Currently trading at ₹125, FedFina is down nearly 11 percent from its issue price. The shares witnessed a weak debut and were listed on the stock exchanges at ₹137.7 on November 30.
The stock has gained about 5 percent in March so far, snapping 3 months of losses. It fell 9 percent in February 2024, 3.5 percent in January 2024 and 3 percent in December 2023.
The stock is currently 18.5 percent off its record high of ₹153.50, hit on December 15, 2023. Meanwhile, it advanced more than 6 percent from its 52-week low of ₹117.70, hit on February 29, 2024.
IPO Details
The ₹1,092.26 crore IPO was open subscription between November 22-24 at a price band in the range of ₹133-140. Fedbank Financial Services IPO was subscribed 2.24 times. The public number was subscribed 1.88 times in the retail category, 3.48 times in QIB, and 1.49 times in the NII category by November 24, 2023 (Day 3).
The IPO consisted of a fresh issue of equity shares up to the value of ₹600 crore and an offer for sale (OFS) of up to 35,161,723 equity shares from the promoters.
According to the RHP, the company planned to use the net proceeds of the new issue, to increase its Tier-I capital base to meet future capital requirements that will arise from the expansion of its assets and business. Additionally, a portion of the proceeds from the new issue will go to cover offering expenses.
Revenues
FedBank Financial Services reported a 27.8 percent increase in its net profit to ₹65.4 crore in the October-December quarter of the financial year 2023-24. The company earned a net profit of ₹51.17 crore profit in the previous year period. The company’s total revenue and total income from operations stood at ₹413.5 crore, a 34 percent YoY increase from ₹308.73 crore reported during the previous year period.
The company’s gross non-performing assets (NPAs) declined from 2.34 percent in the previous quarter to 2.19 percent, according to the Fedfina BSE filing. Its net NPA improved to 1.66 percent during the quarter under review. The financial firm also witnessed a 24 percent annual growth in expenses, which was reported at ₹3,344 crore in the reporting quarter.
Brokerages initiated coverage with buy calls
ICICI Securities: The brokerage has a target price of ₹184, which implies more than 47 percent potential.
The brokerage noted that during FY19-23, Fedbank Financial Services (Fedfina) achieved an impressive > 40 percent Compound Annual Growth Rate (CAGR) in Assets Under Management (AUM), while maintaining an average Gross Non-Performing Loan (GNPL) Ratio of approximately 1 .8 percent.
Over the years, Fedfina has transitioned from a mere supply partner to its parent, Federal Bank, to establishing itself as a robust independent Non-Banking Finance Company (NBFC). This development was supported by a solid foundation laid during its decade-long loan journey. Fedfina stands out among NBFCs by offering a diverse range of products tailored to the MSME segment, including small to medium Loan Against Property (LAP), housing loans, business loans, gold loans and unsecured business loans, it pointed out. Additionally, Fedfina has earned a reputation for providing timely and customized financial solutions to the informal self-employed segment, it said.
Backed by its strong parentage (one of only five bank-backed NBFCs), Fedfina boasts one of the lowest cost of borrowing as of March 2023. In addition, it maintains a diversified geographic presence, with no state contributing more than 20 percent of its AUM , ensuring a balanced risk exposure. In addition, Fedfina has consistently maintained best value quality standards, consolidating its position as a trusted player in the NBFC space, the brokerage added.
JM Financials: The brokerage has a target price of ₹160 for the stock indicating an upside potential of 28 percent from the current market price.
According to the brokerage, FedFina excels in the MSME finance sector with its focus on secured assets. Its flagship product, small-ticket LAP (STLAP), offers strong returns with minimal competition. Additionally, FedFina’s diverse portfolio includes medium bill LAP (MTLAP), affordable housing loans and gold loans, adding to its growth potential. With commercial loans comprising about 16 percent of its portfolio, FedFina is enjoying a profitability boost, it noted.
As a promoted banking entity, FedFina benefits from strong brand recognition and favorable borrowing costs, bolstered by recent credit rating upgrades, JM said. Its emphasis on secured trading and robust underwriting methods ensure healthy asset quality. With an experienced management team and a focus on risk management and technology, FedFina is poised for profitable growth with relatively low volatility, the brokerage added.
It forecasts an increase in Return on Assets (RoA) to 2.6 percent from FY26E, taking Return on Equity (RoE) to 16.7 percent from 14.4 percent in FY23. At current valuations (1.6x FY26e P/BV, 10.1x FY26e P/E), coupled with its strong growth profile and granular asset book, FedFina offers a significant margin of safety.
Equirus Securities: The brokerage also has a target price of ₹160, implying a 28 percent upside potential.
Backed by strong parentage, FEDFINA benefits from access to ample liquidity and capital. Its diverse and predominantly safe product portfolio has garnered strong credit ratings, including CARE ‘AA+/Stable’, CRISIL ‘AA/Positive’, and Indian Rating ‘AA+/Stable’, for long-term bank facilities and NCDs. These factors strengthen FEDFINA’s liquidity approach and help manage fund costs effectively, improving its Risk Management (RM) cost position, Equirus said.
While FEDFINA is well positioned on the passive side, its asset base is also diversified, with securitized products making up approximately 85 percent of Assets Under Management (AUM), it noted. With a mix of resources and support, FEDFINA is poised to deliver 29-30 percent AUM Compound Annual Growth Rate (CAGR) and 21 percent/25 percent/25 percent Net Interest Income (NII)/Pre-Provision- Operating Profit (PPoP). )/Profit After Tax (PAT) CAGR over FY23-FY26E, with AUM expected to reach around ₹194 billion by FY26 end, it predicted. In particular, Net Interest Margins (NIMs) are expected to expand from 8.2 percent in FY23 to approximately 8.5 percent in FY26, while operating expenses as a percentage of average assets are expected to improve from 5.6 percent in FY23 to 5.2 percent in FY26, further forecast. the brokerage
However, asset quality performance remains a key monitor, with potential impacts on credit costs. Although confident of margin expansion and operating leverage, FEDFINA acknowledges the risk of profitability and Return on Average Assets (RoAA) being affected by asset quality deterioration. Therefore, maintaining the quality of assets is crucial to support loan growth, Equirus stated. With conservative credit costs, it expects FY26E RoAAs / RoAEs at around 2.8 percent / 16.3 percent for the company.
Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decision.
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Published: 06 Mar 2024, 13:50 IST