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Suryoday Small Finance Bank IPO Review and Analysis in Detail

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Basis Structure of Suryoday Small Finance Bank IPO

 

Suryoday Small Finance Bank is gearing up to bring its IPO to the markets in January 2021.

According to the latest estimates, Suryoday Small Finance Bank is aiming to raise about ₹ 650-700 crores from the primary market.

This IPO is of the book-building nature, which means the shares are offered in a price band. The other kind of offering is called fixed price offering, and this is characterized by a fixed price for the shares that are on offer.

The Suryoday Small Finance Bank IPO will comprise of a fresh issue as well as an offer for sale.

The fresh issue segment will contain 1.15 crore shares. The company newly issues these shares. Any proceeds from the sale of these shares are retained by the company. In this case, the amount will be utilized towards augmenting their Bank’s Tier – 1 capital base to meet their bank’s future capital requirements.

The offer for sale segment will contain about 84.66 lakh shares. This section contains those shares which belong to other shareholders. The existing shareholders sell part of their stake and the amount raised through the sale of these shares is credited directly to the shareholders.

The table below summarizes the details about the Suryoday Small Finance Bank IPO. Details about the Suryoday Small Finance Bank IPO share price, Suryoday Small Finance Bank IPO date 2020, Suryoday Small Finance Bank IPO listing date and more have been included.

IPO Details

After the IPO, the Suryoday Small Finance Bank shares will be listed on both NSE and BSE.

 

About the Company

 

Suryoday became a Small Finance Bank in 2017. However, the company has been in existence for over a decade.

Since its incorporation in 2009, it has worked as an NBFC in the micro finance category – promoting financial awareness and encouraging financial inclusion.

As of 2020, Suryoday has a presence across 12 states and union territories.

 

Customers

 

Suryoday Small Finance Bank operates primarily on a B2C business model.

As of July 2020, the customer base of Suryoday Small Finance Bank comprised of more than 14.3 lakh customers.

 

Products & Services

 

Suryoday’s product portfolio includes a variety of credit and lending based products. The different categories of loans can be summarized as follows.

1. Joint Liability (Inclusive Finance)

2. Commercial Vehicle Loans

3. Affordable Housing Loans

4. Secured Business Loans

5. Micro-business Loans

6. MSME Loans

7. Financial Intermediary Group Loans

8. Others

The graph below shows the revenue split-up among the different product categories.

Revenue split up

 

Promoter Shareholding Pattern

 

The table below lists out the shareholding pattern prior to the Suryoday Small Finance Bank IPO.

Promoter shareholding pattern

 

Financial Overview of Suryoday Small Finance Bank IPO

 

The table below summarises the primary financial figures for Suryoday Small Finance Bank from 2015 to 2020. All the figures mentioned below are in Rs. Crores.

Financial Overview

The main financial parameters of Suryoday Small Finance Bank look very promising indeed. As we can see here, the total revenue shows a steady increase over the years. It shows a CAGR of 48.56%.

Total Revenue

The total assets too show consistent growth. Over the years, it has recorded a CAGR of 47.98%.

Total Assets

This can be because of the fact that the gross loan portfolio of Suryoday has shown a CAGR of 46.98% over the past two years, from FY 2018 to FY 2020. The deposits, too, have shown a CAGR of 94.95%. From Rs. 749.52 crores in FY 2018, it has grown to Rs. 2,848.71 crores in FY 2020.

In fact, as of FY 2020, 54.44% of the total deposits came from the retail category.

The net profit earned shows an overall increase, but in FY 2017 and FY 2018, the figures show a dip. The CAGR, in this case, is 47.05%.

One worrisome factor here is the fact that over the past six years, the company has recorded a positive net cash flow from operating activities only in two years. The rest of the years are characterized by increasing negative values of net operating cash flow.

 

Industry Analysis

 

The market for small finance banks is booming. From FY 2017 to FY 2020, the assets under management (AUM) of this subcategory have grown at a CAGR of 29%.

Industry Growth

This market is dominated by the top three small finance banks – AU, Equitas and Ujjivan. These three banks together accounted for about 63% of the total assets under management in 2020

Overall, there is significant growth expected in the near future. The deposit base of small finance banks increased by about 48% in FY 2020. A CAGR of 22% is predicted in the loan portfolio in this market.

It is expected that the small finance banks industry will continue to grow over the next few years. This growth is based on the fact that the Indian economy is emphasizing on the growth of the banking sector and financial inclusion. There is a significant market opportunity in the rural parts of the country.

Small finance banks mostly have to rely on smaller loan amounts, primarily to the newer entrants into the banking sector. More than half of the loan books are made up of amounts below Rs. 25 lakhs.

It is impossible to ignore the effects of the COVID-19 pandemic on this sector. Small finance banks will have to exercise extra caution with regard to the disbursement of new loans. They will, of course, concentrate on reducing the proportion of NPAs in their loan books.

The gross non-performing assets (NPAs) in this sector have fallen from 2.2% in 2018 to 1.6% in 2019. This can be owed to diversification in the types of loans granted as well as a reduction in microfinance loans.

As for Suryoday Small Finance Bank, it is a relatively smaller player in comparison to the dominants in the market. The graph below shows the market share of the top small finance banks.

Market share

However, it is noteworthy that Suryoday has been growing at a very impressive rate. This can be attributed to the fact that it provides a higher interest rate as compared to its peers.

The chart below compares the interest rates of Suryoday Small Finance Bank with its peers.

Interest Rate

 

Peer Comparison of Suryoday Small Finance Bank IPO

 

The market for small finance banks is characterized by some barriers to entry. This comes in the form of licenses that have to be obtained from the RBI and the regulations with regard to the same. The process is a lot easier than opening up a commercial bank, but it is cumbersome none the less.

Currently, there are many players in this market. However, the market is dominated by the three largest companies – AU, Ujjivan and Equitas. Suryoday’s market share seems very small, in comparison.

This market is also poised for significant growth on the back of the multiple new entrants and the numerous financial inclusion policies undertaken by the government of India.

The table below lists out the main comparison parameters of Suryoday Small Finance Bank with its listed peers.

Peer review

In comparison to its peers, Suryoday is quite small, to say the least. In terms of the assets under the management, it is one of the smallest, and in terms of the deposits, it is the smallest.

However, it is also noteworthy that Suryoday’s growth rate is one of the highest among its peers.

Based on the strong financials, and the growth rate, there is evidence to support Suryoday’s long-term advancement in this market.

 

Strengths of Suryoday Small Finance Bank IPO

 

When it comes to a service-based market like small finance banks, the customer experience is key. With regard to this, Suryoday's customer-centric approach serves as a distinct strength for the company. Not only that, Suryoday likes to involve its shareholders in many of the decisions.

Suryoday’s diverse asset portfolio reduces its dependence on any one segment and the possibility of non-performing assets. It has steadily reduced the proportion of unsecured loans in its portfolio. From 94.81% in 2018, it has come down to 77.49% in 2020.

Apart from that, Suryoday’s strong risk management framework has reduced its NPAs and will serve to keep this proportion at minimal levels in future.

 

Weaknesses of Suryoday Small Finance Bank IPO

 

Suryoday’s directors are involved in certain legal proceedings which can serve as a hindrance to its image and its future operations.

Although Suryoday’s product portfolio is diversified, its customer base isn’t. Its customers in Maharashtra, Tamil Nadu and Odisha comprised 33.42%, 27.69% and 15.96% of its loan advances respectively. Any changes in the market in these areas can have a significant impact on Suryoday’s operations.

The deposits from the top 20 clients made up about 38.77% of the total deposits of the company as of 2020. If these customers had a change of heart and decided to take their business elsewhere, Suryoday would certainly feel the impact.

Apart from that, the competitive landscape in the small finance banking industry imposes significant pressure on Suryoday. It already has a very small market share. If its business should drop even a little bit for any reason, the other competitors would scoop in and capture the market share.

 

Valuation of Suryoday Small Finance Bank IPO

 

The table below lists out the key valuation parameters of Suryoday Small Finance Bank with that of its listed peers.

Valuation

A common valuation metric is the price to earnings ratio. If the P/E ratio of the company comes out to be greater than the market average, then the company is considered to be overvalued. On the other hand, if it is lower than the market average, it is considered to be undervalued.

In this case, the average P/E ratio in the small finance banking industry is 20.97. Once the pricing band and other IPO details are released, we will be able to compare it and understand the valuation of Suryoday better.

Another possible method of valuation is the formula given by the father of value investing, Benjamin Graham in his book, The Intelligent Investor.

FY20 Profit = 111.98 crore

Growth Rate = 30% (CAGR 5 years)
Value = 111.98 * (8.5 + (2*30)) = 111.98 * 68.5 = 7670.63 crore

According to the Intelligent Investor formula, the value derived above is the intrinsic value of the company on the basis of the earnings growth. If we consider a 10% margin of safety, the value comes out as follows.

By deduction of the margin of safety = 7670.63 – 10% = 6903.56 crore

If the market capitalization as per the basis structure comes below Rs. 6900 crores, then we can say it is undervalued.

 

Frequently Asked Questions

 

1. How to apply in Suryoday Small Finance Bank IPO through Zerodha?

Simply log onto the Zerodha website or the Zerodha mobile app. Select the Suryoday Small Finance Bank IPO from the IPO menu. Select the number of lots and submit your bid for the Suryoday Small Finance Bank IPO.

2. When Suryoday Small Finance Bank IPO will open?

The dates of the Suryoday Small Finance Bank IPO have not yet been released.

3. What is the lot size of Suryoday Small Finance Bank IPO?

The Suryoday Small Finance Bank shares will be available in lots of 10. This means you have to bid on a minimum of 10 shares. If you want to bid on more than 10 shares, you will have to do so in multiples of 10 – that is, 2 lots for 20 shares, 3 lots for 30 shares and so on.

4. How to apply for Suryoday Small Finance Bank IPO?

There are two ways to apply for an IPO. You can apply either through UPI or through ASBA (net-banking).

In order to apply, simply log on to your brokerage house’s website, select the IPO for which you want to apply, select the number of lots that you want to bid for, and submit your bid.

5. When is Suryoday Small Finance Bank IPO listing date?

The listing date of Suryoday Small Finance Bank shares has not yet been released.

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