What you need to know about Fedbank Financial Services IPO?

Fedbank Financial Services Ltd is an NBFC that provides a wide range of lending products including gold loans, home loans, LAP, and business loans. The company's client base largely comes from the MSME and emerging self-employed individuals (ESEI) sectors. As of March 31, 2023, Fedbank Financial Services has offices in 191 districts spread across a total of 16 states and union territories in India. Fedbank Financial Services Ltd operates through 575 branches with a strong presence in Southern India followed by the Western regions of India. It is predominantly active in Andhra Pradesh, Telangana, and Rajasthan. Under the gold loan offering, the company offers privilege loan, balance transfer, small ticket loan, HNI Loan, high value loan and Digi Locker. Under the home loan category, it offers loans for the purchase of house, construction of house, purchase of plot to construct house, home improvement, top-up loans, and balance transfers.

Under the loan against property – LAP business, Fedbank Financial Services Ltd offers loan against residential property, loan against commercial property, commercial property purchase loan and lease rental discounting. Under business loans, the company offers business loans for doctors, business loans for CA, CS, architects, business loans for manufacturers, traders, and other service providers. The net proceeds from the IPO fresh issue portion will be utilized for augmenting the Tier 1 capital base (a basic necessity for all financial institutions looking to expand their loan books). The OFS portion is being offered by the promoters (Federal Bank Ltd) and True North Fund, an investor shareholder. The IPO will be lead managed by ICICI Securities, BNP Paribas, Equirus Capital and JM Financial. Link Intime India Private Ltd will be the registrar to the issue.

Highlights of the IPO issue of Fedbank Financial Services Ltd

Here are some of the key highlights to the public issue of Fedbank Financial Services IPO.

• Fedbank Financial Services Ltd has a face value of ₹10 per share and the price band for the book building IPO has been set in the band of ₹133 to ₹140 per share. The final price will be discovered within this band through the process of book building.
   
• The IPO of Fedbank Financial Services Ltd will be a combination of a fresh issue and an offer for sale (OFS). As you would be aware, a fresh issue tends to bring in fresh funds into the company, but is also EPS and equity dilutive. However, OFS is just a transfer of ownership and does not entail dilution of equity or of EPS.
   
• Let us start with the fresh issue portion first. The fresh issue portion of Fedbank Financial Services Ltd IPO comprises the issue of 4,28,57,143 shares (428.57 lakh shares approximately), which at the upper price band of ₹140 per share will translate into fresh issue size of ₹600.00 crore.
   
• The offer for sale (OFS) portion of the IPO of Fedbank Financial Services Ltd comprises the sale of 3,51,61,723 shares (351.62 lakh shares), which at the upper price band of ₹140 per share will translate into an offer for sale (OFS) size of ₹492.26 crore.
   
• The OFS selling will be by the promoter shareholders of the company, which is Federal Bank Ltd and one investor shareholder, Tru North Fund. Since Fedbank Financial Services Ltd is currently 73.09% owned by the promoters, the promoter stake will get diluted to the extent of the fresh issue and the offer for sale promoter portion.
   
• Therefore, the overall IPO of Fedbank Financial Services Ltd will comprise of the issue and sale of 7,80,18,866 shares (780.19 lakh shares approximately), which at the upper price band of ₹140 per share will translate into total IPO issue size of ₹1,092.26 crore.

While the fresh issue will be capital and EPS dilutive, the offer for sale portion will only result in transfer of ownership. The entire OFS is being offered by the government of India.

Promoter holdings and investor quota allocation

The company was promoted by Federal Bank Ltd, holding the outstanding shares of Fedbank Financial Services Ltd to the tune of 73.09% of outstanding shares. Currently the promoter (Federal Bank Ltd) holds 73.09% stake in the company, which will get diluted post the IPO. As per the terms of the offer, 50% of the net offer is reserved for the qualified institutional buyers (QIBs), while 35% of the total issue size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors. The stock of Fedbank Financial Services Ltd will be listed on the NSE and on the BSE. 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 quota and the reserved quota for the shareholders of its parent Federal Bank Ltd. Employees may get a discount to the IPO price, but that would be communicated separately in the application forms. The anchor portion, will be carved out of the QIB portion.

Lot sizes for investing in the IPO of Fedbank Financial Services 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 Fedbank Financial Services Ltd, the minimum lot size is 107 shares with upper band indicative value of ₹14,980. The table below captures the minimum and maximum lots sizes applicable for different categories of investors in the IPO of Fedbank Financial Services 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 Fedbank Financial Services Ltd IPO and how to apply?

The issue opens for subscription on 22nd November 2023 and closes for subscription on 24th November 2023 (both days inclusive). The basis of allotment will be finalized on 30th November 2023 and the refunds will be initiated on 01st December 2023. In addition, the demat credits are expected to happen on 04th December 2023 and the stock will list on 05th December 2023 on the NSE and the BSE. Fedbank Financial Services Ltd will be special for more than one reason. It will test the appetite for financial stocks general and for NBFC stocks in particular after a very long time. Let us now turn to the more practical issue of how to apply for the IPO of Fedbank Financial Services 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 Fedbank Financial Services Ltd

The table below captures the key financials of Fedbank Financial Services Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI (All ₹ figures are in crores)

There are few key takeaways from the financials of Fedbank Financial Services Ltd which can be enumerated as under

1. In the last 3 years, revenue growth has been steady and also growing. That is evident from the expansion of the revenue pool in sync with the growth in loan book, but more importantly, in the gradual expansion of the NII and the broadening of NPMs. The focus on collections has also helped the company keep NPAs under control.
    
2. Being a financial lending company, it is the net profit margin that would really matter and that has been over 14% showing strong traction in terms of NII growth and also in terms of NIM expansion. That trend is yet to show up in the numbers. Return on equity (ROE) at above 13% is better than the peer group financial companies.
    
3. The company has had below average sweating assets, but it may not too relevant to a financial loan provider. However, the ROA for the latest year at 1.99% is fairly attractive, but here again, the assumption is that the latest year data sustains.

Let us turn to the valuations part. On the latest year standalone EPS of 5.60, the stock is available in the IPO at a P/E of 25 times, which is attractive if the current growth rate can be sustained in profits. This year is likely to see sharp expansion of NIIs and NIMs, so the impact would be felt on the numbers and P/E should be look better for FY24. Also, the ROA at 1.99% is in a position to justify such valuations for the time being.

Fedbank Financial Services Ltd brings to the table some unique advantages to the table like focus on large underpenetrated markets, largely collateralized retail lending, diversified lending profile, leveraging of technology to make the growth model more scalable and strong capacity to underwrite risk. The valuation at 25X may not leave much on the table for the very short run, and hence investors must look at the Fedbank Financial Services Ltd IPO from a perspective of over a year. It can be an attractive bet then.