Bandhan Bank IPO today: Invest for the long-term, decent listing gains unlikely, brokerages say
Brokerages are recommending investors to apply for private lender Bandhan Bank Ltd’s Rs4,470 crore initial public offer (IPO), the largest bank IPO ever, that opens on Thursday from a long-term perspective, on the back of healthy financials and high return ratios.
However, as has been the case with Bharat Dynamics Ltd, they warned that the issue may not see decent listing gains, as there was not much left on the table for investors.
Kolkata-based Bandhan Bank started its banking operations in August 2015. It has set a price band of Rs370-375 per share for its IPO, and at the upper end of the price band, the share sale values the lender at Rs44,730 crore. The issue closes on 19 March.
According to R. Sreesankar, co-head of institutional equities at Prabhudas Lilladher Pvt. Ltd, Bandhan Bank’s return ratios are quite impressive, but its valuation is a bit stretched.
For the nine months ended December 2017 and nine months to December 2016, the bank’s net interest margins (NIMs) came in at 9.86% and 10.34%, respectively. Its annualised return on equity (RoE) was 25.55% and 27.88%, respectively, for the periods mentioned above, and annualised return on assets (RoA) at 4.07% and 4.39%, respectively.
“Agreed the returns are good, but when you start scaling up, can you maintain those numbers? That is going to be a wait and watch,” said Sreesankar.
“It’s a long-term play, but nothing is left on the table for investors in the near term. I would say one should subscribe only if they have a long-term perspective, for short-term play, one should avoid it,” he added.
Bandhan Bank’s valuation will surpass that of Federal Bank Ltd, which is valued at Rs18,722.09 crore, making it the seventh-most valuable private sector lender on the Indian bourses.
In a note on 12 March, Centrum Broking Ltd pointed out that at the higher end of the price band of Rs375, the issue is priced at 10.2 times its fiscal year 2017 adjusted book value.
“At this valuation, while the issue seems richly priced, the bank has a unique business model which cannot be directly compared to any other bank or NBFC (non-banking finance company) in India,” said Payal Pandya, the Centrum analyst, adding that healthy financials and return rations will ensure adequate investor interest.
“Further, the bank is expected to benefit largely from financialisation of household investments, especially in rural and underbanked areas, vast branch network and presence in high-growth segments of micro lending, retail and SME banking,” Pandya said in the note.
Bandhan Bank focuses on retail, medium and small enterprise (MSME) loans, and has focused on underbanked areas.
“Given the high valuations, investors can subscribe to the issue from a long term perspective. It must be noted that since the issue is being offered at expensive valuation, listing gains may be capped,” said Pandya.
Primary market activity has accelerated pace in March, with as many as five companies hitting the market with IPOs.
Also, HDFC Bank Ltd, the country’s most valued lender, is looking to launch its equity share sale of up to $2.5 billion (around Rs15,000 crore) in a fortnight, Mint reported on 5 March, citing people aware of the developments.
The appetite, however, is strong for quality issues.
“For HDFC Bank, the growth numbers are way above the industry average. It is adding a mid-sized bank to itself every year,” said Sreesankar of Prabhudas Lilladher, adding that appetite will be strong for both the bank offers, Bandhan and HDFC Bank, as they fall in niche categories.