Investment Shastra

Bandhan Bank IPO: Micro-Finance focused bank, valued assuming no risk.

IPO Details:

  • Issue Size – Rs 4,473 Cr
  • Price band: Rs 370 – Rs 375
  • IPO size: Rs 4,413 Cr – Rs 4,473 Cr
  • Subscription dates: 15 -19 March
  • Post-IPO valuation: Rs 44,134 Cr to Rs 44,730 Cr

Objectives of the offer
Proceeds of ~Rs 3,600 Cr will be used for lending; Offer for sale for ~ Rs. 800 Cr

About the company
Bandhan Bank Ltd. (BBL), a Micro-Finance Institution (MFI), commenced operations as a commercial bank after obtaining banking license in 2015. It primarily serves under-banked and under-penetrated markets in India. It has loan book size of Rs. 24,400 Cr. Since its inception, it grew its deposits & CASA to Rs. 25,000 Cr. This has reduced its dependency on high cost borrowings.

Bandhan Bank has 887 branches as of December 2017, with a higher presence in north and north-east India. West Bengal, Assam and Bihar together account for 56.37% of the bank’s branches. Micro loans still continue to dominate the loan books with a share of 88%. Other Retail Loans comprise home loans, 2-wheeler loans, loan against property and gold loans. Of its 12 million customers, 10 million are women.

MoneyWorks4me Opinion

Bandhan Bank primarily lends unsecured loans to poor people. This means the Bank consciously takes higher risk at a price. This is reflected in its high margins. At the same time, since the risk of loans default is high, leverage of the Bank is on the lower side at ~5X Equity as compared to an average bank which has leverage of 11-15X Equity. One of the advantages of Bandhan Bank is, its lower cost of funds vs that of Micro-Finance NBFCs. This will help it maintain its margins. However, the cost structure of Micro-Finance lending is quite high

Coming to asset quality, since the loans are unsecured and concentrated in certain geographical areas, slippages can be sudden and high. This is not reflected in its current statements. Non-performing Asset (NPA) is part & parcel of Micro-Finance business, hence, they have higher margins and lower leverage. In good times, the ROE could be high; but in bad times, the company may even report losses. Hence, we should look at average normalized ROE. We believe ROE should lie between 14-18% on an average over long term. Based on that, the company would enjoy terminal price to book of around 1.4-2X.

Currently, the company is offering shares at 10X trailing Book value. This looks too high. Even if the company grows at 25% over next 5 years, we believe it doesn’t justify such high prices. Post raising money, it works out as 5X book value. The fresh capital, i.e. which amounts to 80% of existing capital, won’t be generating ROE immediately. It would take 3-4 years before it does. Hence, we must be trailing book multiples. Also, when NPAs occur, provisioning requirement could hamper growth in some years. This could lead to non-linearity in growth rates. This poses further risk of optimistic estimates panning out.

We will explore this company again when there is more rationality in valuation, and if some temporary issues lead to fall in valuation in short term. We like Bandhan Bank because it’s a bank that would have more regulations, and better accounting practices. Besides, access to CASA gives it a cushion for funding unlike NBFCs who have to go to the market to raise money at higher cost.

However, we find the valuation to be expensive. We believe the markets keep analysing companies in their best cycle and forget about the long term. The management is taking advantage of current liquidity and sentiment to issue shares at premium prices.

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