About the Company:

Federal Bank Limited is the promoter of Fedbank Financial Services Limited. Fedbank is one among the only five private bank-promoted NBFCs in India. In 1995, the company was established in Kochi, Kerala, under the name 'Fedbank Financial Services Limited' as a public limited company. It is registered with RBI to operate as a non-banking financial institution, excluding public deposits. In July 2021, the company relocated its registered office from Kerala to Mumbai, Maharashtra.

Fedbank is an NBFC with a focus on retail services, specifically targeting micro, small, and medium enterprises, as well as emerging self-employed individuals. The company provides a range of products, including housing loans, small and medium ticket loans against property, unsecured business loans, and gold loans.

In Fiscal 2023, Fedbank ranked second and third for the lowest cost of borrowing among MSMEs, gold loan, and MSME & gold loan peer groups in India. As of March 31, 2023, the company experienced the third fastest growth in Assets Under Management (AUM) among NBFCs in India, with a three-year CAGR of 33% from Fiscals 2020 to 2023. The company stands as the fastest-growing gold loan NBFC in India as of March 31, 2023, and continued to exhibit the fastest year-on-year growth among gold loan NBFCs in India as of June 30, 2023. Furthermore, as of June 30, 2023, 86.24% of the total Loan Assets are secured against tangible assets, specifically gold or customer's property.

As of June 30, 2023, the assets under management for mortgage loans, gold loans, and unsecured business loans were ₹47,024.46 million, ₹31,241.72 million, and ₹14,872.49 million, respectively.

The table provided below will aid in gaining a clearer understanding of the distribution of the company's Assets Under Management (AUM):

The company's main office is located in Mumbai, Maharashtra. As of June 30, 2023, it operates in 17 states and union territories throughout India, with a particularly robust presence in the Southern and Western regions. Notably, these states collectively account for over 75% of India's GDP in Fiscal 2023.

The following map and diagram provide a visual aid for a clearer comprehension of these statistics.

Industrial Overview:

India is poised for rapid growth, propelled by key drivers such as a vast population, favourable demographics, urbanization, rising per capita GDP, and an expanding middle-class population. Additionally, the implementation of the Account Aggregators framework is set to establish a robust financial data ecosystem in the country. The ongoing digitization efforts, coupled with the increasing role of digital channels in domestic financial transactions, further support economic growth and financial services. Favourable government schemes and subsidies contribute to this positive trajectory. As depicted in the image below, India is anticipated to emerge as one of the fastest-growing major economies.

In terms of the credit to GDP ratio, India has a low credit penetration compared with other developing countries, such as China indicating that the potential that can be tapped. Similarly, in terms of credit to households as a proportion of GDP as well, India lags other markets, with retail credit hovering at around 26% of GDP as of Fiscal 2023.

Considering only retail credit, there is significant untapped potential in India's market. Furthermore, this sector has demonstrated profitability for NBFCs.

Gold loans have experienced robust growth over the past decade, with organized lenders exhibiting an even more pronounced increase in Assets Under Management (AUMs). CRISIL MI&A forecasts growth in the gold loan industry, driven by market share expansion, awareness initiatives, and increasing customer comfort. Geographic diversification is expected, and demand from micro-enterprises and individuals is set to rise, with an anticipated AUM of ₹7,480 billion by March 2025, reflecting a 10-12% CAGR from Fiscals 2023 to 2025.

The lending in the MSME sector is anticipated to expand for various reasons, including a substantial credit gap in this segment, enhanced data availability and transparency, the ability to utilize multiple data points for credit assessment, the expansion of branch networks among MSME-focused entities, a decrease in risk premiums resulting from reduced information asymmetry, shortened turn-around-time (TAT), and the increased adoption of technology.

IPO Objectives:

The proposed utilization of the Net Proceeds is for the enhancement of the Company's Tier – I capital base. This is intended to address the anticipated future capital requirements arising from the growth in the Company's business and assets.

Financials:

Valuation:

The company's price-to-earnings ratio stands at 25.04, while the industry's average PE ratio is 28.82, suggesting that the issue price is undervalued. Additionally, the company's price-to-book ratio is 3.32, whereas the industry's PB ratio is 3.42, signifying an undervaluation of the issue price.

Peer Comparison

Key Risks:

· Negative Cashflow Uncertainty:

The company currently faces negative cash flow from operations, and there is no assurance that such negative cash flows will not recur in the future.

· Conflict of interest:

Potential conflicts of interest may arise as some directors and promoters of the company have interests in entities engaged in businesses similar to that of Fedbank

· Legal Proceedings Impact: 

 There are some outstanding litigations of the company. Any adverse outcomes in these proceedings in the future could adversely affect the business, cash flows, and reputation.

· RBI Observations on Non-Compliance:

The company is subject to periodic inspection by the Reserve Bank of India, and historical instances indicate that penalties have been imposed for specific non-compliances with the regulator's observations. Failure to comply with the Reserve Bank of India's observations poses a potential risk that could adversely impact the company's business, financial condition, results of operations, and cash flows.

IPO Details