IPO: Fedbank Financial Services

IPO details

Risk report

Management

• Is Fedbank Financial Services free from regulatory penalties?
  Yes, the management is free from regulatory penalties.
• Does the NBFC provide for its non-performing assets (NPAs) adequately? Specifically, is the provision-to-gross NPAs ratio more than 50 per cent?
  No, its provision coverage ratio (PCR) stood at 22.33 per cent, as of June 2023. One reason for such low PCR is that 86 per cent of its loan assets are secured against tangible assets.
• Do the top five managers have stock as a significant part of their compensation (more than 50 per cent)?
  No. While ESOPs have been offered in the past, it does not form a significant part of the top five managers' income.

Financial strength and stability

• Does Fedbank Financial Services have a fresh slippage-to-total advances ratio of less than 0.25 per cent? (fresh slippages are loans that became NPAs in the last financial year)
  No, the ratio stood at 1.52 per cent for the year ended FY23.
• Did the NBFC generate a current return-on-equity (ROE) of more than 12 per cent and a return-on-assets (ROA) of more than 1 per cent?
  Yes, the NBFC reported an ROE and ROA of 14.5 and 2.4 per cent, respectively, as of June 2023.
• Has Fedbank Financial Services increased its loan book by 20 per cent annually over the last three years?
  Yes, the NBFC increased its loan book by 36.6 per cent annually between FY21 and FY23.
• Has the NBFC increased its net interest income (NII) by 20 per cent annually over the last three years? (NII is the difference between the revenue generated from a NBFC's assets and the expenses associated with paying out its liabilities.)
  Yes, it achieved an annualised growth rate of 36 per cent in net interest income between FY21 and FY23.
• Is there a direct relationship between the increase in the loan book and the increase in net interest income?
  Yes, higher advances have translated into higher net interest income.
• Is Fedbank Financial's capital adequacy ratio more than 15 per cent?
  Yes, it reported a capital adequacy ratio of 19.71 per cent as of June 2023.
• Can the NBFC run its business without relying on any external funding in the next three years?
  Yes. With a capital adequacy ratio at 19.71 per cent as of June 2023, the financial strength, coupled with the IPO proceeds, would ensure the sustainability of business operations without external help.
• Did the NBFC generate an average net interest margin (NIM) of more than 3 per cent in the last two years? (Net interest margin or NIM denotes the difference between the interest income earned and the interest paid by a NBFC or financial institution relative to its interest-earnings assets like cash).
  Yes, its average three-year net interest margin (NIM) stood at 7.8 per cent.
• Is the NBFC's average gross NPA ratio (gross NPAs/total advances) over the last three years less than 1 per cent and the average net NPA ratio (net NPAs/total advances) less than 0.5 per cent?
  No, it reported an average gross NPA of 1.8 per cent and an average net NPA of 1.35 per cent in the last three years.
• Does the NBFC have a cost-to-income ratio of less than 50 per cent?
  No, it reported a cost-to-income ratio of 59.5 per cent in Q1 FY24.

Growth and business

• Will Fedbank Financial Services be able to scale up its business?
  Yes, the largely underpenetrated Indian retail credit market presents an opportunity for the company to grow.
• Does the NBFC have a loan book of more than Rs 1,00,000 crore?
  No, it reported an AUM of Rs 9,434 crore, as of June 2023.
• Does the NBFC have a recognisable brand truly valued by its customers?
  No. There are many banks, NBFCs and SFBs (small finance banks) lending to the MSME and retail segment.
• Does Fedbank Financial Services have a credible moat?
  No, it operates at a small scale in a commoditised market.
• Is the level of competition faced by the NBFC relatively low?
  No. Due to low corporate demand, banks have become more aggressive in the retail segment. Other than that, its competitors include established foreign commercial banks, NBFCs, housing finance companies (HFCs), SFBs, lending platforms and the private unorganised and informal financiers who principally operate in the local market. More players in consumer-facing businesses with a repository of data (such as e-commerce companies and payment service providers) are expected to enter the lending business, intensifying competition.

Valuations

• Is Fedbank Financial's price-to-earnings ratio lower than its peers' median level?
  No, it will trade at a price-to-earnings ratio of 27.2, higher than its peers' median level of 14.01.
• Is the NBFC's price-to-book ratio lower than its peers' average level?
  Yes, it will trade at a price-to-book ratio of 2.6, lower than its peers' median level of 2.98.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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