Doms Industries Ltd IPO : SUBSCRIBE

DOMS
  • Date

    13th Dec, 2023 - 15thDec, 2023

  • Price Range

    Rs. 750 to Rs. 790

  • Minimum Order Quantity

    18

Company Overview

Incorporated in 2006, DOMS Industries Ltd. is engaged in making and selling stationery and art products. The company operates under the brand ‘DOMS’ and other brands/sub-brands like ‘C3’, ‘Amariz’, and ‘Fixyfix’. The company is known for creating a variety of high-quality products like pencils and mathematical instrument boxes. DOMS holds a significant market share of 29% for pencils and 30% for mathematical instrument boxes in FY23 in the domestic market. It offers a diverse range of products, including items for school, art materials, paper stationery, kits and combos, office supplies, hobbies and crafts, and fine art products. The company undertakes manufacturing operations in Umbergaon, Gujarat, and Bari Brahma in Jammu and Kashmir. The company has a special partnership with some companies in the FILA Group to distribute and market their products in South Asia which helps them to reach more customers in that region. Their products are available globally due to a strong distribution network that spans across 45 countries covering America, Africa, Asia Pacific, Europe, and the Middle East. Their domestic distribution network for general trade comprises over 120 super-stockists, and over 4,000 distributors along with a dedicated sales team of over 500 personnel covering more than 120,000 retail touch points in 3,500 cities and towns. Additionally, it caters to its consumers through modern trade and e-commerce.

Objects of the issue:

The net proceeds from the fresh issue will be used towards the following purposes:

  • To partly finance the cost of establishing a new manufacturing facility to expand its production capabilities for a wide range of writing instruments, watercolor pens, markers, and highlighters; and;
  • General corporate purposes.
Investment Rationale:

Leadership position in the Indian stationery and art material industry with the widest range of products

DOMS is the second largest player in India’s branded stationery and art products market, with a market share of around 12% by value in FY23. The company’s core products such as pencils and mathematical instrument boxes enjoy high market shares of 29% and 30% by value in FY23, respectively. They have a wide and differentiated product category, which includes over 3,800 SKUs as of September 30, 2023, and is spread across (i) scholastic stationery; (ii) scholastic art material; (iii) paper stationery; (iv) kits and combos; (v) office supplies; (vi) hobby and craft; and (vii) fine art products. In addition to being present across multiple product categories to cater to diverse demography, they have also ensured their products are available at various price points through its brands ‘DOMS’ and ‘C3’, each of which benefit from strong brand loyalty and unique market positioning. In FY21, FY22, and FY23, and the six months ended September 30, 2023, the company sold an aggregate of 1.48 billion units, 3.06 billion units, 3.93 billion units, and 2.2 billion units across product categories, respectively, and achieved gross product sales of Rs. 4,130.5 million, Rs. 6,930.9 million, Rs. 12,317.3 million, and Rs. 7,768.4 million, respectively. DOMS’ presence across multiple stationery categories and price points has enabled it to be the fastest-growing stationery and art material products company in India in terms of revenue over the period from FY20 to FY23.

Robust manufacturing infrastructure, with a focus on backward integration driving efficiencies

The company has 13 manufacturing facilities across Umbergaon, Gujarat, spread over approximately 34 acres of land and covers approximately 1.18 million square feet, making it one of the largest stationery manufacturing facilities in India. It undertakes end-to-end operations, from conceptualization to design, manufacturing, packaging, and distribution of products through its integrated operations at Umbergaon manufacturing facilities. DOMS fully integrated operations comprise procurement of raw materials, moulding, assembling, integration of sub-assemblies into finished products, quality control, and testing of finished products. The company’s facilities and storage depots are also strategically located to achieve a shorter time to market, greater cost competitiveness (through proximity to raw material suppliers), and responsiveness of its inventory position to changes in the portfolio market , thereby allowing them to cater to domestic and international markets more effectively. The backward integrated manufacturing process for its mathematical instrument boxes provided them with significant efficiencies, leading to market leadership position in this product category in a very short period. DOMS’s implementation of SAP as its ERP solution in 2015 has also helped them to standardize its processes and provide for planning, performance monitoring, and provision of real-time information to improve profitability.

Valuation and Outlook:

India has a thriving stationery and art materials industry, and there are several opportunities for the country to become an export hub for stationery products. The demand for stationery products is growing rapidly worldwide, driven by increased literacy rates and education levels. India can capitalize on this demand by producing a diverse range of stationery products at competitive prices. DOMS Industries has demonstrated commendable performance over the past three years, marked by significant growth in revenue and profitability. The company’s remarkable turnaround from losses in FY21 to substantial profits in FY22 has further propelled its financial standing. The company’s asset utilization, as indicated by return on assets (ROA) of 16.1% and an above-average asset turnover of 2.1x for the latest year, is commendable. On the valuation front, the IPO is priced at 30.15x FY24 annualised earnings which we believe is richly valued and sustaining the recent performance on profitability front would be critical in justifying the current valuations. Despite the fully priced P/E, there are notable advantages that DOMS Industries Ltd brings to the market, including market leadership, a strong brand presence, established international partnerships, and a foothold in the export market. We, therefore, recommend a “SUBSCRIBE” for listing gains rating to the issue.

India Shelter Finance Corporation Ltd IPO : SUBSCRIBE

india-shelter-ipo
  • Date

    13th Dec, 2023 - 15th Dec, 2023

  • Price Range

    Rs. 469 to Rs. 493

  • Minimum Order Quantity

    30

Company Overview

Headquartered in Haryana, India Shelter Finance Corporation Ltd. (ISFC) is a retail-focused affordable housing finance company with an extensive distribution network comprising 203 branches as of September 30, 2023, and a scalable technology infrastructure across its business operations and the loan life cycle. The company’s target segment is the self-employed customer focusing on first-time home loan takers in the low and middle-income group in Tier II and Tier III cities in India, and affordable housing loans, i.e., loans with ticket sizes lower than Rs. 2.5 million as per the criteria set out in the Refinance Scheme under the Affordable Housing Fund for the Financial Year 2021-22 issued by the National Housing Bank. The company primarily finances the purchase and self-construction of residential properties by first-time home loan takers through home loans and also offers loans against property. Its main focus is serving low and middle-income, salaried, and self-employed individuals, catering to their financial needs. With over 13 years of operations as a housing finance company, the company has a significant presence in the states of Rajasthan, Maharashtra, Madhya Pradesh, Karnataka, and Gujarat’s affordable housing finance market in India.

Objects of the issue:

The net proceeds from the fresh issue will be used towards the following purposes:

  • to meet future capital requirements towards onward lending; and
  • for general corporate purposes.
Investment Rationale:

Fastest growing AUM among Housing Finance Companies in India, with high yields along with granular and retail-focused portfolio

ISFC achieved AUM growth of 40.8% between FY21-23, registering the highest growth among housing finance companies in India. The strong growth rate reflects the effectiveness of its operational model and the ability to underwrite and serve customers in the targeted segments in Tier II and Tier III cities in India. The company maintains a focus on serving low and middle-income, salaried, and self-employed individuals, catering to their financial needs. They have gained domain knowledge and understanding of the specific financial circumstances and challenges faced by the low and middle-income customer segment, and their underwriting process is tailored towards assessing their creditworthiness. As of September 30, 2023, 100% of their loans catered to the retail segment. ISFC reported the second-highest total income-to-advance ratio at 16.8% compared to its peers and during the same period, it also reported the third-highest yield on advances at 14.9%. The company has been able to maintain a consistently high yield of more than 14% on its portfolio, driven by its commitment to deliver strong financial performance during the last three financial years.

Diversified borrowing profile with a demonstrated track record of reducing financing costs

The housing finance company focuses on maintaining a long-term and diversified borrowing profile by engaging with multiple lenders to ensure timely funding throughout the year. This approach mitigates the risk of relying on a single funding source and enables them to negotiate favourable borrowing costs. ISFC demonstrated the ability to improve its borrowing costs, even in environments characterized by rising interest rates. Their average borrowing costs reduced to 8.3% as of March 31, 2023, from 8.7% as of March 31, 2021. The company leverages its NHB borrowings to support its lending activities, ensuring a reliable and cost-efficient source of funding. In line with its commitment to diversification and innovative financing models, it has also embraced co-lending initiatives that involve partnering with other financial institutions to provide joint lending solutions. Furthermore, as a portion of its portfolio is eligible for priority sector lending, it has carried out securitization and direct assignment transactions, thereby transferring credit risk and ensuring the optimization of its results of operations.

Valuation and Outlook:

The housing finance sector of India comprises Public Sector Banks, Private Sector Banks, Housing Finance Companies, NBFCs, and other players (including foreign banks, Small Finance Banks, etc.), Of the total Rs. 31 trillion credit outstanding of the housing loans market, HFCs had the second highest market share of 34% in FY23. Within the player groups, HFCs are expected to register strong growth due to their higher market share, deeper penetration in tier-II and tier–III cities, and adequate liquidity support. ISFC’s profitability increased in FY23 owing to improved credit costs and an increase in interest yields. Going forward, borrowing costs are expected to stabilize in FY24 and the overall profitability of housing loans is still expected to be sustained, on account of higher interest income. The company plans to expand its branch staff, extend the branch network within existing geographical areas, and explore opportunities in adjacent markets for diversification. Their credit and risk management policies which is backed by technology and data analytics have helped them to maintain asset quality, leading to a fall in its GNPA to 1.0% as of September 30, 2023, compared to 2.8% as of September 30, 2022. Amongst its peer set, ISFC had the second-highest annualized RoA of 4.7% for the six months ended September 30, 2023. Furthermore, the company has posted steady growth in its top and bottom lines. As the lender will utilize the net proceeds of the fresh equity shares issue to meet future capital requirements towards lending, we are positive about the IPO. At the current adjusted P/BV multiple of 2.5x, we believe the company is attractively valued and advise investors to “Subscribe” to the issue from a long-term perspective.

Fedbank Financial Services Ltd IPO : SUBSCRIBE

Fedbank Financial Services Ltd IPO : SUBSCRIBE
  • Date

    22nd November, 2023 - 24th November, 2023

  • Price Range

    Rs. 133 to Rs. 140

  • Minimum Order Quantity

    107

Company Overview

Incorporated in 1995 in Kerala, Fedbank Financial Services Ltd. (FFSL) is a retail-focused NBFC, targeting MSMEs and emerging self-employed individuals (ESEIs) sector. The company has a well-tailored suite of products to match customer needs, including housing loans, small ticket loans against property (LAP), medium ticket LAP, unsecured business loans, and gold loans. The NBFC has registered third fastest AUM growth among NBFCs in the peer set in India, with a three-year CAGR of 33% during FY20-23 period and the fourth fastest annual AUM growth of 42% for three months ended June 30, 2023. As of June 30, 2023, the company’s AUM across various products stood at: 33.1% for gold loans, 25.3% for medium ticket LAP, 24.5% for small ticket LAP and housing loans and 15.8% for unsecured business loans. Additionally, FFSL is the fastest-growing gold loan NBFC in India among the peer set as of March 31, 2023, and had the fastest annual growth among gold loan NBFCs in India as of June 30, 2023. Its operations are spread across 17 states and union territories across India, with a strong presence in the southern and western regions. As of June 30, 2023, they covered 190 districts in 17 states and union territories in India through 584 branches. Due to its “Phygital” doorstep model, a combination of digital and physical initiatives for providing customised services to its customers across all products, the company can validate data and analyse the customers’ creditworthiness. Furthermore, their underwriting process has allowed them to manage defaults and NPAs across all its products.

Objects of the issue:

The net proceeds from the fresh issue will be used towards the following purposes:

  • Towards augmenting the company’s capital base to meet future capital requirements and onward lending.
  • The selling shareholders will receive the offer proceeds.
Investment Rationale:

Focus on retail loan products with a collateralised lending model targeting             individuals and emerging MSME sector

FFSL focuses on a collateralised lending model for its retail finance segment, targeting ESEI consumers and the emerging MSME sector. As of June 30, 2023, 86.2% of its total loan assets were secured against tangible assets. Its average ticket size was Rs. 0.13 million in the three months ended June 30, 2023. Out of the collateral for the medium ticket LAP and small ticket LAP, 77.4% of the collateral is self-occupied residential or commercial property as of June 30, 2023. As of June 30, 2023, the average LTV on its total loan assets with property collateral at the time of sanctioning the loan was 51.4%. The ESEI and MSME segment is largely unaddressed by lending institutions in India and FFSL’s products meet the specific requirements of its target customers with quick turnaround times and customised services for each customer’s unique needs.

Diversified funding profile with the advantage of lower cost of funds

FFSL’s ability to access diversified funding sources is a key contributor for their growth. They intend to continue diversifying their funding sources, identify new sources and pools of capital, and implement robust asset liability management policies to optimise their borrowing costs further and help expand the net interest margin. Their average cost of borrowing was 8.8% (annualised), 7.8%, 7.4%, and 8.3% for 1QFY24, FY23, FY22 and FY21, respectively. The company can access borrowings at a competitive cost due to their stable credit history, credit ratings, conservative risk management policies and strong brand equity. The NBFC has been rated “AA-” by CARE for its NCDs since 2022 and “AA-” by India Ratings and Research Private Limited for its NCDs and bank loans since 2018. FFSL is one of the only two long-term AA- rated players among the peer set, with a cost of borrowing less than 8.5% between FY19 and FY23. Its rating of “AA” and “AA-“ indicates resilient liability origination despite challenges faced by the Indian economy due to varied factors and the failure of other NBFC companies in India.

Valuation and Outlook:

NBFCs have shown remarkable resilience and gained importance in the financial sector ecosystem, growing from less than Rs. 2 trillion assets under management (AUM) at the turn of the century to Rs. 34 trillion at the end of FY23. Their share in the overall credit pie has increased from 12% in FY08 to 18% in FY23 and is projected to remain stable in FY24. By catering to under-banked, lower-income and mass-market customers who are unserved or underserved by banks, NBFCs have enhanced financial inclusion and expanded the market for formal financial services. FFSL has an edge over its peers as it has access to capital from its Promoter, Federal Bank. Additionally, they have grown their liability relationships from 23 lending institutions as of March 31, 2021, to 27 institutions as of June 30, 2023. Additionally, as of June 30, 2023, they have borrowed from 12 private sector banks (including its Promoter, Federal Bank), nine public sector banks, one NBFC, one foreign bank and four other entities (such as the Small Industries Development Bank of India). It has logged the third-fastest AUM growth amongst NBFC peers set in India, with a three-year CAGR of 33% during FY20-23 period. FFSL has also marked steady growth in its top and bottom lines over the last three years. Moreover, the NBFC has an effective underwriting capability due to its experienced underwriting team and established processes, which is likely to keep asset quality issues at bay going forward. On the valuation front, the issue is valued at a P/BV of 3.3x on the upper price band based on the FY23 book value. With most of the positives seemingly priced in, we advise investors to “SUBSCRIBE” to the issue for the benefit of listing gains.

Tata Technologies Ltd IPO : SUBSCRIBE

Tata Technologies Ltd IPO : SUBSCRIBE
  • Date

    22nd November, 2023 - 24th November, 2023

  • Price Range

    Rs. 475 to Rs. 500

  • Minimum Order Quantity

    30

Company Overview

Tata Technologies Ltd. is a leading global engineering services company offering product development and digital solutions, including turnkey solutions, to global original equipment manufacturers (“OEMs”) and their tier 1 suppliers. The company also leverages its deep domain expertise in the automotive industry to serve its clients in adjacent industries, such as aerospace and transportation and construction heavy machinery (“TCHM”). The company primarily provides outsourced engineering services and digital transformation services to global manufacturing clients which accounts for 80% of its revenue from operations for the fiscal year 2023. The company complements its primary services via products and education business. Through its Products business, the company resells third-party software applications, primarily product lifecycle management (“PLM”) software, and solutions, and provides value-added services such as consulting, implementation, systems integration, and support. The company’s education business provides “phygital” education solutions in manufacturing skills including upskilling and reskilling in relation to the latest engineering and manufacturing technologies to public sector institutions and private institutions and enterprises through curriculum development and competency center offerings through their proprietary iGetIT platform. Such complementary business comprises 20% of total revenue from operations for the fiscal year 2023. The company is a pure-play manufacturing focused Engineering R&D company, primarily focused on the automotive industry. The company’s automotive revenue attributable to the services segment comprised 88.7% of the revenue attributable to the primary services segment for fiscal year 2023. The company endeavors to create value for its clients by helping them develop products that are safer, cleaner and improve the quality of life for its end-customers. The company leverages its deep manufacturing domain knowledge to deliver value-added services to its clients in support of their digital transformation initiatives including product development, manufacturing, and customer experience management. In a world that is becoming increasingly complex with shortening product innovation timelines and rapid technological changes, the company’s globally distributed onshore-offshore service delivery capability and its diverse teams from different parts of the world having multiple skill sets, help the company to suitably address its client’s requirements and solve complex engineering problems for its clients in a real-time environment.

Objects of the issue:

The net proceeds from the fresh issue will be used towards the following purposes:

  • Achieve the benefits of listing the equity shares on the stock exchanges;
  • Carry out Offer for Sale of up to 95,708,984 equity shares by the selling shareholders.
Investment Rationale:

Deep expertise in the automotive industry

The company’s comprehensive portfolio of services for the automotive industry addresses the product development and enterprise optimization needs of traditional OEM’s and new energy vehicle companies, together with their associated supply chains. The company’s automotive ER&D services span the entire automotive value-chain and includes concept design and styling, tear down and benchmarking (“TDBM”), vehicle architecture, body engineering, chassis engineering, virtual validation, ePowertrain, electrical and electronics, connected, manufacturing engineering, test and validation and vehicle launch. In addition to the spectrum of discrete service offerings, the company also offers turnkey full vehicle development solutions for traditional internal combustion engine (“ICE”) powered vehicles, plug-in hybrids (“PHEV”) and battery electric vehicles (“BEV”) which have been developed over a period of 10 years. In this area, the company’s services extend from concept, detailed design and development, test and validation to the production launch of the vehicle. The company’s automotive domain expertise and deep understanding of its client requirements underpin the approach the company takes in helping its clients leverage digital technologies to optimize the manner in which they conceive, develop, manufacture, sell, and service new products.

Well-recognized brand with experienced promoter and management team

The company benefits from the strong track record, reputation, and experience of its promoter, Tata Motors Ltd., which is part of the Tata Group. The Tata Group is one of the leading business conglomerates in India, with a heritage of over 100 years, comprising more than 28 equity-listed companies across multiple verticals such as technology, steel, and automotive. The company’s promoter is one of the leading global automobile manufacturers in the world, providing integrated and smart e-mobility solutions to its customers in over 125 countries. With an employee base of over 81,800 as of March 31, 2023, the manufacturing facilities of the promoters of the company are located across India, the United Kingdom, and South Korea. Its promoter is the only OEM in India that offers an extensive range of mobility solutions, covering cars, utility vehicles, trucks, and buses. Its promoter has a strong global network of 90 subsidiaries, equity accounted associates, and joint ventures, including

JLR in the United Kingdom and Tata Daewoo in South Korea. Also, the company believes that they are well positioned to benefit from the Tata Group’s business priorities to increase investment in EVs, aerospace, and defense. In addition to benefiting from the high standards of corporate governance and brand value associated with the Tata Group, the company also has the opportunity to leverage and benefit from the Tata Group’s global network for exploring potential business opportunities and acquiring direct access to senior decision-makers at potential end clients.

Valuation and Outlook:

The Global ER&D Services market refers to the sum of ER&D expenditure by global capability centers (“GCCs”) and the ER&D expenditure outsourced to third-party engineering service providers (“ESPs”).  The ER&D spend outsourced to ESPs stood at USD 105-110 billion (Rs. 8,620-9,031 billion) in 2022 out of which Indian Service providers accounted for almost 24%. The Indian ESP market is expected to grow at a CAGR of 14-17%, and accounted for nearly 25% of the overall global outsourced ER&D spend of Rs. 9,031 billion in 2022. With the growth of the ESP market and rise in demand for autonomous and connected technologies driven by regulatory pressures for safety and cost considerations, OEMs are likely to maintain their commitment to providing improved and safer experiences to their clients through the integration of connected and autonomous technologies. Furthermore, in response to the escalating need to meet carbon emission targets, electrification is anticipated to take center stage in the automotive industry. Global automakers are planning substantial investments, estimated at USD 1.2 trillion (Rs. 99 trillion) through 2030, to develop and produce EVs, marking a significant shift away from traditional combustion engines. A similar shift is seen in India as the Government of India intends to have EV sales penetration of 30% for private cars, 70% for commercial vehicles, 40% for buses, and 80% for two and three-wheelers by 2030 due to the immediate focus on decarbonizing the transport sector. In order to bridge this gap and with the advent of industry 4.0, there is an increasing need to equip engineers and technical staff with emerging skill sets. According to Zinnov, the company is currently the only player uniquely positioned to address the needs of educational upgradation in India with its global partner ecosystem and system integration capabilities. The company has a track record of sustained Revenue/EBITDA/PAT growth which grew at a CAGR of 85.4%/112.8%/160.9% during the FY21-23 period, respectively. On the upper price band, the issue is valued at a P/E of 32.51x based on FY23 earnings which we feel is fairly valued. We, therefore, recommend a “Subscribe” rating for the issue.

Flair Writing Industries Ltd IPO : SUBSCRIBE

Flair Writing Industries Ltd IPO : SUBSCRIBE
  • Date

    22nd Nov, 2023 - 24th Nov, 2023

  • Price Range

    Rs. 288 to Rs. 304

  • Minimum Order Quantity

    49

Company Overview

Flair Writing Industries Limited (“Flair”) was incorporated on August 12, 2016 and is engaged in the manufacturing and distribution of writing instruments including pens, stationery products, and calculators. The company’s flagship brand “Flair” has enjoyed a market presence of over 45 years. Flair manufactures and distributes several brands in India and partners with various international brands in the writing instruments industry. The company’s products are sold under the “Flair” brand, their principal brands “Hauser” and “Pierre Cardin” and have recently introduced “ZOOX” in India. The company also contract manufactures writing instruments as an OEM for export and sale in India. They also provide customized corporate gifting products to their corporate customers. Flair manufactures pens and other products from 11 manufacturing plants located in Valsad, Naigaon (near Mumbai), Daman and Dehradun. In FY23, Flair Writing Industries sold more than 130.4 crore units of pens, of which 97.5 crore units (74.8%) of the pens were sold in India while the remaining 32.8 crore units (25.2%) were exported to other countries. Leveraging on their manufacturing capabilities and the existing customer base in the writing and creative instruments business, they have also diversified into manufacturing houseware products and steel bottles.

Objects of the issue:

The net proceeds from the fresh issue will be used towards the following purposes:

  • Setting up the new Valsad Unit – Rs. 56 crores;
  • Funding capital expenditure of the company and the subsidiary, Flair Writing Equipments Pvt. Ltd. (“FWEPL”) – Rs. 87 crores;
  • Funding working capital requirements of the company and the subsidiaries, FEWPL and Flair Cyrosil Industries Pvt. Ltd. (“FCIPL”) – Rs. 77 crores;
  • Repayment/pre-payment, in part or full, of certain borrowings availed by the company and their subsidiaries – Rs. 43 crores;
  • Offer for sale – Rs. 301 crores;
  •  General corporate purposes.
Investment Rationale:

One of the leading players in writing instruments industry with a diversified product range across varied price points

Flair is among the top three players in the overall writing instruments industry, with a revenue of Rs. 916 crores in FY23 and occupies a market share of approximately 9% in the overall writing and creative instruments industry in India, as of March 31, 2023. Flair is also among the top two organized players which have seen faster growth in revenue as compared to the overall writing and creative instrument industry. The company grew its business at a CAGR of approximately 14% during FY2017-23 period whereas the industry grew at a CAGR of 5.5%. Flair also has the most comprehensive and extensive product portfolio across various price points and consumer segments including pen products, creative and stationery products, calculators. Overall, Flair offered 727 different products at prices ranging between Rs. 5 and Rs. 3,000. The company focuses on providing quality products to consumers, including students, professionals and offices. The company’s goal is to cater to consumers in their target segments, from writing instruments priced between Rs. 5 and Rs. 15 (“Mass Segment”), priced between Rs. 16 and Rs. 100 (“Mid-premium Segment”) and priced above Rs. 100 (“Premium Segment”). To enhance their brand presence in terms of product pricing, Flair focuses on competitive pricing and aggressive marketing for their Mass Segment and focus on brand building and product differentiation in their Mid-premium Segment and Premium Segment.

Largest pan-India distribution network and strong international presence with focus on exports and partnership

In FY23, Flair had the largest distributor/dealer network and wholesale/retailer network in the writing instruments segment in India, comprising approximately 7,700 distributors/dealers and approximately 315,000 wholesalers/retailers. As of H1FY24, they had 131 super-stockists in India (including Flair Sporty), supported by their sales and marketing employees, and a retail presence in 2,424 cities, towns, and villages in India. Their multi-tiered nationwide domestic sales and distribution network enables their products to reach a wide range of consumers and helps to ensure effective market penetration across geographies. Flair has also established long-term relationships with international companies for which they manufacture and distribute or act as a contract manufacturer. Their relationship with their five largest customers (in terms of revenue contribution) located in the US, UAE, Yemen, Japan, and Colombia averaged approximately 15 years. Their top five export countries were the US, UAE, Yemen, Colombia, and Japan, which contributed 61.19% of the revenue from exports during FY23. As of H1FY24, they had relationships with 54 international distributors for the distribution and sale of their products in more than 77 countries.

Valuation and Outlook:

Flair Writing Industries Ltd. exhibits a commendable track record of robust and consistent financial performance, showcasing impressive growth across key financial metrics from FY21 to FY23. With a notable CAGR of 77.9%, 992.8% and 133.2% in their topline, PAT, and EBITDA, respectively, the company has positioned itself as a frontrunner in the market. The company’s rapid revenue growth, aligned with the geometric expansion in demand, is a testament to its successful market penetration and responsiveness to increased demand, particularly in the school sector. Flair leverages its deep insights into the writing products business, coupled with a diversified product range in a segment characterized by perennial demand. The scale advantage allows the company to maintain cost competitiveness, further solidifying its market position. Additionally, the strategic focus on the home needs sector is anticipated to further bolster sales, underlining Flair’s adaptability to diverse market segments. As an stationery entity, the net profit margin exceeding 10% underscores the company’s sound financial health. The RoE surpassing 31.2% in the latest year is indicative of efficient capital utilization and robust asset turnover ratio of 1.5 implies above-average asset efficiency. The IPO offers an attractive proposition, particularly considering the EPS of 12.66, resulting in a P/E ratio of 24.01x. The valuation becomes compelling under the assumption of sustained profit growth and when factoring in the intrinsic value of the brand and premium valuation of the FMCG space. In summation, Flair Writing Industries Ltd. emerges as a relatively secure investment opportunity with appealing valuations and we advise a “SUBSCRIBE” rating with a medium to long-term horizon.

Gandhar Oil Refinery India Ltd IPO : SUBSCRIBE

Gandhar Oil Refinery India Ltd IPO : SUBSCRIBE
  • Date

    22nd Nov, 2023 - 24th Nov, 2023

  • Price Range

    Rs. 160 to Rs. 169

  • Minimum Order Quantity

    88

Company Overview

Gandhar Oil Refinery India Ltd. is a leading manufacturer of white oils by revenue, with a growing focus on the consumer and healthcare industries. As of June 30, 2023, the company’s product suite comprised over 440 products, primarily across the personal care, healthcare and performance oils (PHPO), lubricants and process and insulating oils (PIO) divisions under the Divyol brand. These products are used as ingredients by leading Indian and global companies in end-user industries such as consumer, healthcare, automotive, industrial, power, tyre, and rubber sectors. The company was India’s largest manufacturer of white oils by revenue in FY23, including domestic and overseas sales, and is one of the top five players globally in terms of market share in CY22. As of June 30, 2023, the company’s products were sold in over 100 countries across the globe. It catered to over 3,500 customers in FY23, including leading Indian and global companies such as Procter & Gamble, Unilever, Marico, Dabur, Encube, Patanjali Ayurved, Bajaj Consumer Care, Emami and Amrutanjan Healthcare, supported by its global supplier base and manufacturing operations in India and the United Arab Emirates. The company currently operates three manufacturing facilities, with two plants in Western India and one in Sharjah, United Arab Emirates, spread across 1,28,454 square meters to cater to domestic and global operations. As of June 30, 2023, the manufacturing facilities’ combined annual production capacity was 522,403 kL.

Objects of the issue:

The net proceeds from the fresh issue will be used towards the following purposes:

  • Investment into Texol by way of a loan for financing the repayment/pre-payment of a loan facility availed by Texol from the Bank of Baroda;
  • Capital expenditure through purchase of equipment and civil work required for expansion in  capacity of automotive oil at Silvassa Plant;
  • Funding working capital requirements;
  • General corporate purposes.  
Investment Rationale:

Dominant market share in the Indian white oils market, with a focus on consumer and healthcare industries

The global white oil market is oligopolistic, with a few highly active players and the top 10 players accounting for 40-45% market share. Gandhar Oil Refinery was India’s largest manufacturer of white oils by revenue in FY23, including domestic and overseas sales and was one of the top five players globally in terms of market share in CY22. As of June 30, 2023, the company offered a diverse portfolio of over 440 products, primarily across the PHPO, lubricants and PIO divisions. The products form a major component by volume for various consumer and healthcare end-industry products such as cosmetics, skin care products, ointments, over-the-counter and other medicines, lubricants,     processing oils and insulating oils. Further, the company has significant overseas business spanning over 100 countries across the Asia-Pacific region (APAC), Europe, Africa and the Americas as of June 30, 2023. In addition to the scale of operations, market share, overseas sales, range of product offerings and diverse manufacturing capabilities, the company differentiate itself from competitors based on a strategic focus on products for the consumer and healthcare end-user industries, which accounted for 30.2% and 7.9%, respectively, of pro forma consolidated revenue from finished goods sold in FY23. With focus on the PHPO business division and consumer and healthcare end-user industries, the company looks well-positioned to continue increasing margins and growing business.

Comprehensive customer and supplier base of leading oil companies along with competitive pricing bodes well for business

The leading consumers and pharma manufacturers prefer a long-term relationship with established suppliers of specialty oils, as spot purchases from distributors are cost inefficient and lead to erosion in margins. The company has developed sticky relationships with customers by offering customized products and addressing their stringent quality requirements. The company has catered to an extensive customer base of 3,529 Indian and global companies during FY23. The customers in the PHPO division include P&G, Unilever, Marico, Emami, Bajaj Consumer Care, Encube, Patanjali Ayurved, Dabur, Amrutanjan Healthcare, Supreme Petrochem and other leading Indian manufacturers of  

pharmaceutical products. The customers for the PIO division include Toshiba Transmission and Distribution Systems (India) and other leading manufacturers of transformers and power distribution and transmission companies. Gandhar Oil Refinery has long-standing relationship with several key customers which has helped to maintained high customer loyalty. The company‘s strong customer relationships and certifications obtained by its manufacturing facilities demonstrate the strength of reputation, quality and consistency of products, thereby providing significant competitive advantage over new entrants in the industry. Further, Gandhar Oil Refinery’s business strength lies in its global supplier base, which comprises some of the world’s largest global and Indian oil companies. The company procures most of its raw materials from South Korea and the Gulf Co-operation Council region. The key suppliers in these regions include SK Lubricants, S-Oil, GS Caltex and other global base oil suppliers. Over the years, the company has transitioned to directly purchasing raw materials from base oil suppliers from using intermediaries earlier, resulting in increased efficiency, lower costs and improved credit terms.

Valuation and Outlook:

Gandhar Oil Refinery is a leading manufacturer of white oils by revenue, with a growing focus on the consumer and healthcare industries. The company was India’s largest manufacturer of white oils by revenue in FY23, including domestic and overseas sales, and is one of the top five players globally in terms of market share in CY22. The company operates three strategically located manufacturing facilities, with two plants in Western India and one in Sharjah, UAE which are easily connected to global oil supply routes and major markets. The company has a track record of sustained pro forma consolidated revenue from operations which grew at a CAGR of 49.7% during FY21-23. This was the highest CAGR among selected specialty oil peers and the second-highest CAGR growth among selected specialty chemical peers. The percentage of customers placing repeat orders in the FY23, FY22 and FY21 was 68.9%, 66.4% and 59.3%, respectively, demonstrating customer satisfaction and value of the company’s products. Overall, healthy financial performance, expansion of product portfolio, improvement of return ratios, and growing overseas business are key growth drivers for the company’s performance in the long term. The issue is valued at a P/E of 7.1x on the upper price band based on FY23 earnings, which is fairly valued. We, therefore, recommend an   “SUBSCRIBE” rating for the issue.

Indian Renewable Energy Development Agency Ltd IPO : SUBSCRIBE

Indian Renewable Energy Development Agency Ltd IPO : SUBSCRIBE
  • Date

    21st Nov, 2023 - 23rd Nov, 2023

  • Price Range

    Rs. 30 to Rs. 32

  • Minimum Order Quantity

    460

Company Overview

Incorporated in 1987, IREDA is an NBFC established with the objective of providing innovative financing in RE and energy efficiency/conservation and environmental technologies. IREDA is the largest pure-play green financing NBFC in India and is a wholly owned Government of India (GoI) enterprise under the administrative control of the Ministry of New and Renewable Energy (MNRE). The company is registered with the Reserve Bank of India (RBI) as a Systemically Important Non-Deposit-taking Non-Banking Finance Company (a NBFC-ND-SI) with Infrastructure Finance Company (IFC) status. IREDA provides a comprehensive range of financial products and related services from project conceptualisation to the post-commissioning stage in RE projects and equipment manufacturing. It provides financial assistance through fund-based and non-fund-based facilities, including project finance, short-term loans, debt refinancing, performance guarantees and letters of comfort. The company mainly finances projects in the wind, hydro, solar, and bio-energy sectors and emerging areas, such as battery-powered vehicles. They also provide line of credit to other NBFCs for on-lending to RE and EEC projects. In addition, they provide loans to government entities and financing schemes for RE suppliers, manufacturers, and contractors.

Objects of the issue:

The net proceeds from the fresh issue will be used towards the following purposes:

  • Towards augmenting the company’s capital base to meet future capital requirements and onward lending.
  • The selling shareholders will receive the offer proceeds.
Investment Rationale:

Consistent track record geared towards high-quality assets, diversified asset book and stable profitability

The company has an established track record of consistent growth in the loan book and stable profitability in the RE financing space in India. As on March 31, 2023, its term loans outstanding stood at Rs. 470.8 billion, compared to Rs. 278.5 billion as on March 31, 2021, increasing at a CAGR of 30% during the period. As of September 30, 2022 and September 30, 2023, the term loans outstanding were Rs. 337.8 billion and Rs. 475.1 billion, respectively. It has maintained a diversified asset book spread across sectors and geographies along with this growth. Regarding geographical diversification of the company’s asset base, they have term loans outstanding across 23 states and five Union Territories in India as of September 30, 2023. The quality and stability of the loan book are demonstrated through the fact that its loans to RE power-generating projects in some sectors have already been commissioned and started generating operating income. Of the term loans outstanding as of September 30, 2023, 37.9% had a residual maturity profile of less than three years, 26.3% had a maturity profile between three and seven years, and 35.8% had a maturity profile of more than seven years.

Strategic role in the government’s initiatives in the renewable energy sector

Since its inception, it has been closely involved in developing and implementing various policies and schemes for structural and procedural reform in the RE sector. IREDA has served as the implementing agency for the following key MNRE policies and schemes: (i) National Programme on High Efficiency Solar PV Modules under the Production Linked Incentive Scheme (Tranche I), for which the financial outlay over a five-year period is Rs. 45 billion; (ii) Central Public Sector Undertaking (CPSU) Scheme Phase-II for setting up 12,000 MW grid-connected solar PV power projects with Viability Gap Funding (VGF) support of Rs. 858 million for self-use or use by Government or Government entities, of both Central and State Governments; (iii) Solar and wind GBI Schemes, with the wind GBI scheme having a total commissioned capacity of 13,624.88 MW and a budget of Rs. 12.14 billion being allocated for FY24, and the solar GBI scheme, under which 72 solar projects with total capacity of 91.8 MW were set up across 13 states, as of March 31, 2023; and (iv) National Clean Energy Fund Refinancing Scheme. The company has expanded its financing services in line with the RE priorities of the GoI, such as solar, wind, hydropower, biomass, and co-generation.

Valuation and Outlook:

Power sector financing NBFCs primarily focus on financing power generation, transmission, distribution, and other activities. These NBFCs provide funds for various types of power projects, including thermal power plants, transmission lines and renewable energy projects such as solar power plants, wind farms, hydroelectric projects, bioenergy energy projects and clean energy generation. As of FY23, the outstanding credit of key power financing NBFCs reached around Rs. 9,399 billion, indicating a CAGR of nearly 10% over FY19. In FY24, power-financing NBFCs are expected to continue this growth momentum and is likely to be driven by an increase in power demand, rising population, renewable integration, and the country’s sustainability goals. IREDA plans to continue launching financing products to meet the evolving needs of RE developers. Its lower average cost of borrowing enables competitive pricing of the financial products, enabling it to grow business, attract quality borrowers and optimise profitability. The company is India’s largest pure-play green financing NBFC and intends to leverage this position to raise green or sustainable bonds in international and domestic markets. As a result of its concerted approach to recovery, they have closed or upgraded net 18 non-performing project loan accounts in FY23, with recovery of Rs. 2,024.3 million. The NBFC has the best asset quality amongst peers, with its GNPA ratio at 3.13% at the end of September 2023 as compared to 3.14% for REC and 3.67% for PFC. As the lender will utilise the net proceeds of the fresh equity shares issue to augment its Tier-I capital base, its capital adequacy will enhance and lead to a stable leverage position. At the current P/BV multiple of 1.2x, we believe the company is attractively valued and advise investors to “Subscribe” from a medium to long-term perspective.

ASK Automotive Ltd IPO : SUBSCRIBE

ASK Automotive Ltd IPO : SUBSCRIBE
  • Date

    7th Nov, 2023 - 9th Nov, 2023

  • Price Range

    Rs. 268 to Rs. 282

  • Minimum Order Quantity

    53

Company Overview

Incorporated in 1989 as a manufacturer of brake shoe products for two-wheelers (2Ws), ASK Automotive has since diversified its operations to include offerings such as (i) AB systems and (ii) aluminium lightweight precision (“ALP”) solutions. (iii) wheel assembly to 2W original equipment manufacturers (OEMs); and (iv) safety control cables (“SCC”) products. The company is a prominent player for 2W OEMs in India, with a market share of 9% in FY23 in production volume (Source: CRISIL Report). The company is the largest manufacturer of brake-shoe and advanced braking (“AB”) systems for two-wheelers in India, with a market share of approximately 50% in FY23 in terms of production volume for OEMs and the branded independent aftermarket (“IAM”), on a combined basis. They have in-house design and engineering capabilities that enable them to deliver complex, precision components and solutions with a focus on quality. The company supplies its products to the top six 2W OEMs (in terms of production volume and value in FY23) in India, the largest motorised 2W market in the world, with domestic sales of 16.25 million units during FY23 (Source: CRISIL Report). In FY22, they commenced commercial supplies to 2W EV OEMs in India, including TVS Motor, Ather Energy, Hero MotoCorp, Greaves Electric Mobility, Bajaj Auto and Revolt Intellicorp. They have long-standing relationships with all six of their top 2W OEM customers ranging from 16 years to 30 years.

 

Objects of the issue:

The net proceeds from the issue will be used towards the following purposes:

  • The selling shareholders will receive the entire offer proceeds.
Investment Rationale:

Established manufacturer of safety systems and critical engineering solutions to India’s largest OEMs

India is among the largest exporters of 2Ws in the world. The 2W market constituted approximately 76% by production volume of the total Indian automotive market in FY23, comprising 2Ws, 3Ws, PVs and CVs. The company supplies its products to 2W OEMs in India, the largest motorised 2W market in the world, with domestic sales of 16.25 million units in FY23. The company has a comprehensive portfolio of EV and powertrain-agnostic products and supplies safety systems and critical engineering solutions to nine 2W EV OEMs in India. In addition, it is developing capabilities for product migration from steel and plastics to aluminium for lightweight and thermal management for e-powertrain and e-powertrain products. Due to the capital-intensive nature of the business and heavy dependence on complex technology, machinery and systems, the market may be difficult for new entrants due to the high entry barriers.

Technology and innovation-driven manufacturing process, with an extensive suite of systems and solutions for EV and ICE sectors

ASK Automotive entered the EV sector in FY21 to complement its existing systems and solutions for the ICE sector. The company has developed technologically advanced products based on customer specifications in the EV sector, including e-powertrain pulleys for a 2W EV customer to help achieve lightweight for its vehicles. The global trend toward vehicle electrification provides them with growth opportunities in the EV sector. As a technology and innovation-driven company, they are well positioned to capture market share in the growing EV sector. The increased adoption of electrification is expected to result in an additional focus on lightweight, which is likely to increase usage of ALP solutions in the 2W, 3W, CV and PV sectors, increasing the average quantity of aluminium used per vehicle in India for new product innovations for use in EVs. This will enable it to improve the content of its products, systems and solutions per vehicle, which it aims to achieve through the comprehensive suite of powertrain-agnostic products.

Valuation and Outlook:

The advanced braking systems market – including the sale to domestic OEMs, aftermarket, and export – is estimated at Rs. 54,299 million in FY23. Advanced braking systems are expected to grow at 8.9% CAGR over the next five years to reach Rs. 83,202 million. The market would be majorly driven by the fast-growing passenger vehicle segment, followed by 2W and CVs. The PLI scheme for the automobile industry will likely propel exports, thereby supporting demand for auto components in India. Almost all vehicle segments would log robust production growth between FY23 and FY28. The company’s experience in developing complex critical safety systems and solutions has led to established relationships with several customers. The component manufacturer has served the top six 2W OEMs (in terms of production volume and value for FY23) for more than 16 years as of June 30, 2023. ASK Automobile’s profit grew at a CAGR of 28.6% during the FY21-23 period to reach Rs. 6,037.4 million in FY23, demonstrating robust financial performance and positioning them for future growth. The company’s strategic focus to strengthen its position in the EV market and leverage its experience in developing AB systems and ALP solutions is helping them develop new products for OEMs. This has enabled the company to achieve further weight reduction, enhanced performance and improved vehicle acceleration via high-performance driveline products and improved efficiencies, positioning it firmly in the market. On the valuation front, the issue is valued at a P/E of 39.8x on the upper price band based on Q1FY24 annualised earnings. We recommend a “SUBSCRIBE” for the benefit of listing gains for the issue, as most of the positives seem priced in the offering.

Protean eGov Technologies Ltd IPO : SUBSCRIBE

Protean eGov Technologies Ltd IPO : SUBSCRIBE
  • Date

    6th Nov, 2023 - 8th Nov, 2023

  • Price Range

    Rs. 752 to Rs. 792

  • Minimum Order Quantity

    18

Company Overview

Protean eGov Technologies Ltd (PETL) is one of the leading IT-enabled solutions companies in India engaged in conceptualizing, developing and executing nationally critical and population-scale greenfield technology solutions. The company works with the government and has gained extensive experience creating digital public infrastructure and developing innovative citizen-centric e-governance solutions. The company was initially set up as a depository in 1995 and made a systemically important national infrastructure for capital market development in India. It has been the chief architect and implementer for some of the most critical and large-scale technology infrastructure projects in India. Since its inception and as of June 30, 2023, it has implemented and managed 19 projects spread across seven ministries and autonomous bodies, ushering change in the public delivery of services. Over the years, the company has successfully adapted to technology advancements through continuous investments in new technologies. The company also has domain knowledge for various industries that allow it to develop functionalities that address the specific requirements of end-users, businesses and public entities.

Objects of the issue:

The net proceeds from the issue will be used towards the following purposes:

  • The selling shareholders will receive the entire offer proceeds.

 

Investment Rationale:

Pioneer and market leader in universal, citizen-centric, population-scale e-governance solutions

The company is among India’s leading IT-enabled e-governance service providers in terms of operating income and profitability in FY23 and among the few players in the country which are working towards the creation of open digital ecosystems. Since its inception and as of June 30, 2023, it has developed and implemented 19 projects across seven ministries across India. PETL’s market share has been 45% in PAN issuance, 58% in TIN, 94% in NPS and 100% in Atal Pension Yojana (APY). It has embraced an impact-weighted framework to guide all business decisions with a focus on the Environment, Social and Governance framework. The company also has experience implementing and managing population scale critical solutions. PETL are amongst the few private players in India in the e-governance space working towards the achievement of the Digital India initiative and creation of open digital ecosystems by leveraging open source technologies across a variety of sectors such as e-commerce, mobility, healthcare, agriculture and education, amongst others. The company focuses on building a value system, driving it to contribute towards a sustainable and responsible future.

Expertise in securing, scaling and advancing the technology infrastructure

PETL has a competitive edge as it has invested in technology platforms to increase the operating leverage while ensuring scalability, improved functionality and driving innovation. These investments have also helped to provide clients and other stakeholders with bespoke services. The company’s market-first innovations have been implemented across various sectors and products, such as TIN in taxation pilot infrastructure for GST, laying the foundation for a unified tax accounting system in India. PETL actively contributes to and supports open digital building blocks using open-source technology and protocols that power ONDC for use cases in sectors like e-commerce, mobility and available finance. The company has developed scalable platforms by adopting a differentiated technology-centric approach focusing on increasing security and risk mitigation to help drive growth. Additionally, PETL platforms require limited capital expenditure to scale when adding new offerings or when volumes increase, allowing them to offer seamless and efficient services to users. To ensure project scalability, the company has deployed techniques like multi-tasking, multi-threading, multi-processing, and caching through advanced automation tools, monitoring tools, backup methodologies and a relational database management system. PETL has also adopted secure protocols that include multi-zone and three-tier architecture, 128/256-bit encryption, dual firewalls for core and perimeter and an intrusion prevention system. Logs for its firewalls and intrusion prevention system are reviewed promptly, with exceptions immediately escalated. The company also implemented a business continuity management system to establish, manage, maintain and continually improve business continuity capabilities. 

Valuation and Outlook:

PETL has successfully adapted to technology advancements through continuous investments in new technologies and capabilities and by developing sophisticated technology architecture. Their domain knowledge for various industries has allowed them to create functionalities that address the requirements of end-users, businesses and public entities. PETL clients benefit from its delivery model, significant experience across various technologies, industry knowledge, project management expertise and proprietary software engineering tools. The company was a pioneer in the e-governance sector in terms of profitability, operating income, and operating profit in FY23. It is a professionally managed company led by an experienced senior management team whose expertise and industry experience have helped it grow operations and innovate services. The company has a track record of sustained revenue and PAT growth, growing at a CAGR of 10.9% and 7.8% during the FY21-23 period. Further, building capability around data analytics, healthy financial performance, diversifying offerings with a focus on new sectors and expanding into more contemporary geographies are key growth drivers for the IT company’s performance in the long term. The issue is valued at a P/E of 29.9x on the upper price band based on FY23 earnings, which we feel is fairly valued. We, therefore, recommend an SUBSCRIBE rating for the issue.

ESAF Small Finance Bank Ltd IPO : SUBSCRIBE

ESAF Small Finance Bank Ltd IPO : SUBSCRIBE
  • Date

    3rd Nov, 2023 - 07th Nov, 2023

  • Price Range

    Rs. 57 to Rs. 60

  • Minimum Order Quantity

    250

Company Overview

Incorporated in 1995, the promoter group ESAF Financial Holdings Private Ltd. was granted the RBI In-Principle Approval to establish a Small Finance Bank (SFB) on October 7, 2015. Later, the bank was incorporated as ‘ESAF Small Finance Bank Limited’ on May 5, 2016, in Thrissur, Kerala. Subsequently, it commenced business as a small finance bank on March 10, 2017. It is included in the second schedule to the RBI Act, pursuant to a notification dated November 12, 2018, issued by the RBI. ESAF is an SFB focusing on unbanked and under-banked customer segments, especially in rural and semi-urban centres. The bank’s advances comprise (a) Micro Loans, which comprise Microfinance Loans and Other Micro Loans; (b) retail loans, which include gold loans, mortgages, personal loans, and vehicle loans; (c) MSME loans; (d) loans to financial institutions; and (e) agricultural loans. Its liability products comprise current accounts, savings accounts, term deposits and recurring deposits. It has a network of 700 banking outlets (including 59 business correspondent-operated banking outlets), 767 customer service centres (which are operated by its business correspondents), 22 business correspondents, 2,116 banking agents, 525 business facilitators and 559 ATMs spread across 21 states and two union territories, serving 7.15 million customers as at June 30, 2023. While the bank’s operations are spread across India, its business is concentrated in South India, particularly in Kerala and Tamil Nadu. As at June 30, 2023, 62.4% of its banking outlets are located in South India (including 43.4% in Kerala and 13.9% in Tamil Nadu), 73.1% of its gross advances are from customers in South India (including 43.5% from Kerala and 22.1% from Tamil Nadu), and 86.9% of its deposits are from banking outlets in South India (including 80.0%  from Kerala and 3.4% from Tamil Nadu). The SFB use business correspondent entities to source and service customers for Micro Loans. Its business correspondents also source customers for mortgage loans, vehicle loans, MSME loans, agricultural loans and select deposit products. In addition, their business correspondents are responsible for sourcing and servicing their banking agents. Its business model focuses on the principles of responsible banking, providing customer-centric products and services through the innovative application of technology.

Objects of the issue:

The net proceeds from the fresh issue will be used towards the following purposes:

  • To augment the Bank’s Tier-1 capital base to meet future capital requirements.

 

Investment Rationale:

Primary focus on rural and semi-urban banking franchise

ESAF SFB mainly focuses on providing loans to customers in rural and semi-urban centres.  Its customers in rural and semi-urban centres (combined) have increased from 3.0 million as at March 31, 2021, to 3.9 million as at March 31, 2023, and further increased to 4.1 million as at June 30, 2023. As at June 30, 2023, its gross advances in rural and semi-urban centres (combined) were Rs. 90,951.76 million, representing 63.0% of the gross advances. As at June 30, 2023, 4.1 million of the customers were in rural and semi-urban centres (combined), representing 56.9% of the total customers, and the number of banking outlets in rural and semi-urban centres (combined) was 502, representing 71.7% of its entire banking outlets. Since April 2020, the bank has considerably expanded the number of states and territories of operations. In FY21, they expanded their operations to Meghalaya, Uttar Pradesh, Haryana, Tripura and Chandigarh by opening banking outlets and/or appointing business correspondents for these states/union territories. In FY22, the bank expanded its operations to Uttarakhand by establishing a business correspondent for that state. In FY23, they opened branches in Tripura and Uttarakhand for the first time. The SFB intends to deepen its distribution within the states and union territories it operates by opening additional branches, having business correspondents open more customer service centres, entering into relationships with new business correspondent entities and business facilitators and adding ATMs.

Customer connections driven by its customer-centric products and servicing other non-financial services

ESAF SFB’s products and services are designed to meet the various lifecycle needs of customers such as home loans, clean energy product loans, loans for agricultural activities, loans against property, personal loans, education loans, gold loans and vehicle loans. An example of its customer-centric approach is that its Micro Loans can be repaid weekly, fortnightly or monthly based on customer preferences. As at June 30, 2023, 55.3% of its Micro Loan customers repaid their loans weekly. In addition to providing financial services, their business correspondents undertake various non-financial services, including conducting financial literacy programmes, livelihood programmes, entrepreneurship training programmes and community engagement programmes. The bank recently launched three new loan products to assist their customers during the COVID-19 pandemic: (1) Income Generation Loan Top Up, which is a pre-approved loan and a variant of the Income Generation Loan and is targeted at customers who have an existing Income Generation loan; (2) Utdhan Loan Series 3 – Covid Care Loan, which was tailor-made to support the financial needs of customers adversely affected by the COVID-19 pandemic; and (3) Pratheeksha Kiran Loan, which was mainly for the restoration of livelihoods and households of customers impacted by the pandemic. Due to its customer-centric products and processes, they have high customer retention rates.

Valuation and Outlook:

India’s financial inclusion has improved significantly from 2014 to 2021 as the adult population with bank accounts increased from 53% to 78% (Source: Global Findex Database) due to the Indian government’s efforts to promote financial inclusion and the proliferation of supporting institutions. To promote financial inclusion, the Indian banking industry has seen several changes in recent years. NBFCs such as Bandhan and IDFC received permission to set up universal banks. Also, a few microfinance companies, a local area bank, an NBFC, and one urban co-operating bank have received permission to set up small finance banks. Despite its larger contribution to GDP of 47%, the rural segment’s share in credit remains relatively low at around 8-9% of the overall credit outstanding as of March 31, 2023. This provides a vast market opportunity for SFBs and other players present in the segment. With their microfinance experience, SFBs can manage local stakeholders and maintain operational efficiency. SFBs’ cost of funds is substantially low as they are allowed to raise CASA deposits. This will also help it to lend at more reasonable rates to its customers, enhancing its cross-sell opportunity in terms of asset products, insurance, etc. ESAF SFB was the fifth largest SFB in India in terms of AUM as of June 30, 2023. Amongst the SFBs, ESAF posted the fastest AUM CAGR of 39% over FY2021-23 period. The SFB’s capital adequacy ratio, which is the ratio of capital to risk-weighted assets and current liabilities, as at June 30, 2023, was 20.6%, which is the best asset quality amongst comparable peers as of June 30, 2023. As the lender will utilise the net proceeds of the fresh equity shares issue to augment its Tier-I capital base, its capital adequacy will enhance and lead to a stable leverage position. At the current P/BV multiple of 1.6x, we believe the company is attractively valued and advise investors to “Subscribe” from a medium to long-term perspective.