IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

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Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

CreditAccess Grameen Ltd / Equity Capital Markets

CreditAccess Grameen (CAG) is a financial institution focused on microfinance services in the underbanked and underpenetrated markets in India. According to press reports, CAG will start pre-marketing its IPO by the end of February or early March, seeking to raise up to Rs9 billion ($140 million).Investors seeking new exposure to the Indian microfinance sector are spoilt for choice through the upcoming IPOs of CAG and <a href="https://www.smartkarma.com/entities/26705" target="_blank" data-smartkarma-citation="entities:26705:1">Bandhan Bank Ltd (1366254D IN)</a>. CAG has top-quartile growth, profitability, and asset quality metrics in comparison to its peer group of microloan-focused small finance banks. Our overall view on a fundamental basis is that Bandhan is a better IPO play on the Indian microfinance sector than CAG due to:<ol><li>CAG’s net interest income growth of 55% and loan advances growth of 21% in FY17 is the second-highest in its peer group, behind Bandhan. CAG’s strong profitability metrics are due to a combination of a high net interest margin (NIM) and a low cost-to-income ratio. CAG’s NIM at 11.6% is the highest among its peers in 1H18.</li><li>CAG’s asset quality is good in the context of its state exposure. Demonetisation had an impact due to 100% loan book exposure to microloans and 87% gross loan book exposure to severely affected states such as Karnataka and Maharashtra. CAG’s GNPA ratio increased from 0.1% in FY16 to 7.7% in FY17. The GNPA ratio decreased to 5.4% in 1H18 which, except for Bandhan’s low GNPA, is in line with its peers.</li><li>Once the merger of <a href="https://www.smartkarma.com/entities/251" target="_blank" data-smartkarma-citation="entities:251:1">Bharat Financial Inclusion Limited (BHAFIN IN)</a> and IndusInd Bank is completed, CAG will be the only large NBFC-MFI. We believe CAG could start facing some challenges from the recent small finance bank-converts such as Janalakshmi and <a href="https://www.smartkarma.com/entities/22697" target="_blank" data-smartkarma-citation="entities:22697:1">Ujjivan Financial Services (UJJIVAN IN)</a>. The crux of the problem is that CAG would continue to operate under the NBFC-MFI restrictions, while these would largely not apply to the small finance banks. CAG can offset some of the increased competition from small finance banks by taking share from smaller NBFC-MFIs.</li></ol>We will provide a view of valuation once the IPO price range is announced.

CreditAccess Grameen (CAG) is a financial institution focused on microfinance services in the underbanked and underpenetrated markets in India. According to press reports, CAG will start pre-marketing its IPO by the end of February or early March, seeking to raise up to Rs9 billion ($140 million).Investors seeking new exposure to the Indian microfinance sector are spoilt for choice through the upcoming IPOs of CAG and Bandhan Bank Ltd (1366254D IN). CAG has top-quartile growth, profitability, and asset quality metrics in comparison to its peer group of microloan-focused small finance banks. Our overall view on a fundamental basis is that Bandhan is a better IPO play on the Indian microfinance sector than CAG due to:CAG’s net interest income growth of 55% and loan advances growth of 21% in FY17 is the second-highest in its peer group, behind Bandhan. CAG’s strong profitability metrics are due to a combination of a high net interest margin (NIM) and a low cost-to-income ratio. CAG’s NIM at 11.6% is the highest among its peers in 1H18.CAG’s asset quality is good in the context of its state exposure. Demonetisation had an impact due to 100% loan book exposure to microloans and 87% gross loan book exposure to severely affected states such as Karnataka and Maharashtra. CAG’s GNPA ratio increased from 0.1% in FY16 to 7.7% in FY17. The GNPA ratio decreased to 5.4% in 1H18 which, except for Bandhan’s low GNPA, is in line with its peers.Once the merger of Bharat Financial Inclusion Limited (BHAFIN IN) and IndusInd Bank is completed, CAG will be the only large NBFC-MFI. We believe CAG could start facing some challenges from the recent small finance bank-converts such as Janalakshmi and Ujjivan Financial Services (UJJIVAN IN). The crux of the problem is that CAG would continue to operate under the NBFC-MFI restrictions, while these would largely not apply to the small finance banks. CAG can offset some of the increased competition from small finance banks by taking share from smaller NBFC-MFIs.We will provide a view of valuation once the IPO price range is announced.

CreditAccess Grameen IPO Preview: Good but Not the Best

Bandhan Bank Ltd / Equity Capital Markets

Bandhan Bank is a commercial bank focused on microfinance services in the underbanked and underpenetrated markets in India. Bandhan is targeting a March IPO primarily to meet Reserve Bank of India’s (RBI) New Bank Licensing Guidelines to IPO three years from the date it began operations. According to press reports, Bandhan has started pre-marketing its IPO this week, seeking to raise at least Rs25 billion ($400 million) and potentially up to Rs45 billion ($710 million). This wide range would result in a market cap range of $4.8-8.6 billion.Bandhan has superior growth, profitability, and asset quality metrics in comparison to its peer group of new private sector banks and microloan-focused small finance banks. Our view is that the IPO is attractive and we would participate up to a valuation of FY18 P/B of 8x due to:<ol class=""><li>Bandhan’s net interest income growth of 30% in 1H18 is the second highest in its peer group. In terms of loan advances growth, Bandhan’s growth of 35% of FY17 and 15% in 1H18 is the highest among its peer group. Bandhan’s strong profitability metrics are due to a combination of a high net interest margin (NIM) and a low cost-to-income ratio. Bandhan’s NIM at 10.0% is the highest among its peers in 1H18.</li><li>As 91% of Bandhan's loan book is microloans, Bandhan avoided the ill-advised lending of the public and private sector banks. Demonetisation had an impact, with Bandhan Bank’s GNPA ratio increasing from 0.5% in FY17 to 1.4% in 1H18. However, Bandhan’s GNPA ratio in 1H18 is significantly below Equitas (5.8%) and Ujjivan (5.6%). Consequently, Bandhan has a low NPA ratio and top quartile asset quality in comparison to its peers.</li><li>Based on our estimates, at a raise of Rs25,000 million, Bandhan trades at a significant 117% premium to its peers on a 2018 P/B basis. However, Bandhan’s P/B valuation needs to be put in the context of its superior ROE and ROA metrics. At a raise of Rs25,000 million, Bandhan lies below the linear trend line for P/B vs ROE and Market cap/Assets vs ROA, i.e. trades at a discount to fair value for the ROE/ROA it delivers. Consequently, to trade at a fair value for the ROE/ROA it delivers, Bandhan needs to raise at most Rs33,000 million, implying an FY18 P/B of 8x.</li></ol>

Bandhan Bank is a commercial bank focused on microfinance services in the underbanked and underpenetrated markets in India. Bandhan is targeting a March IPO primarily to meet Reserve Bank of India’s (RBI) New Bank Licensing Guidelines to IPO three years from the date it began operations. According to press reports, Bandhan has started pre-marketing its IPO this week, seeking to raise at least Rs25 billion ($400 million) and potentially up to Rs45 billion ($710 million). This wide range would result in a market cap range of $4.8-8.6 billion.Bandhan has superior growth, profitability, and asset quality metrics in comparison to its peer group of new private sector banks and microloan-focused small finance banks. Our view is that the IPO is attractive and we would participate up to a valuation of FY18 P/B of 8x due to:Bandhan’s net interest income growth of 30% in 1H18 is the second highest in its peer group. In terms of loan advances growth, Bandhan’s growth of 35% of FY17 and 15% in 1H18 is the highest among its peer group. Bandhan’s strong profitability metrics are due to a combination of a high net interest margin (NIM) and a low cost-to-income ratio. Bandhan’s NIM at 10.0% is the highest among its peers in 1H18.As 91% of Bandhan's loan book is microloans, Bandhan avoided the ill-advised lending of the public and private sector banks. Demonetisation had an impact, with Bandhan Bank’s GNPA ratio increasing from 0.5% in FY17 to 1.4% in 1H18. However, Bandhan’s GNPA ratio in 1H18 is significantly below Equitas (5.8%) and Ujjivan (5.6%). Consequently, Bandhan has a low NPA ratio and top quartile asset quality in comparison to its peers.Based on our estimates, at a raise of Rs25,000 million, Bandhan trades at a significant 117% premium to its peers on a 2018 P/B basis. However, Bandhan’s P/B valuation needs to be put in the context of its superior ROE and ROA metrics. At a raise of Rs25,000 million, Bandhan lies below the linear trend line for P/B vs ROE and Market cap/Assets vs ROA, i.e. trades at a discount to fair value for the ROE/ROA it delivers. Consequently, to trade at a fair value for the ROE/ROA it delivers, Bandhan needs to raise at most Rs33,000 million, implying an FY18 P/B of 8x.

Bandhan Bank IPO Preview: Poor People, Rich Returns

India

Bandhan Bank Limited operates as a commercial bank. The Bank provides accounts checking, savings deposits, money market, mortgage, and term loans services, as well as card facilities and Internet banking services. Bandhan Bank serves customers in India.

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Bandhan Bank Ltd (BANDHAN IN)

CreditAccess Grameen IPO Preview: Good but Not the Best

CreditAccess Grameen (CAG) is a financial institution focused on microfinance services in the underbanked and underpenetrated markets in India....

Arun George

Bandhan Bank IPO Preview: Poor People, Rich Returns

Bandhan Bank is a commercial bank focused on microfinance services in the underbanked and underpenetrated markets in India. Bandhan is targeting a...

Arun George

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