SBFC Finance IPO opens today: Should you subscribe to the shadow lender's issue?

The Rs 1,025-crore initial public offering (IPO) of SBFC Finance will open for subscription on Thursday, August 3, which can be subscribed till Monday, August 7. The company will be selling its shares in the range of Rs 54-57, with a lot size of 260 shares, and its multiples thereof.

Incorporated in 2008, SBFC Finance is a non-banking finance company which provides secured MSME loans and loans against gold primarily to entrepreneurs, small business owners, self-employed individuals, and salaried and working-class individuals. The company has an extensive pan-India network in over 157 Branches in 105 cities in 16 states and two union territories.

The company issue includes a fresh issue size of Rs 600 crore, other than an offer-for-sale (OFS) of up to Rs 425 crore from its promoter including Arpwood Partners Investment Advisors, Arpwood Capital and Eight45 Services.

The net proceeds from the issue shall be utilised towards augmenting the company's capital base to meet their future capital requirements arising out of the growth of the business and assets, while the proceeds from OFS will go to the selling shareholders of the company.

For the financial year ended on March 31, 2023, SBFC Finance reported a net profit at Rs 149.74 crore with a total revenue from operations at Rs 740.03 crore. The company had clocked a net profit Rs 64.52 crore with a revenue from operations at Rs 530.70 crore in the year-ago period. Its AUM during the period increased to Rs 4,942.82 crore from Rs 3,192.18 crore.

The company has reserved shares worth Rs 10.25 crore for its eligible employee, who will get a discount of Rs 2 per share. 50 per cent of the net offer has been reserved for qualified institutional bidders, while 35 per cent shares will be reserved for retail investors. Non-institutional investors will get the remaining 15 per cent of the net offer.

ICICI Securities, Axis Capital and Kotak Mahindra Capital Company are the lead managers to the issue, while KFin Technologies has been appointed as the registrar to the issue. Shares of the company will be listed on both NSE and BSE with Wednesday, August 16 as the tentative date of listing.

Ahead of its IPO, SBFC Finance has raised Rs 304.42 crore by allocation of 5.34 crore equity shares to 37 anchor investors at a price of Rs 57 per share, a BSE circular said. Abu Dhabi Investment Authority, Amansa Holdings, Neuberger Berman, Ashoka India, Steadview Capital Master Fund, Carmignac Portfolio, Think India Opportunities and Natixis International were the marquee investors that participated in the anchor book.

Majority of the brokerage firms are positive on the issue, suggesting investors to subscribe to the issue citing its pan India network, strong return ratios, superior business model and lower cost of funds. However, they have also flagged risks of higher valuations and rate sensitive factors as the key risks for the company. Here's what analysts said about SBFC Finance's IPO:

Choice Broking
Rating: Subscribe with caution
"We view the SFL to sustain a strong growth trajectory given the ample growth opportunities in the MSME segment and adequate capital. Though, rising competition in self-employed, secured MSME segments, high risky nature of focused segments, geographical risk and economic uncertainties are the key risks to the business," said Choice Broking.

The demanded valuation seems on the higher side. Mentioned peers in RHP are mainly affordable housing finance companies which can’t be compared on an apple- to-apple basis. Ugro Capital, having similar business to SFL, is currently trading at P/BV of 1.9 times, it added with 'subscribe with caution' considering above parameters.

Stoxbox
Rating: Subscribe
With the management having vast experience, an HDFC background and an in-house sales team, we remain comfortable on the credit profiling and corporate governance front. The lender has a strategic focus on diversifying its loan portfolio across the states, thereby avoiding concentration risk and helping it to grow at a faster pace, said Stoxbox.

"With the company’s limited leverage position, we believe that the company is fairly valued and advise investors to 'subscribe' from a medium to long-term perspective," it added.

SBICap Securities
Rating: Subscribe
SBFC, at the upper price band, is valued at 2.6 times of its FY23 book value based on post-issue capital. While comparing the stock with its close peers on similar valuation parameters, the company is fairly valued. We recommend investors to subscribe the IPO for listing gains at a cut-off price, said SBICap Securities.

LKP Securities
Rating: Subscribe
"Factoring the superlative return ratio, FY23 ROA of 3 per cent and further improvement post fund raise; we believe that SBFC Finance Limited is worth subscribing. Thus, we recommend a 'subscribe' rating for the issue," said LKP Securities.

Geojit Financial Services
Rating: Subscribe
Net interest income grew by 50 per cent YoY to Rs 378cr, while Net interest margin dropped to 9.3 per cent in FY23 from 9.4 per cent in FY22, while return on assets rose to 2.92 per cent from 1.48 per cent during the same period, said Geojit Financial Services.

"SBFC’s portfolio quality metrics are improving. Considering the lower valuation, consistent improvement in asset quality, and decent business performance, we assign a 'Subscribe,' rating for the issue on a short-to medium-term basis," it added.

Hensex Securities
Rating Subscribe
"Diversified pan-India presence with an extensive network, 100 per cent in-house sourcing, Comprehensive credit assessment, underwriting and risk management framework, extensive on-ground collections infrastructure, lower cost of funds and consistent performance are key positive for the company," said Hensex Securities, which has a subscribe rating on the issue.

However, the brokerage has cited the risk of nonpayment or default by the borrowers, volatility due to interest rate changes, downgrade in the credit ratings and potential threat of unsustainable growth target are key risks for the company, which may dent its performance.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Business Today)

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