ESAF Small Finance Bank Ltd. (Subscribe)

Highlights

ESAF Small Finance Bank Limited (ESFBL) incorporated in 2016, is a small finance bank with a focus on unbanked and under-banked customer segments, especially in rural and semiurban centres. ESAFL commenced its business as a small finance bank on March 10, 2017 and it were included in the second schedule to the RBI Act pursuant to a notification dated November 12, 2018 issued by the RBI.

The company main products are its advances and deposits. Its advances comprise of (i) Micro Loans, which comprises Microfinance Loans and Other Micro Loans (ii) retail loans, which includes gold loans, mortgages, personal loans, and vehicle loans (iii) MSME loans (iv) loans to financial institutions and (v) agricultural loans where its liability products comprise of (i) current accounts (ii) savings accounts (iii) term deposits and (iv) recurring deposits.

ESFBL services includes safety deposit lockers, foreign currency exchange, giving their customers access to the Bharat Bill Payment System, money transfer services and Aadhaar Seva Kendra services. It also distributes third-party life and general insurance policies and Government pension products.

As of June 30, 2023, the Company operated a network of 700 banking outlets (including 59 business correspondent-operated banking outlets), 767 customer service centers (managed by its business correspondents), 22 business correspondents, 2,116 banking agents, 525 business facilitators, and 559 ATMs in 21 states and two union territories, serving 7.15 million customers.

As a small finance bank (SFB), ESFBL are required to have at least 75.00 pct of its adjusted net bank credit to the priority sectors. Its business model focuses on the principles of responsible banking, providing customer-focused products and services through the innovative application of technology.

Out of the total proceeds of Rs. 4,630 mn, the company would utilize Rs. 3,907 mn towards augmenting Bank’s Tier – I capital base to meet Bank’s future capital requirements and for increasing its Bank’s business, which is primarily onward lending. Remaining 7,23 mn would go towards existing selling shareholders.

Key Highlights

• As of June 30, 2023, the 12 small finance banks, including ESFBL, accounted for approximately 13 pct of the industry’s total AUM. Small finance bank advances under management (AUM) grew at a 29 pct CAGR from March 31, 2018 to June 30, 2023, according to CRISIL MI&A, and are expected to grow at a 22- 24 pct CAGR between June 30, 2023 and March 31, 2025. Looking at the high growth rate of the industry the company has huge opportunities to grow in this industry.
• The bank intends to boost deposits, particularly retail deposits, to assist develop their business and lower their cost of funds. Furthermore, they want to continue to target NRIs to increase their deposit base, particularly their CASA basis. They also want to continue targeting HNIs to expand their deposit base, particularly the CASA base.
• The bank intends to improve their technological platforms, such as online banking, mobile banking, ATMs, cash deposit machines, customer care applications, and payment interfaces, to expand the adoption of their service delivery mechanisms.
• ESFBL operations are spread out across India, its business is concentrated in South India, particularly in the states of Kerala and Tamil Nadu. As at June 30, 2023, 62.43pct of its banking outlets are located in South India (including 43.43 pct in Kerala and 13.86 pct in Tamil Nadu), 73.09 pct of its gross advances are from customers in South India (including 43.45 pct from Kerala and 22.14 pct from Tamil Nadu) and 86.90 pct of its deposits are from banking outlets in South India (including 80.04 pct from Kerala and 3.36 pct from Tamil Nadu).
• As of June 30, 2023, its gross advances to its customers in rural and semi-urban centres (combined) accounted for 62.97 pct of gross advances and 71.71 pct of its banking outlets were in rural and semi-urban centres (combined).
• The company AUM grew from Rs. 84,259.30 mn to Rs.163,312.65 mn as of March 31, 2021 and 2023, respectively, registering a CAGR of 39.22 pct, and increased to Rs.172,039.68 mn as at June 30, 2023, an increase of 5.34 pct. Its deposits grew from Rs. 89,994.26 mn to Rs. 146,656.25 mn as of March 31, 2021 and 2023, respectively, registering a CAGR of 27.66 pct, and increased to Rs. 156,558.54 mn as of June 30. 2023, an increase of 6.75 pct. While GNPA of the company declines to 1.65 pct in Q1FY24 against GNPA of 6.66 in Q1FY23. Also, NNPA of the company declined to 0.81 in Q1FY24 pct from 3.78 pct in Q1FY23.

Key Risk

• As at June 30, 2023, and March 31, 2023, 2022 and 2021, 75.15 pct, 75.35 pct, 83.59 pct and 85.50 pct of its advances (net of provisions) were unsecured advances, respectively. If any default by the borrower can affect the company’s financial condition.
• The company are subject to stringent regulatory requirements and prudential norms. If they are unable to comply with such laws, regulations and norms it may have an adverse effect on its business, financial condition, results of operations and cash flows.

Valuation

ESFBL has the best asset quality among compared peers. It is favourably placed with portfolio share of 63% from rural and semi-urban, which is the highest among the comparable. It has a healthy market share in the south with robust financials and healthy return ratios. Based on annualized FY24 earnings, the issue appears attractively priced. At higher price band, the issue is quoting at 1.46x P/BVPS with current book value per share of Rs 40.92.

Disclaimer: Financial Hospital Advisors LLP (Brand Name Fintoo) herein referred as Financial Hospital is registered with SEBI as an Investment Adviser under the SEBI (Investment Advisers) Regulations, 2013 with registration number INA000015756. No disciplinary action has been taken against Financial Hospital Advisors LLP or its associate entities by any regulatory authority.