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Review By Dilip Davda on November 17, 2023

•    FFSL is promoted by Federal Bank Ltd. and is having differentiated financial services offerings.
•    The company has posted steady growth in its top and bottom lines for the reported periods. 
•    Based on annualized FY24 earnings, the issue appears fully priced. 
•    Financial service sector is set for bright prospects ahead. 
•    Well-informed investors may park funds for the medium to long term rewards. 

PREFACE:
The company filed its first DRHP in February 2022 for a bigger size IPO, but it allowed to lapse. It refiled DRHP with reduced size of issue in July 2023 and now finally it is going public with even lower size of maiden IPO. The delayed move raised eyebrows among the primary market players. 

ABOUT COMPANY:
Fedbank Financial Services Ltd. (FFSL) is a retail focused non-banking finance company ("NBFC") promoted by The Federal Bank Limited. It has the second and third lowest cost of borrowing among the micro, small and medium enterprises ("MSMEs"), gold loan and MSME & gold loan peer set in India in Fiscal 2023 and three-months period ended June 30, 2023, respectively. (Source: CRISIL Report) As on March 31, 2023, FFSL had the third fastest AUM growth among NBFCs in the peer set in India with a three year CAGR of 33% between Fiscals 2020 and 2023, and the fourth fastest year-on-year AUM growth of 42% for three-months period ended June 30, 2023. (Source: CRISIL Report) It is one among five private bank promoted NBFCs in India. (Source: CRISIL Report) It is the fastest growing gold loan NBFC in India among the peer set as of March 31, 2023, and had the fastest year-on-year growth among gold loan NBFCs in India as of June 30, 2023. (Source: CRISIL Report) As on June 30, 2023, 86.24% of its total Loan Assets are secured against tangible assets, namely gold or customer's property.

It has been rated "AA" by CARE for non-convertible debentures ("NCDs") since 2022, and "AA-"- by India Ratings and Research Private Limited for NCDs and bank loans since 2018. FFSL is promoted by Federal Bank, which, adds a degree of trust among stakeholders. Federal Bank will continue to own more than 51% of outstanding share capital post the completion of the Offer. 

FFSL is headquartered in Mumbai, Maharashtra. As of June 30, 2023, it covered 190 districts in 17 states and union territories in India through 584 branches. Its branches are located in states, such as Andhra Pradesh (including Telangana) and Rajasthan, which have better asset quality than other states as of Fiscal 2023. (Source: CRISIL Report) 

It also has a "Phygital" doorstep model, a combination of digital and physical initiatives, for providing customized services to customers across all products. This also helps it to constantly remain in touch with customers. Technology is the core building block of its underwriting model which combines electronic data and physical information and document collection. Its underwriting process has allowed it to manage defaults and NPAs across all products in Fiscals 2023, 2022 and 2021, and the three-months period ended June 30, 2023. Its Gross NPA were 2.26%, 2.05%, 2.03%, 2.23% and 1.01% for the three-months period ended June 30, 2023 and June 30, 2022, and Fiscals 2023, 2022 and 2021, respectively, and Net NPA were 1.76%, 1.57%, 1.59%, 1.75% and 0.71% for the three-months period ended June 30, 2023 and June 30, 2022, and Fiscals 2023, 2022 and 2021, respectively.

As of June 30, 2023, it conducted operations through 584 branches, of which 237 branches were located in western and northern India in the states/union territory of Gujarat, Maharashtra and Delhi and 272 branches were located in southern India in states of Telangana, Andhra Pradesh, Tamil Nadu and Karnataka. The remainder were spread across contiguous states and union territories in India.

As of June 30, 2023, it had 1,796 local channel partners, to complement its branch network and increase geographical penetration while controlling costs. As of June 30, 2023, the Company employed 3,732 people, 77.12% of staff are in the sales function, while 11.87% of the employees are dedicated for credit, risk management, audit and quality functions.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book building route combo IPO of fresh equity shares issue worth Rs. 600 cr. (approx. 42857138 shares at the upper cap) and an Offer for Sale of 35161723 shares (worth Rs. 492.26 cr. at the upper cap). Thus the overall IPO size is of 78018861 shares worth Rs. 1092.26 cr. at the upper cap. It has announced a price band of Rs. 133 - Rs. 140 per share of Rs. 10 each. The issue opens for subscription on November 22, 2023, and will close on November 24, 2023. The minimum application to be made is for 107 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 21.15% of the post-IPO paid-up capital of the company. It will utilize the net proceeds from the fresh equity issue for augmenting its Tier-I capital. 

FFSL has reserved 714332 shares for its eligible employees and offering them a discount of Rs. 10 per share. From the rest, it has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. 

The four joint Book Running Lead Managers are ICICI Securities Ltd., BNP Paribas, Equirus Capital Pvt. Ltd., land JM Financial Ltd. while Link Intime India Pvt. Ltd. is the registrar of the issue. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 30.00 - Rs. 72.37 between November 2018 and November 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 19.34, Rs. 45.22 per share. 

Post-IPO, its current paid-up equity capital of Rs. 326.08 cr. will stand enhanced to Rs. 368.93 cr. At the upper price band of the IPO, the company is looking for a market cap of Rs. 5165.06 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, FFSL has posted a total revenue/net profit of Rs. 697.57 cr. / Rs. 61.68 cr. (FY21), Rs. 883.64 cr. / Rs. 103.46 cr. (FY22), and Rs. 1214.68 cr. / Rs. 180.13 cr. (FY23). For Q1 of FY24 ended on June 30, 2023, it earned a net profit of Rs. 53.88 cr. on a total revenue of Rs. 367.87 cr. 

For the last three fiscals, it has reported an average EPS of Rs. 4.26 and an average RoNW of 10.87%. The issue is priced at a P/BV of 3.19 based on its NAV of Rs. 43.95 as of June 30, 2023, and at a P/BV of 2.53 based on its post-IPO NAV of Rs. 55.23 per share (at the upper cap).

If we attribute annualized FY24 earnings to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 23.97.Thus the issue appears fully priced.

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, FFSL has shown Aptus Value, IIFL Finance, Five Star Business, Manappuram Fin., Muthoot Finance, and SBFC Finance as their listed peers. They are trading at a P/E of 32.47, 33.04, 33.38, 9.19, 14.26, and 53.49 (as of November 17, 2023). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The four BRLMs associated with the offer have handled 74 public issues in the past three fiscals, out of which 20 issues closed below the offer price on listing day.

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