.17%. The growth in the profits on a consistent basis is a sign that NII and NIMs have also been growing in tandem.
    
3. The company has a very low sweating of assets at just about 0.09X on average. However, the sweating is generally a yield fixation for financials and may not be too relevant as long as the bank can maintain its NII growth and the spread as measured by its net interest margins (NIMs).

Let us turn to the valuations part. On the latest year diluted EPS of ₹27.21, the upper band stock price of Rs468 gets discounted at a P/E ratio of 17.2 times. With its healthy profit growth and net margins, this should be a fairly reasonable P/E ratio for the investors. There are also some qualitative points to remember.

Here are some qualitative advantages that Capital Small Finance Bank Ltd brings to the table.

• The bank has a retail focused liability franchise with higher share of CASA deposits in their liability mix.
   
• Advances portfolio that is streamlined and lower on the risk scale, reducing the prospects of NPAs.
   
• Consistent record of improving profitability and solid operating and profitability metrics over last 3 years

The IPO is a good opportunity to participate in the fast growing organized microfinance business. Investors must be willing to wait for longer and also be willing for higher risk scale. The pricing does leave something on the table for investors.