Fedbank Financial Services (FedFina), incorporated on 17 April 1995, is a retail focused non-banking finance company (NBFC) promoted by The Federal Bank. The company is focused on catering to the MSMEs and the emerging self-employed individuals (ESEIs) sector. It has a well-tailored suite of products targeted to match customers needs, which includes mortgage loans such as housing loans, small ticket loan against property (LAP) and medium ticket LAP, unsecured business loans, and gold loans.

The company is among five private banks promoted NBFCs with third lowest cost of borrowings and grew its AUM at a strong CAGR of 33% between FY2020 and FY2023, while the growth was robust at 42% for Q1FY2024. AUM across various products was 33.12% for gold loans, 25.33% for medium ticket LAP, 24.52% for small ticket LAP and housing loans and 15.76% for unsecured business loans.

FedFina is present in 17 states and union territories across India with a strong presence in Southern and Western regions of India. It has covered 190 districts in 17 states and union territories in India through 584 branches. The branches are in states, such as Andhra Pradesh, Telangana, and Rajasthan, which have better asset quality than other states as of FY2023.

Additionally, the company has dedicated micro-sites on the website for each of branches, which focus solely on customer engagement for branch customers. The company also has a phygital doorstep model, a combination of digital and physical initiatives, for providing customized services to customers across all its products. This also helps it to remain in touch with customers.

FedFina has been rated AA by CARE and AA- by India Ratings and Research Private Limited since 2018.

Technology is the core building block of an underwriting model which combines electronic data and physical information and document collection. The underwriting process manages defaults and NPAs across all products. Gross NPA was 2.26% and Net NPA was 1.76% end June 2023. As of June 2023, 86.24% of the total Loan Assets are secured against tangible assets, namely gold or customers property.

CRAR of the company was at 19.71%, with Tier I capital comprising 14.70% end June 2023.

People are at the forefront of organization. The employee base of the company was at 3,732 personnel across 584 branches. From Fiscals 2021 to 2023, the company has been certified as a Great Place to Work by Great Place to Work Institute.

Anil Kothuri is the MD and CEO of the company with over 28 years of experience in the financial services sector.

The Offer and the Objects

The initial public offer (IPO) consists of fresh issue to raise Rs 600 crore through issuance of 4.51 crore equity shares at the lower band of Rs 133 per share (face value Rs 10 per share) and 4.29 crore equity shares at the upper band of Rs 140 per share.

The issue also consists of Offer for Sale (OFS) of 3.52 crore equity shares to raise Rs 467.65-492.26 crore. The promoter - Federal Bank has offered 5,474,670 equity shares for sale through OFS and investor selling shareholder True North Fund VI LLP has offered 29,687,053 equity shares for sale.

The promoter shareholding in the company would decline to 62.4% post- IPO from 72.3% pre-IPO.

The issue is to be made through the book-building process and will open on 22 November 2023 and will close on 24 November 2023.

The company proposes to utilize the net proceeds from the fresh issue towards augmenting the capital base to meet future capital requirements, arising out of the growth of business and assets. The company expects to receive the benefits of listing the equity shares on the stock exchanges, including to enhance brand image among existing and potential customers and creation of a public market for the equity shares in India.

Strengths

The company is present in large and under-penetrated markets with strong growth potential. The self employed and MSME segment is largely unaddressed by lending institutions in India and provides a sizable opportunity to rapidly grow and expand further.

The retail credit growth is expected to benefit from factors such as formalization of the economy, growing working population, increasing urbanization and increasing digital adoption in India.

The multi-channel network combined with physical branches, channel partners and digital solutions provides a significant footprint in target geographies.

The company is largely focused on a collateralized lending model for the retail finance segment and 86.24% of total loan assets are secured against tangible assets. The average ticket size was low at Rs 1.3 lakh in the Q1FY2024.

The company has a well diversified funding profile with an advantage of lower cost of funds driven by stable credit history, credit ratings, conservative risk management policies and strong brand equity.

The company has a strong underwriting capability and presence in the select customer segment combined with robust risk management capabilities focused on effective underwriting and collections.

The company is a technology driven company using systems with digital infrastructure to manage a scalable and sustainable operating model, enabling expansion and scaling of businesses and drive growth in revenue at lower incremental costs.

Weaknesses

The six states - Gujarat, Maharashtra, Telangana, Andhra Pradesh, Tamil Nadu, Karnataka and 2 union territories - Puducherry and Delhi accounted for 93.65% of gross AUM.

The company has a concentration of loans to self-employed at 45.22% and MSME at 64.75% of the total loan profiles.

A significant majority of the customer base belongs to the low to middle income group, who may be more likely to be affected by fluctuations in the economic conditions than large corporate borrowers.

The customer in the low- and middle-income group may not have credit histories or formal income proof such as tax returns and other formal documents that would enable them to assess their creditworthiness. It may therefore be difficult to carry out the necessary credit risk analysis on all the customers.

The company is exposed to operational risks as it handles high volumes of cash and gold jewelry in a dispersed network of branches,

Due to recent growth, a significant portion of the loan portfolio is relatively new and was disbursed during the last 36 months.

Valuation

EPS on post-issue equity for TTM ended June 2023 works out to Rs 5.2. At the price band of Rs 133 to Rs 140, P/E works out to 25.8 to 27.1 times of EPS for TTM ended June 2023.

Post-issue, the book value (BV) will be Rs 54.7, while adjusted BV (ABV) net of net NPAs works out to Rs 50.7 per share at the upper price band.

The scrip is being offered at price to Adj BV multiple of 2.8 times at the upper price band.

Among peer NBFCs, Aptus Value Housing Finance is trading at P/ Adj BV multiple of 5.5 times (consolidated basis), Five-Star Business Finance 5.2 times, SBFC Finance 3.9 times, Muthoot Finance 2.7 times (consolidated basis), IIFL Finance 2.7 times (consolidated basis) and Manappuram Finance 1.4 times (consolidated basis)

In terms of PE, SBFC Finance is trading at 59.1 times its EPS for TTM ended June 2023, Five-Star Business Finance 36.2 times, Aptus Value Housing Finance 28.0 times (consolidated basis), IIFL Finance 14.8 times (consolidated basis), Muthoot Finance 14.1 times (consolidated basis) and Manappuram Finance 7.7 times (consolidated basis).

Among the peers, the ROA of Fedbank Financial Services was lower at 2.0% for FY2023. Aptus Value Housing Finance posted a strong RoA of 7.0% for FY2023 on consolidated basis, Five-Star Business Finance 7.0%, Muthoot Finance 4.6% (consolidated basis), Manappuram Finance 3.8% (consolidated basis), IIFL Finance 3.0% (consolidated basis) and SBFC Finance 2.7%.

ROE for Fedbank Financial Services was at 9.4% in the TTM ended June 2023 as compared with Muthoot Finance at 17.5% (consolidated basis), Manappuram Finance 17.1% (consolidated basis), IIFL Finance 16.9% (consolidated basis), Aptus Value Housing Finance 15.5% (consolidated basis), Five-Star Business Finance 14.3% and SBFC Finance 6.5%.

AUM of Fedbank Financial Services surged 42% year on year to Rs 9434 crore end June 2023. The AUM of SBFC Finance has also expanded at strong pace of 47% to Rs 5327 crore end June 2023, followed by Five-Star Business Finance 43% to Rs 7583 crore, IIFL Finance 29% to Rs 68178 crore, Aptus Value Housing Finance 29% to Rs 7123 crore, Muthoot Finance 21% to Rs 76799 crore and Manappuram Finance 21% to Rs 37086 crore.

The GNPA ratio of Fedbank Financial Services was at 2.26% end June 2023. Among the peers, the GNPA ratio of Aptus Value Housing Finance was at 1.29%, Manappuram Finance 1.40%, Five-Star Business Finance 1.41%, IIFL Finance 1.84%, SBFC Finance 2.54%, and Muthoot Finance 4.26% end June 2023.

The NNPA ratio of Fedbank Financial Services was at 1.76% end June 2023, while that of Five-Star Business Finance was at 0.79%, Aptus Value Housing Finance 0.97%, IIFL Finance 1.06%, Manappuram Finance 1.20%, SBFC Finance 1.55%, Muthoot Finance 3.01% end June 2023.

The net interest margin of Fedbank Financial Services was low among peers, at 8.2% for FY2023. Five-Star Business Finance posted strong NIM of 20.6% in FY2023, followed by Aptus Value Housing Finance 13.1%, Manappuram Finance 11.5%, SBFC Finance 9.5%, Muthoot Finance 9.3% and IIFL Finance 8.5%.