Equitas seals first Indian IPO of financial year

Microfinance company Equitas Holdings has kicked off a potentially record breaking year for Indian equity issuance, raising at least Rs21.6 billion ($327 million) from the first initial public offering of the 2016/17 fiscal year.

The deal will rank as the country’s third largest IPO in the past three-and-a half-years behind Bharti Infratel’s $760 million deal from December 2012 and InterGlobe Aviation’s more recent $459 million flotation in October last year.

Amid a dearth of ECM activity so far this year, it also represents only the third Asian IPO outside of China and Japan to rake in more than $300 million.

However, India may yet prove to be one of the few bright spots of 2016, with bankers expecting HDFC Life Insurance and Larsen & Toubro Infotech to each raise about $300 million. Vodafone India may also bring the country’s largest ever IPO, although the company recently said the prospective $4 billion offering may not see the light of day before calendar year-end. 

The majority of the rest of the deals in the pipeline are likely come from the secondary market as the Modi government continues to divest non-core assets to keep the nation's fiscal deficit in check.

For the 2017 financial year it has set a $5.4 billion divestment target, with potential block sales in Oil & Natural Gas Corp (ONGC), National Hydroelectric Power Corp and IDBI Bank.

Domestic focus

Where Equitas is concerned, the IPO ended up being a domestic affair since the company had to reduce its foreign shareholding below 49% after gaining a small finance bank licence last year.

The IPO was, therefore, structured with a 33%/67% split between primary and secondary shares to give existing foreign shareholders an opportunity to exit. Sellers included Netherlands Development Finance Company, Sequoia Capital and Westbridge Capital.

According to the company’s red herring prospectus, foreign investors held a 92.64% stake pre-IPO, which will fall to 35% post listing.

When bookbuilding ended late Thursday, the 139 million shares offered to the public had achieved a 16.2 times oversubscription ratio according to National Stock Exchange of India data. The IPO also incorporated a further 59.5 million shares, which had been pre-sold to 16 anchor investors.

The shares were offered on a very narrow price range of Rs109 - Rs110 so there was little difference in terms of valuation. According to ICICI Securities projections, the bank has been valued at 1.82 to 1.83 times post-issue book value as of the end of last year, and 1.9 times for the year ending March 2017.

It said, “We believed pricing is reasonable given that it is lower than well run private sector banks and it also seems sufficient to capture the likely compression in ROA over the next couple of years due to required investment.”

Smaller lender, big ambitions

Chennai-headquartered Equitas is India’s fifth largest microfinance company by lending size. It provides financing to individuals and small- and medium-sized enterprises, as well as specialised lending such as vehicle and mortgage loans.

Historically, the company relied on bank lending and bond issuance as its main funding source. But this is likely to change after it became one of 10 financial institutions to receive in-principal approval to set up a small finance bank.

This should allow Equitas to take customer deposits and diversify its funding sources, potentially expanding the scope of its lending services.

On the filp side, the company will be subject to higher regulatory capital constraints. According to the Reserve Bank of India, small finance banks will be subject to a minimum capital adequacy ratio of 15% and a Tier I ratio of at least 7.5%.

In a pre deal research report, ICICI Securities said Equitas’s transformation woul entail other risks including higher operating expenses and liability management requirements.

But India Infoline was also positive on the firm established by ex DCB consumer banking head PN Vasudevan. It concluded that Equitas has, “exhibited high standards of corporate governance and transparency in conducting business.”

Given the IPO’s domestic focus, HSBC was only one foreign bank in the syndicate alongside Axis Capital, Edelweiss Financial and ICICI Securities.