Fedbank Financial Services IPO: 10 key risk factors from RHP to know before investing

Fedfina IPO, which will close on November 24, comprises a fresh issue of equity shares aggregating up to ₹600 crore and an offer for sale (OFS) of up to 3.51 crore shares by selling shareholders.

Fedbank Financial Services IPO price band has been fixed in the range of ₹133 to ₹140 per equity share and the company plans to raise a total of ₹1,092.26 crore from the upper end of the price band.

The OFS comprises up to 54.74 lakh equity shares by its promoter Federal Bank and up to 2.96 crore shares by True North Fund VI LLP.

The company proposes to utilize the net proceeds from the fresh issue towards augmenting its Tier – I capital base to meet future capital requirements, arising out of the growth of its business and assets.

Read here: Fedbank Financial Services IPO: 10 must-know points from RHP

ICICI Securities, BNP Paribas, Equirus Capital Pvt Ltd and JM Financial are the Book Running Lead Managers to the issue, while Link Intime India Pvt Ltd is the IPO registrar.

The Federal Bank arm FedFina had filed DRHP for an IPO last year but pulled out of it amid unfavourable market conditions. It refiled IPO papers with SEBI again in July 2023.

Here are key risk factors from the Fedbank Financial Services IPO RHP.

Fedbank Financial Services IPO: Key risk factors

1) Fedbank Financial Services said it may face asset-liability mismatches, which could affect its liquidity and consequently may adversely affect its operations and profitability. 

Asset and liability mismatch, which represents a situation when the financial terms of an institution’s assets and liabilities do not match.

2) The NBFC had negative cash flows in the past and may continue to have negative cash flows in the future.

3) As on June 30, 2023, 93.65% of the company’s gross asset under management (AUM) was concentrated in six states and two union territories and any adverse developments in these regions could have an adverse effect on its business and results of operations.

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4) As the company handles high volumes of cash and gold jewelry in a dispersed network of branches, it said it is exposed to operational risks, including employee negligence, fraud, petty theft, burglary and embezzlement, which could harm its operations and financial position. 

5) The company also faces a risk of inability to maintain its capital adequacy ratio.

6) Another risk faced by the NBFC is of any deterioration in the performance of any pool of receivables securitized and assigned to banks and other institutions.

7) There are pending litigations against the company and its promoter. 

“Any adverse decision in such proceedings may render us/them liable to liabilities/penalties and may adversely affect our business, cash flows and reputation. Certain legal proceedings involving our Company and our Promoter are pending at different levels of adjudication before various courts, tribunals and authorities. In the event of adverse rulings in these proceedings or consequent levy of penalties, we may need to make payments or make provisions for future payments and which may increase expenses and current or contingent liabilities.” said the company in the RHP.

Also Read: Fedbank Financial Services IPO: GMP, review, other details. Apply or not?

8) The company also faces a risk of non-payment or default by its borrowers as it has a huge concentration of loans to emerging self-employed individuals (ESEI) and micro, small and medium enterprises (MSME). As of June 30, 2023, ESEI and MSME comprise 45.22% and 64.75% of its total loan profiles, respectively. 

9) The company is subject to periodic inspection by the Reserve Bank of India (RBI). In the past, the RBI has imposed penalties for certain non-compliances with its observations. Non-compliance with the observations of the Reserve Bank of India could adversely affect our business, financial condition, results of operations and cash flows. 

10) The company operates in a highly regulated industry and changes in the laws, rules and regulation applicable to it may adversely affect its business. 

Fedfina IPO Review:

Fedbank Financial Services has logged the third-fastest AUM growth amongst NBFC peers set in India, with a three-year CAGR of 33% during FY20-23 period. 

The company has also marked steady growth in its top and bottom lines over the last three years. Moreover, the NBFC has an effective underwriting capability due to its experienced underwriting team and established processes, which is likely to keep asset quality issues at bay going forward, BP Equities noted.

“On the valuation front, the issue is valued at a P/BV of 3.3x on the upper price band based on the FY23 book value. With most of the positives seemingly priced in, we advise investors to “Subscribe” to the issue for the benefit of listing gains,” BP Equities said.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Updated: 22 Nov 2023, 11:27 AM IST