Bandhan Bank IPO review (Apply)

Bandhan Bank Ltd. (BBL) a micro finance company that got RBI license in 2015 for Bank has transited itself into a bank on 23rd August 2015. It had a mandate to bring IPO within three years of starting banking operation; it is coming much before that with its maiden IPO. BBL is a commercial bank focusing on serving under banked and underpenetrated markets in India. Bandhan Bank has a banking license that permits it to provide banking services pan-India across customer segments. It currently offers a variety of asset and liability products and services designed for micro banking and general banking, as well as other banking products and services to generate non-interest income.

BBL's strength lies in microfinance and has strength of 2,633 DSCs and 9.86 million micro loan customers as of December 31, 2017. It also opened Greenfield network of 501 bank branches and 50 automated teller machines ('ATMs'), which as of December 31, 2017 has grown to 887 bank branches and 430 ATMs, together serving over 2.13 million general banking customers. Bank's distribution network is particularly strong in East and Northeast India, with West Bengal, Assam and Bihar together accounting for 56.37% and 57.58% of its branches and DSCs as of December 31, 2017, respectively. It currently offers a variety of asset and liability products and services designed for micro banking and general banking. Its asset products consist of retail loans including a substantial portfolio of micro loans, as well as micro, small and medium enterprise ('SME') loans and small enterprise loans. As of December 31, 2017, 96.49% of its Gross Advances were in priority sector lending ('PSL') compliant with the Reserve Bank of India ('RBI's') PSL requirements. As of December 31, 2017, BBL's retail-to-total deposit ratio stood at 85.07%. As on the same date, bank's deposits and Gross Advances (including IBPC/Assignment) stood at Rs. 25294 crore and Rs. 24364 crore respectively.

BBL is coming out with its maiden IPO of 119280494 equity shares of Rs. 10 each via book building route with a price band of Rs. 370 – Rs. 375 to mobilize Rs. 4413.38 crore to Rs. 4473.02 crore based on lower and upper price bands. Issue consists of a fresh issue of up to 97663910 equity shares and offer for sale of 21616584 shares. Issue opens for subscription on 15.03.18 and will close on 19.03.18. The objects of the Fresh Issue are to augment Bank's Tier-I capital base to meet its future capital requirements. Further, the proceeds from the Issue will also be used towards meeting the expenses in relation to the Issue.

Minimum application is to be made for 40 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. Issue constitutes approx. 10% of fully diluted post issue equity of the bank. Having issued initial equity at par, it raised further equity at a price of Rs. 42.93 per share. Post issue its current paid up equity capital of Rs. 1095.14 crore will stand enhanced to Rs. 1192.80 crore. Average cost of acquisition of shares by the promoters is Rs. 26.17 per share. BRLMs to the issue are Kotak Mahindra Capital Co. Ltd., Axis Capital Ltd., Goldman Sachs (India) Securities Pvt. Ltd., J M Financial Ltd. and J P Morgan India Pvt. Ltd. Karvy Computershare Pvt. Ltd. is the registrar to the issue.

On performance front, BBL has reported total income/net profits of Rs. 7.95 cr. / Rs. 0.60 cr. (FY15), Rs. 1731.25 cr. / Rs. 275.25 cr. (FY16) and Rs. 4320.12 cr. / Rs. 1111.95 cr. (FY17). For first nine months of the current fiscal ended on 31.12.17 it has earned net profit of Rs. 957.70 on total income of Rs. 3954.51 cr. For last three fiscals it has posted an average EPS of Rs. 6.21 and an average RoNW of 15.27%. Issue is priced at a P/BV of 7.60 on the basis of its NAV of Rs. 49.35 as on 31.12.17. If we annualize latest earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 35 plus. Thus issue appears reasonably priced. Industry composite P/E is 35 plus and some of its listed peers are trading at a P/E of around RBL Bank (30), Ujjivan Finance (194), Equitas Holdings (1173), AU Small Bank (79). It is also considering Kotak Bank, Axis Bank, IndusInd Bank, Yes Bank, Bajaj Finance as its peers.

On BRLM's front, five merchant bankers associated with this issue have handled 57 public issues in the past three years out of which 17 public issued closed below the issue price on listing date.