Axis Capital: ‘Add’ on Equitas Holdings; target price at Rs 125

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Published: September 14, 2019 3:09:14 AM

ESFB will not be permitted to open new branches without RBI permission. Remuneration of MD & CEO will be frozen at existing levels.

Axis Capital, Equitas Holdings, target price, Axis Capital, Equitas Small Finance BankDual listing has already impacted the valuations of the existing listed company (holding company discount). (Reuters)

No immediate option – dual listing required:

Equitas Holdings did not get approval from RBI for extension of timeline (deadline was September 4, 2019) for listing of Equitas Small Finance Bank (ESFB). This is a key overhang on the stock and reason for significant underperformance (stock down ~20% in last 3 months).

We believe Equitas though looking at various alternatives to protect the interest of existing shareholders will have limited choice in the immediate term but to list the SFB. Dual listing has already impacted the valuations of the existing listed company (holding company discount). We like the core business but dual listing and RBI penalty will play a key role in the short term. We downgrade the stock to ‘Add’ while retaining TP of Rs 125 (upside of ~15% from CMP). At CMP, the stock trades at 1.5x/ 1.3x FY20E/ 21E ABV.

RBI penalty:

ESFB will not be permitted to open new branches without RBI permission. Remuneration of MD & CEO will be frozen at existing levels. Further restrictions may be imposed if the bank fails to make satisfactory progress towards the listing of its shares.

Further course of action:

Equitas has proposed a new scheme of arrangement wherein it intends to capitalise the free reserves and issue shares of the SFB to its shareholders without cash consideration, in proportion to their holding in EHL. This scheme of arrangement is subject to approval from Sebi, RBI, NCLT, shareholders and creditors.

In case the Scheme of Arrangement does not get approved, ESFB would be taking immediate steps for an IPO and get its shares listed as soon as possible. Reverse merge the holding company with the SFB post 5 years of operations (September 2021) if awarded approval from the regulators.

Norms of RBI that will impact Equitas and Ujjivan:

RBI, in its licensing norms to small finance banks, had kept the following criteria/ rules for the listed entities like Equitas Holdings & Ujjivan Financial Services. Key norms: (1) Promoter holding should be minimum 40% for the first five years of the small finance bank. (2) Promoter holding should reduce to below 30% by 10th year of operations of the SFB (to 26% within 12th year). (3) Small Finance Bank should be listed within 3 year.

Key issue:

Dual listing will make no sense as the listed entities have no other business and will lead to sub-optimal valuations for existing listed companies. If it gets RBI approval and collapses the holdco structure (merges the holding company and the bank), it will still miss the norms as there will be no identified promoters. Hence, the only way out is that the regulator issues clarification and simplifies the structure/ norms.

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