Why maintain Suryoday SFB regardless of 25 per cent drop from IPO value


When Suryoday Small Finance Bank went public in March 2021, we recommended “subscription” to investors with a high risk tolerance and a long-term perspective. After the listing, the share has fallen by around 25 percent compared to the IPO. This follows deteriorating investor sentiment towards microfinance players (due to the lockdown and the Assam MFI Bill) and the underperformance the company showed in March 2021 (compared to our expectations at the time of going public).

While the bank experienced almost an interruption in its payouts after the nationwide lockdown in the first half of FY 2021, growth was not up to date in the second half – in FY21, payouts fell 28 percent year-on-year to 2,217 billion yen back. although the bank had its highest payouts ever in March 2021. With increasing pressures on collection efficiency and the marginal improvement in its NPA numbers, the bank took a cautious stance for most of the year.

Interest rate reversals due to NPAs and slower payouts weighed on net interest income (up 16 percent year-over-year FY21 to 0.5410.5 billion) and consequently net income for FY21 (down 89 percent year-over-year to ₹ 11.9 billion).

With 57 percent of its loan portfolio concentrated in states like Maharashtra and Tamil Nadu, which currently have local lockdowns, we expect the risks to remain in the quarters to come. In the event of impending risks in the short to medium term, an immediate revaluation of the share is not likely, unless the results of the coming quarters indicate otherwise. Nevertheless, the most important positive factors of the long-term fundamentals, such as the strong capital adequacy (51.5 percent) and no impending dilution risk with the involvement of promoters (which is a problem for competitors such as Ujjivan SFB and Equitas SFB) remain. We therefore recommend holding the stock for this time, given the likely lull in near-term growth.

Pandemic blues

We placed our IPO call because of the healthy return and the better cost-income ratio of the SFB compared to its competitors. However, due to the excess liquidity on the balance sheet and the rise in interest rate reversals due to the NPAs, Suroday’s return on investment fell from 2.5 percent in FY20 to 0.2 percent in FY21. The cost of income also increased from 47.1 percent in FY20 to 64.4 percent in FY21, after the bank’s total income in FY21 fell 40 percent year-on-year.

While the bank’s reported gross non-performing assets (GNPAs) were 9.4 percent at the end of the March 2021 quarter, they were only one notch above the proforma GNPA numbers reported in December 2020 (9.28 percent) . The dip in asset quality was limited in the final quarter of FY21 as customers accounted for around 3.3 percent of advances that opted to restructure.

In April 2021, when many states like Maharashtra opted for sporadic bans, the collection efficiency of the SFB (an EMI adjusted) fell from 87 percent in March 2021 to 82 percent efficiency.

Unlike 2020, when the recovery was pretty rampant during the unlock phase, we think the recovery could be slower this time as states are taking a lot of caution when reopening.

However, the RBI’s restructuring norms (which can now be extended to MSME borrowers with a maximum aggregate outstanding amount of up to 50 billion) could support the bank’s GNPA, similar to last year’s. Note that the bank has approximately 63.7 percent outstanding pension coverage on its existing non-performing loans.

These short-term risks seem to be priced into Suryoday SFB’s stock, however. The bank is currently trading at 1.5 times its book value, which is a significant discount to its peers (who trade at more than 2 times book value). Immediate upside is unlikely, however, and long-term investors can continue to hold the stock.

Healthy financing profile

Suryoday SFB continued to show healthy traction in its deposit business – total deposits increased 14 percent year over year to ₹ 3.256 billion in FY21. Retail deposits now make up around 80 percent of the bank’s deposits, compared to just 54 percent last year.

With deposits now accounting for 48 percent of the bank’s funds, Suryoday saw funds costs fall 59 basis points (bps) yoy in FY21 after deposit costs fell 57 bps yoy. This could help to widen the margin. That said, the bank still has a healthy capital buffer of 51.5 percent, mostly made up of tier 1 funds, which could help plan the bank’s growth story over the long term.