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RBL Bank IPO: Should You Subscribe?
RBL is targeting the SME and MSME segments for its growth besides it is also tapping the large untapped rural markets
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The ongoing RBL public has everything going right. IPOs are attracting a fair share of the investible surpluses of households. Leveraged investors are borrowing to the hilt to subscribe. IPOs are delivering decent listing gains for investors. And banking and financial stocks are among this season’s headline grabbing stocks. But does this mean investors should subscribe to the RBL IPO? Will it deliver listing or long-term gains?
RBL is an old bank in town with a new look, modern avatar that is a play on the growth in Indian demography, and growth opportunities in under-banked rural segment. Having started off as a small regional bank in Sangli, Maharashtra back in 1943, the bank has found a spring in its performance, much of which has been achieved in the last six years.
Having being known as Ratnakar Bank for much of its 73-year old history, it’s now a full-fledged modern commercial bank with a new management taking over the reigns in 2010. Vishwavir Ahuja, who headed Bank of America’s India operations, turned the bank around in to a modern fast-growing commercial bank by making acquisitions and sprucing up lending activities. The bank took over businesses of the RBS, and also acquired credit card businesses to strengthen its retail product offerings.
No surprise then the bank clocked a stupendous annual growth of 45.8 per cent over FY12-16, while profits have seen a similar growth of 45.6 per cent.
RBL is targeting the SME and MSME segments for its growth besides it is also tapping the large untapped rural markets. The bank has not only entered into partnerships but also acquired stakes in firms to extend its rural reach. RBL recently acquired a minority stake in Swadhaar Finserve for Rs 20.5 crore, which is engaged in offering products and services to the underbanked rural population.
The bank is expanding its footprint across the country having opened 25 branches in cities like Kolkatta, Chennai, Bangalore, among others in the last year. While it has expanded its balance sheet rapidly, at the same time it has spruced up its risk management practices, thereby keeping NPAs in check at below one per cent.
Low cost deposits and a robust CASA growth are a key pillar of growth for banking activities and on this front the bank has not been able to spruce up its low-cost accounts. Its current CASA ratio stands at 18.46 per cent, which is similar to last year. But it has managed to lower its cost of funds to 8 per cent in FY16.
The issue will see the bank garnering around Rs 800 crore which will go some distance in boosting its capital adequacy ratio that currently stands at 12.94 percent as on March 2016.
The stock is being offered at a price band of Rs 224-225, which will result in a market value of Rs 8320 crore. However, the pricing is a tad stiff in the current environment that is putting a premium on financial services sector. The IPO’s valuations work out to 1.96 times on its FY16 book value. DCB, by contrast, is quoting at a price-to-book value of 1.8 times.
Looking at its valuations on the commonly used PE basis, the IPO is priced at 25 times FY16 earnings, as compared to DCB Bank’s 17 times.
While RBL has robust financials, good asset quality, expanding retail businesses, pricing is a key issue with the IPO. At 224-225, the stock is likely to see muted listing gains. However, over the long-term with a focus on rural and MSME, growth is expected to remain robust. Hence, investors should look at the stock favourably only if they have a horizon of staying invested for the next 1-2 years.