Fedbank Financial Services IPO: 5 Things to Know

Investors with an eye on India's growth story have typically directed their capital towards the vast conglomerates helmed by the country's tycoons or the dynamic tech firms revolutionizing various sectors.

However, this year has witnessed a shift in investment dynamics with an increased emphasis on initial public offerings (IPOs).

The IPO market has gained significant traction, drawing increased attention from foreign investors in India's primary market.

Recent data reveals that foreign portfolio investors (FPIs) have injected Rs 213.5 bn into the primary market from April 2023 to August 2023, marking a substantial surge in investment.

In the first five months of the current financial year alone, FPI investments in the primary market have already reached 90% of the total FPI investment in the previous year.

The IPO momentum continues to build, with a robust pipeline featuring approximately 30 companies having received SEBI approval for IPOs, set to raise Rs 407.4 bn.

Additionally, 38 companies, with IPO sizes totalling Rs 436.6 bn, are awaiting SEBI approval and have filed their offer documents.

Among these promising prospects is the eagerly anticipated IPO of Fedbank Financial Services.

Here are the key details of the IPO.

Issue period: 22 November 2023 to 24 November 2023

Type of issue: Book Built Issue

Price band: Not fixed yet

Face value: Rs 10 per equity share

Lot size: NA

Tentative IPO allotment date: 30 November 2023

Tentative listing date: 5 December 2023.

#1 About the Company

Fedbank Financial Services (FedFina) is a retail-focused non-banking finance company (NBFC) promoted by Federal Bank.

They had the second lowest cost of borrowing among the micro, small, and medium enterprises (MSMEs), gold loan, and MSME & gold loan peer set in India in 2023.

The company is focused on catering to the MSMEs and the emerging self-employed individuals (ESEIs) sector.

FedFina has a network of over 570 branches across India. The NBFC has a strong focus on customer service and offers a variety of digital channels to make it easy for customers to access its products and services.

As of 31 March 2023, FedFina had the third fastest AUM growth among NBFCs in the peer set in India with a three-year CAGR of 33% between FY 2020 and 2023, and 86% of the total loan assets are secured against tangible assets like gold or customer's property.

#2 A Look at the Financials

The company's revenue has grown at a CAGR of 20.6% in the last three years, while the net profit of the company grew at a CAGR of 44.2%.

This was due to the increase in sales over time.

For the financial year 2023, the company reported 37.5% increase in revenue to Rs 12.1 bn. This is primarily due to increasing in demand.

The net profit was reported at Rs 1.8 bn, up 180% from Rs 1 bn reported a year back, due to rise in realisations and better operational efficiency.

Fedbank Financial Services Financial Snapshot (2021-23)

Particulars	31-Mar-21	31-Mar-22	31-Mar-23
Revenues (Rs in bn)	6.9	8.8	12.1
Revenue Growth (%)	-	27.5	37.5
Net Profit (Rs in bn)	0.6	1	1.8
Net Worth (Rs in bn)	8.3	11.5	13.6

Data Source: Company's Red Herring Prospectus (RHP)

In the future, the company aims to utilise its expertise and technological infrastructure capabilities to broaden its network, positioning itself as a leading player in the financial services sector.

#3 Peer Comparison

As per the company's red herring prospectus, these are the industry peers of Fedbank Financial Services.

Peer Comparison

Company	Revenue from Operations (2023)	EPS (Basic) (in Rs)	Return on Net Worth (%)
Fedbank Financial Services	12,146.80	5.6	13.3
Aptus Value Housing	11,289.90	10.1	15.1
IIFL Finance	84,471.10	39.5	17.9
Five Star Business Finance	15,289.30	20.2	13.9
Manappuram Finance	67,499.50	17.7	15.6
Muthoot Finance	119,750.10	89.9	16.9

Data Source: Company's Red Herring Prospectus (DRHP)

#4 Arguments in Favour of the Business

• The business enjoys a significant presence in large and underpenetrated markets, providing a solid foundation for growth. This wide market reach creates ample opportunities for the company to capitalise on emerging trends and increasing demand.
• The strategic emphasis on retail loan products, coupled with a collateralised lending model, positions the business uniquely. This approach not only attracts individuals but also targets the emerging MSME sector, creating a distinct and challenging-to-replicate niche in the market.
• The company's strong underwriting capability, combined with a robust risk management framework, ensures prudent lending practices. This not only mitigates potential risks but also contributes to the overall stability of the business, instilling confidence in investors and stakeholders.
• The well-diversified funding profile is a key strength, providing a competitive advantage through a lower cost of funds. This financial structure enhances the company's ability to manage operational costs efficiently and respond effectively to market dynamics.

#5 Risk Factors

• The company's business and operations rely on its ability to access cost-effective funding sources promptly. Disruptions in these funding sources could hurt the company's business, results of operations, and financial condition.
• Inadequacies in assessing and recovering the assessed or full value of collateral, or outstanding amounts under defaulted loans, may have adverse effects on the company's business, results of operations, and financial condition.
• A substantial portion of the company's assets under management is derived from its gold loan products, and any loss of business related to these products could adversely affect the company's business and prospects.
• The company faces a significant concentration of loans to emerging self-employed individuals (ESEI) and MSME, increasing the risk of non-payment or default by borrowers, posing potential adverse effects on the company's business, results of operations, and financial condition.

Conclusion

Moving ahead, the company aims to expand its presence by opening additional branches, with a specific focus on semi-urban and rural areas.

Additionally, there are plans to introduce a range of new products and services in the upcoming years, including digital lending products, wealth management services, and investment offerings.

As per the National Council of Applied Economic Research (NCAER), the Indian finance sector is anticipated to experience a Compound Annual Growth Rate (CAGR) of 12.7% from 2022 to 2027.

This projected growth opens up fresh opportunities for financial services companies to cater to the needs of both businesses and consumers.

Moreover, the government is dedicated to enhancing financial inclusion across the nation. This commitment is expected to increase accessibility to financial services for a larger population, thereby contributing to the expansion of the financial sector.

Nevertheless, it is always prudent to conduct thorough research before making any investment decisions. Ensure that the investment aligns with your financial objectives and matches your risk tolerance level.

For more information on IPOs, check out the list of upcoming IPO's.

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