Capital Small Finance Bank IPO: Invest or Not?

Credited to be the first Small Finance Bank (SFB) company in India, Capital Small Finance Bank started operations in the sector in 2016. With one of the lowest credit costs among its peers, Capital SFB has submitted a Draft Red Herring Prospectus (DRHP) to bring an IPO in 2024. The initial public offering will open for subscription on 7 February and close on 9 February 2024. The IPO band fixed is in the range of ₹445-465, making the issue size of ₹523.07 crore.

So, what does this mean? 🤔

It means that it is time to analyse whether this occasion is a good opportunity for investors or just a fluke among the showers of up-and-coming IPOs.

All you have to do is give me 6 minutes of your time, and I will save 12-15 hours of yours. 🕛

How? Well, I have analysed the DRHP submitted by Capital SFB to SEBI and will be providing insights into crucial sections.

This way, you can decipher the IPO’s prospects and decide whether to invest or not. Convenient, isn’t it? No need to thank me. Just click on that LIKE button ❤️ and let me know your views in the comments section.     

(But if you still prefer to assess the DRHP, then by all means, click here and have a go at it.)

Now, before we jump into IPO details, let me get you in on a less-known secret. Industry analysis is critical from an investor’s POV before betting on an IPO, as the key information the sector provides helps the company soar higher.

Therefore, we will be starting the article with...

Industry Overview

The Indian banking industry is undergoing a period of significant transformation driven by digitisation and financial inclusion. That’s where SFBs specialise in, providing a source of capital to the backward & middle-class populace.

In terms of penetration, credit in the retail & service segment has seen a significant rise in contrast to industrial credit over the past five fiscal years. The following factors are fueling this uprise in the financial sector:

• Better margins: Small banks typically operate with lower overhead costs than larger banks, which allows them to earn higher margins on their loans. You know good things come in little packages. 🎁
• Lower NPA: Small banks have been able to keep their Non-Performing Assets (NPAs) lower than larger banks due to factors like focused lending, agility, and close relationships with clients. The risk of banks collapsing due to NPAs is hence reduced marginally. 🏦
• Strong consumer demand: Increased access to financial services, focus on customer needs, and competitive interest rates make SFBs much more in demand than private banks. Hence, citizens get diversification for financial aid alongside large banks. 🧑‍🤝‍🧑

These factors have also generated a never-before-like demand for financial products and services I mentioned earlier. SFBs are well-positioned to capitalise on this growth, and Capital Small Finance Bank Ltd. is expected to be a significant beneficiary of this trend. The bank is also poised to benefit from the government's focus on financial inclusion.

After all, sectors and the companies under it are directly proportional to each other. Now, let’s get introduced to the company bringing the IPO.  

About Capital Small Finance Bank

The bank strongly focuses on serving the underbanked and unbanked segments of the population in rural and semi-urban areas. It offers a wide range of financial products and services, including loans, deposits, and wealth management products.

Regarding asset quality, cost of funds, retail deposits and CASA deposits for fiscal year 2021, Capital SFB is the leading bank in the sector. With a 40% CASA ratio, 2.08% GNPA and 1.13% NNPA ratio, Capital SFB is one of the most reputed banks in the industry.
Here, GNPA is the Gross Non-Performing Asset representing the total value of loans that are in default or have not been serviced for a specific period (usually 90 days or more). On the other hand, NNPA stands for Net Non-Performing Assets, which represents the GNPA minus the provisions made by the bank to cover potential losses from bad loans.

The figures amidst the past few years will help you understand its financial outlook. ⬇️

Interestingly, Capital SFB had been in the banking industry for more than two decades before it was awarded the position of an SFB. It came into existence in January 2000 as the nation’s largest local area bank. Thus, Capital SFB is not a rookie in the industry, as many may believe. 🤓

But, looking at the other banks in the SFB sector, you can see a different picture of Capital SFB’s standing in the industry. Sure, Capital SFB surpasses all its competitors with the lowest GNPA%, but banks like AU SFB and Equitas SFB showcase a better financial standing. Refer to the infographic and table below for better understanding. 

The high difference between the top peers of the sector indeed gives one something to think about. Thus, make sure to check both financials and stability ratios, like NNPA, before making the decision.

IPO Details

Capital SFB submitted a DRHP on 30 October 2021 and finally received approval from SEBI to raise funds via an Initial Public Offering. (Talk about intezaar ki inteha. 😉)

The SFB plans to raise funds through an Initial Public Offering (IPO) by issuing new equity shares worth ₹450 crore and offering for sale up to 3,84 008 existing shares.

Book Running Lead Managers for the issue are:

• Edelweiss Financial Services Limited,
• Axis Capital Limited,
• SBI Capital Markets Limited and
• Link Intime India Private Limited.

Objective for the IPO:

• To meet the bank's future capital requirements and augmentation of the bank's Tier-1 capital base.
• A large part of the fund raised will go towards paying fees to the (BRLMs) and legal counsel involved.
• Funds will be used to cover costs related to listing its shares on the stock exchange, such as advertising, lawyer fees, and fees for the Securities and Compliance Board of India (SCSB).

The Big Question: To Invest or Not?

Let’s take the case study of the Tata Technologies IPO and Honasa Consumer IPO. Where Tata Technologies showed a blockbuster listing with a 140% subscription, Mamaearth’s parent company, Honasa Consumer, listed with a 2% premium. What does this explain? For me, “brand name is a big thing in the investing world” was the lesson.

Don’t get me wrong! I am not saying that Tata Technologies is a bad deal or that Honasa Consumer could have been better; it’s just that the premium brand of Tata Group and the fact that its IPO was being offered after a decade was a big thing.
But, investing money based on the name itself is not sufficient. Understanding companies’ pros and cons is equally important. For Capital Small Finance Bank Ltd., these things should be considered:

Strengths:

• From 35.16% in FY16 to 40.07% in FY21, CASA has risen for Capital Small Finance Bank.
• It is one of the banks with the highest secured loan book (around 99.39%).
• It offers a diversified portfolio to middle-income customer segments, making it a financial centre.

Weakness:

• Maintaining the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) set by RBI is crucial for Capital SFB to operate as a bank.
• Any changes to these limits or the bank's failure to meet them could affect its future cash flow.
• Growth in NPA or credit risk, as well as failure in maintaining the credit assessment, may lead to a decline in the bank's performance.

The Bottom Line

And that’s where I leave you to ponder about the upcoming IPO. What do you think? Capital SBF is more on the safe side with satisfactory financial standing in the industry. Are you excited about applying for it? Let me know your views in the comment section below.

*Disclaimer: The IPO and companies discussed above aren't a recommendation from Insider by Finology and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.