Utkarsh, Fincare IPOs coming soon - worth it?

[artemio]

Two Small Finance Banks (SFBs) - Fincare and Utkarsh - filed their DRHPs with SEBI in early August - within a week of each other! Both are IPOing since they have to - they are mandated (per RBI guidelines) to go public within 3 years of crossing networth of Rs. 500 crores, and they've both hit this timeline.

Not here to give you buy/ sell recommendations for the IPOs, but will instead articulate a framework to help you evaluate SFBs - including the business model and the key factors this business is sensitive to.

Background: Utkarsh & Fincare SFB

Basic overview

Fincare and Utkarsh both commenced operations as small finance banks (SFBs) in 2017, after receiving their SFB licenses from the RBI.

Let's start with some basics - what are SFBs? They are a separate category of banks created with the idea of furthering the financial inclusion agenda. Here are some rules SFBs have to abide by:

1. 75+% loans to priority sectors - i.e. underserved sectors (40% for other banks)
2. 50+% loans with ticket sizes of

 

[lostsoul159753]

@artemio Well I know a lot of top management guys of Utkarsh personally. At least 8 of them. Dont ask me how.

I can vouch for at least one factor: integrity. These guys are solid guys, built utkarsh from a microfinance company and rose their way up slowly but steadily. Have seen their journey up close as friends.

Rest you have already shared other aspects. For me the cost of funds has to go down gradually for a larger impact, and the SFB has to fuel expansion from proceeds of listing. Its like a regional player right now and needs to have a prominant national presence.

Its my personal opinion that its a Go ahead for long term, and for positional if priced right.

 

[artemio]

@lostsoul159753 thanks for sharing. No doubt what Utkarsh has built in one generation is very impressive. Also a huge fan of inclusion models and SFBs have huge potential to succeed with the low cost of deposit advantage.

If there was one risk with Utkarsh it's the fact that 75% of their portfolio is MFI concentrated - so they really need to prove they can diversify away into non-MFI verticals. In other words shed their MFI image and prove they can be a bank. You mentioned a similar risk with geography - which is also a concentration risk.

Given the above and the fact that they are a low ROE business today, I find it tough to justify a valuation of anything more than 1 times book and it is likely the IPO is valued higher than that.

 

[tabithalongman]

@artemio SFB stands for "Shit Finance Banks", Having seen first hand how these banks operate their primary job is to "Suck poor people money by charging high ROI (16 - 24%) on retail loan products". These banks are prone to different types of risk which the investor is unaware or is not made aware.

They were originally mooted for providing banking services to unbanked population but they ended up money making machine for few.

Only invest -
1. If you are very high risk taker.
2. You exactly know what they are doing with EQUITY.

 

[pawello]

@artemio If the listing of previous SFBs is anything to go by (and naturally it's not enough to gauge), I'll be skipping both.

 

[kidteen1]

@artemio When/where can we subscribe for the IPO?

 

[zorro7]

@kidteen1 The listing date will be released later, then you can apply for IPO on any broker platform.