SBFC Finance IPO grey market premium falls. Will it still debut on a strong note?

When SBFC Finance becomes publicly traded on August 16, it will likely debut with a 35 to 40 percent premium over its IPO price of Rs 57 per share, as opposed to the 70 percent premium that was initially anticipated.

If strong initial public offering (IPO) subscription numbers and a robust business model with stable asset quality were the primary reasons for bullishness up until last week, the equity market correction is the primary reason for this transition, according to experts.

In more than three and a half weeks, particularly since July 20 when Nifty reached a record high of 19,992, the index has retraced approximately 3 percent, and analysts predict the market consolidation to continue. In the future weeks, the runaway rally since the end of March is unlikely to continue.

On the grey market, SBFC consistently traded at a 70 percent premium until the beginning of this week, when the premium fell to 40-45 percent over the upper price band, analysts said under the condition of anonymity. The grey market is an unofficial market where IPO shares are traded prior to listing.

The Rs 1,025 crore IPO was oversubscribed 70.16 times from August 3-7, with qualified institutional buyers (QIBs) purchasing 192.89 times the allotted quota, high net worth individuals 49.09 times, retail 10.99 times, and employees 5.87 times their allotted portion.

In light of the subdued market sentiment, Prashanth Tapse, Research Analyst and Senior Vice President of Research at Mehta Equities, expects a listing gain of 35 to 40 percent over the final IPO price, as opposed to the 65 to 70 percent previously anticipated.

‘Listing gain justified’

He believes that the present listing gain is warranted based on the company's attractive IPO valuations, strong anchor book, and impressive financial track record, followed by a business model with a strong emphasis on under-served and under-banked customers, which affords the company the opportunity to receive a premium listing.

Astha Jain, a senior research analyst at Hem Securities, also anticipates that SBFC will list at a 40 percent premium to its IPO price.

The professionally managed NBFC, with a primary focus on the MSME loans segment (which contributes over 80% of total revenue) and gold loans (17% of total revenue), saw assets under management grow at a CAGR of 44% during FY19-FY23, while disbursements grew at a CAGR of 40% over the same period.

"Its balance sheet has steadily improved, with its net worth reaching Rs 1,727.27 billion as of March 2023, an increase of 34 percent over March 2022.

Additionally, a stable credit history, risk management policies, and brand equity have enabled it to access borrowings at competitive rates, with an average cost of borrowing of 8.22 percent for FY23 compared to 7.65 percent for FY22," SBI Securities said.

With a presence in 120 cities and 152 branches in India, the company emphasises on loans with ticket sizes ranging from Rs 5 lakh to Rs 30 lakh, which comprised over 87 percent of its total AUM in FY23.

With direct customer sourcing and strong relationships, the company sustains gross non-performing assets (NPAs) and net NPAs ratios of 2.43 percent and 1.41 percent in FY23 compared to 2.7 percent and 1.6 percent, respectively, in FY22.

SBFC Finance reported a net profit of Rs 150 crore for the year FY23, up 132% from the previous year, and net interest income increased by 49% to Rs 378.9 crore during the same period.

The NBFC is supported by the private equity firm Clermont Group and the investment banking firm Arpwood Group. Its public offering consists of a fresh issuance of shares worth Rs 600 crore and an offer to sell shares worth Rs 425 crore by entities within the Arpwood Group. The offer price range was between Rs 54 and Rs 57 per share.

The proceeds from the new issue will be used to increase the company's capital base in order to satisfy its future capital needs for business and asset expansion.

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