Fino Payments Bank

Valuations ahead of growth prospect

The bank focuses on under-banked and under-served population and relies on fee and commission income

Fino Payments Bank is a growing fintech company offering a diverse range of financial products and services that are primarily digital and have payments focus. It offers such products and services to target markets via a pan-India distribution network and proprietary technologies. Bank has grown its operational presence to cover over 90% of districts end September 2021.

The bank has become profitable in the fourth quarter of FY2020 and has been profitable in subsequent quarterly periods. The bank has nearly tripled the number of transactions on its platform from 154.02 million in FY2019 to 434.96 million in FY2021 and further recorded 123.38 million transactions in Q1FY2022. The gross transaction value has increased from Rs 45684.80 crore to Rs 132930.69 crore in FY2021 and recorded Rs 39035.99 crore in Q1FY2022.

Rishi Gupta is a Managing Director & CEO of the bank and was a key employee of FINO and was instrumental in the formation of business and operations of the bank.

The payment business operates an asset light business model that principally relies on fee and commission-based income generated from merchant networks and strategic commercial relationships. Each merchant serves the banking and financial needs of its community, which in turn form the backbone of assisted-digital ecosystem, referred to as "phygital" delivery model (i.e., a combination of physical and digital). The use of analytics on the data enhances the merchants ability to cross sell the third-party products offered by the bank to existing customers, thereby increasing potential revenue and opportunity to further customize products and services offering.

A merchant-led distribution model requires minimal capital expenditure cost because the on-boarding and setup capital expenditure costs are borne by the merchant, and accordingly, allows for operating leverage and efficient expansion in a timely manner.

Innovation, technology, and customer trust lies at the core of all and forms the foundation for the entire business model. The bank aims to continue to strengthen its focus within emerging India, presenting a large market opportunity and has typically been overlooked by most of the large Indian financial institutions. This section of Indian society is characterized by low levels of financial literacy and technology use, lack of financial inclusion and typically does not have access to even basic banking services and is often referred to as the unserved and underserved population.

The products and services of the bank includes various current accounts and savings accounts (CASA), issuance of debit card and related transactions, facilitating domestic remittances, open banking functionality (via Application Programming Interface (API)), withdrawing and depositing cash (via micro-ATM or Aadhaar Enabled Payment System AePS) and cash management services (CMS).

The bank has more than doubled the Income derived from all financial products and services from Rs 351.97 crore in FY2019 to Rs 770.77 crore in FY2021 and recorded income of Rs 200.19 crore in Q1FY2022.

In addition, as a condition of RBI License bank is not permitted to directly provide credit products and thereby it is not exposed to the credit risk associated with underwriting credit products.

The bank has a strong leadership position within the Indian fintech industry. It ranked third among banks in facilitating digital transactions end February 2020 and had the largest network of micro-ATMs end August 2021. The bank is also the only payments bank to offer a subscription-based savings account in India. The customer satisfaction, brand and reputation have played an important role in making the bank an industry leader in fintech products and services, as well as to further developing business and improving market position.

The bank has significant geographic coverage and position as a large-scale, leading technology-enabled company with a diverse banking product offering also provides economies of scale that yield significant operating efficiencies, supports future growth, and helps to diversify some of risks, such as regional or geographical risks or concentration risks

The unique distribution, technology, and partnership (DTP) framework enables the bank to serve the target market efficiently. DTP framework allows reaching a vast number of customers in under-penetrated markets and keeping fixed costs low – all of which supports the sustainability and scalability of business models. Open banking API capability has also been an important element in the delivery of financial products and services to customers.

Financial Inclusion Network Operations (FINO) started as a technology company aimed at developing technological solutions. On 7 September 2015, Fino PayTech was granted inprinciple approval to set up a payments bank and the bank commenced operations as a Payments Bank with effect from June 2017.

The bank is wholly owned subsidiary of Fino Paytech, whose principal shareholders include marquee investors such as ICICI Bank, Intel Capital Corporation, International Finance Corporation, HAV3 Holdings (Mauritius), Blackstone GPV Capital Partners (Mauritius) VI-B FDI and Bharat Petroleum Corporation.

The Offer and the Objects

The initial public offer (IPO) consists of a fresh issue to raise Rs 300 crore issuing 5357143 shares at lower price band of Rs 560 per share and 5199307 shares at the upper band of Rs 577 per share.

Further, the offer of sale (OFS) comprises issuance of 15602999 shares to raise Rs 873.77 crore at lower price band and Rs 900.29 crore at upper price band.

The promoter, Fino PayTech is offering 15602999 equity shares out of its 100% shareholding. The shareholding of Fino PayTech would decline to 75% post issue.

The issue is to be made through the book-building process and will open on 29 October 2021 and will close on 2 November 2021.

Bank proposes to utilize the Net Proceeds from the Fresh Issue towards augmenting its Tier-I capital base to meet its future capital requirements. Additionally, the Bank expects to receive the benefits of listing the Equity Shares on the Stock Exchanges.

Strengths

A unique distribution, technology, and partnership (DTP) framework enables the bank to serve the target market efficiently and improve on scale, service, and sustainability. Distribution is having access to a vast and established merchant network, technology for delivering products and partnerships leveraging the increased reach.

The bank has and aims to continue to invest into technology throughout business with a goal to offer an unparalleled user experience. In-house technology expertise and culture of application-led innovation, provides an attractive value proposition to stakeholders. The bank has a dedicated business technology team with approximately 110 technical staff.

The merchant-led model is a capital light business strategy in respect of network expansion.

Except for referrals of third-party loan providers, the bank does not offer any lending products and does not hold credit risk for loans.

An established technology platform and consistent investment in further improvements, allows servicing a wide pool of customers and catering to their diversified requirements.

Focus on and use of technology throughout business assists in expanding reach throughout India without incurring the relatively higher costs associated with traditional bricks and mortar branch presence.

The bank incurs minimal capital expenditure costs in connection with on-boarding merchants, while the on-boarding and setup capital expenditure costs are borne by the merchant, such as any existing physical premises, laptop, mobile based phone, internet connectivity, micro-ATM and AePS devices and fingerprint and/or IRIS scanners, and technology significantly simplifies merchant on-boarding and training process, making it cost effective for the merchant and efficient for both parties.

In addition to merchant network which, as of June 2021 was 724,671, the bank leverages 17,430 active BCs to reach the underserved and unserved populations in hard-to-reach locations referred to the last mile of delivery.

The bank also uses strategic commercial relationships with corporate entities, most notably with BPCL, to expand operational reach, improve brand awareness and acquire new customers.

'FINO' brand has been in existence for approximately 14 years, the bank benefited from operational experience and expertise gained throughout that time.

Weaknesses

The COVID-19 pandemic has had and may continue to have certain adverse effects on business

The primary drivers of revenue are the fees and commissions charged on products and services, which accounted for 95-98% of total income during the last three years.

The fees and commissions income depend upon many factors including general macroeconomic conditions, the supply or demand for a product and service, regulatory instructions, changes in general banking activity and competitive factors.

The bank relies extensively on information technology systems and any weakness, disruption or failure in such systems could adversely affect operations.

The success of the bank depends on the ability to innovate, upgrade, and respond to new technological advances.

Payment Banks in India are subject to stringent regulatory requirements and prudential norms.

Payment Banks are required to be owned and controlled by Indian residents and at least 26% of paid-up capital is required to be held by Indian residents.

Promoter is required to ensure that its shareholding in bank does not fall below 40% of the paid-up Equity Share capital during the first five years from the date of commencement of business operations

Payment Banks cannot undertake lending activities.

Payment Banks cannot set up subsidiaries to undertake non-banking financial services activities.

The other financial and non-financial services activities of Promoter need to be kept distinctly ring-fenced and not commingled with Payment Banks financial services.

Payment Banks are required to invest minimum 75% of demand deposit balances in Government securities/ Treasury Bills with maturity up to one year that are recognized by RBI as eligible securities for the maintenance of Statutory Liquidity Ratio (SLR) and hold maximum 25% in current and time/ fixed deposits with other scheduled commercial banks for operational purposes and liquidity management

The bank has a limited operating history as a Payments Bank. Also, the payments bank industry was only proposed by the RBI in 2014 and therefore, the industry has a limited history.

Many merchants are in the states of Uttar Pradesh at 70847, Bihar 58452 and Madhya Pradesh 38277, aggregating to 46% of their own merchants end June 2021. These three states also contributed 43% of total income in FY2021 and 47% in Q1FY2022. Any adverse changes in the conditions affecting these regions can adversely affect business.

The bank is dependent on merchants and strategic commercial relationships for service and product distribution network, as well as the relationships with the BCs. Changes in relationships with such entities, could impair their respective operations and could have an adverse effect on business.

The banking and financing sector in India is highly competitive and there is competition across all of products and services from other payments banks, certain fintech companies, micro finance institutions (MFIs), small finance banks (SFBs), as well as from scheduled commercial banks, public sector banks, private sector banks, non-banking financial companies (NBFCs) and foreign banks with branches in the country.

Valuation

Fino Payments Bank has turned profitable in FY2021 and its only second profitable payment bank after PayTM Payments Bank. The bank has recorded 14% growth in total revenues to Rs 791.03 crore in FY2021 and 36% growth to Rs 206.24 crore in Q1FY2022. Net profit has increased to Rs 20.47 crore in FY2021 from loss of Rs 32.04 crore in FY2020. Net profit increased 69% to Rs 3.13 crore in Q1FY2022.

The TTM EPS on post-issue equity works out to Rs 3.5 for the period ended June 2021. At the price band of Rs 560 to Rs 577, P/E works out to 160.7-166.5 times of TTM EPS for the period ended June 2021.

Post-issue, the book value (BV) will be Rs 58.5 at upper price band. The scrip is being offered at price to BV multiple of 9.9 times at the upper price band.

The company is the first payment bank in India to list on exchanges. The bank has 14 years experience in the fintech space and almost four years into operations as a payments bank and plans to stick to its asset-light format and emerging India-specific solutions as it expands into new products and regions. The operational risk in the business is negligible as merchants do all transactions. Business is also not exposed to the credit risk associated with underwriting credit products as payments banks are not permitted to lend.

Fino Payments Bank is more a fintech platform rather than a payments bank. Another IPO bound fintech player, PB Fintech - owners of Policybazar and Paisabazar platforms, is offered at price to book value multiple of 7.8 times. In terms of EV to sales for TTM ended June 2021, PB Fintech is offered at 43.0 times and Fino Payments Bank is offered at 5.9 times EV to sales.

Some of the concerns for payment bank businesses are faster pace of digitization across the country, especially in rural India. Depending on transaction fee-based banking solutions alone may not be the best bet for fintech and neobanking companies. Some lending-based banking approval becomes a necessity for these banks. The core payments bank model has limited revenue scope. Four out of 11 RBI-licensed payments banks already dropped out of the race even before fully launching their services. The payment banks industry is new and has limited history.