A reader pointed out that my review of Equitas Holdings IPO posted two days ago is confusing because while I start with reasons on why you can avoid subscribing to the IPO, I eventually end the post with a paragraph on who can invest. This has not gone down well with some of my readers who have questioned the purpose of my post. In my defense I can only say that I was just listing out the pro’s and con’s of the public issue. Given below are my clarifications on Equitas’s IPO.
Equitas Holdings – Short Term Buy (Time Horizon – 1 month)
The IPO valuations are reasonable compared to their listed peers. The price to book value (after IPO) is 1.7 times for FY2017, this is low compared to 3.3 times that SKS Microfinance currently trades at. Equitas Holdings has Sequoia Capital as investors who I think they can manage to get a premium listing out of this issue. In the short term you can expect listing gains but I cannot foresee how long it will trade higher than the issue price. I believe the shares of the company will eventually be available at a discount to the issue price in the coming months as it moves lower in conjunction with the general market.
The key figure to watch out is IPO over-subscription, this will help us to gauge the listing gains that can accrue in this issue. If the over subscription is less than 2 times, you can skip the issue, it’s not worth the risk considering the below issue price listing of recent IPO’s like Cafe Coffee Day and Quickheal. I expect the recently concluded IPO of the e-commerce company Infibeam to list below issue price in the coming fortnight.
Equitas Bank – Medium Term Sell (Time Horizon – 1- 12 months)
The cost of setting up a small finance bank is high as the company will need to make fresh investments in setting up new branches, upgrading technology and hiring new banking personnel. Along with these expenses the company would also need to adhere to regulatory requirements of being a bank and provide for cash reserve ratio, priority sector lending, all of which will affect profitability in the medium term. Operating as an NBFC, Equitas had more leeway in lending and loan recovery, this would now change once it converts to a bank. You should however wait for the results before you take a call on selling it, Equitas is expected to report a net profit of Rs 120 Crore for FY16.
Long Term – Buy (Time period – 1-5 years)
Eventually all the investments it makes over the next 1-2 years would begin delivering results. It is in the long term that the stock can truly give phenomenal returns, if you could enter into the stock below the Rs 70 threshold, then nothing like it. I would wait until the stock corrected to that level and then would buy large quantities with a 7-10 year horizon.
For a more detailed analysis visit IPO Central.