1 April 2016
IPO Note | Sector: Financials
BSE SENSEX
25,270
Issue Summary
Period
Price band (INR)
Size (INR m)
S&P CNX
7,713
April 5-7, 2016
109 - 110
INR 21.6-21.7b
INR14.5offer for sale
and INR7.2b fresh issue
130.8m offer for sale
and 65.5m fresh issue
36.8
Equitas Holdings
Price Band: INR 109-110
First IPO of a small finance bank:
Incorporated in 2007, Equitas Holdings is
an NBFC focused on individuals and micro and small enterprises (MSEs) that
are underserved by formal financing channels. The company is one of the 10
recipients of small finance bank (SFB) licenses by the RBI and is the India’s
first small finance bank recipient to come up with an IPO.
Target segment:
Equitas’ target customers are low income and economically
weaker individuals operating small businesses, as well as MSEs with limited
access to formal financing channels. Equitas is a holding company and
operates through its three subsidiaries. Equitas Microfinance (EMFL) is
engaged in microfinance lending, Equitas Finance (EFL) in vehicle and MSE
lending, and Equitas Housing Finance (EHFL) is in affordable housing finance.
About the issue:
Total IPO size is INR21.7b, of which INR14.5b is offer for
sale from existing foreign investors. Post IPO, foreign shareholding will
decline from the current 93% to 35%.
Founder and Managing Director:
Equitas founder, Mr PN Vasudevan has
over two decades of experience in financial services. He started his career
with the Chola Group, where he was instrumental in starting the vehicle
finance business. Post that, he had also worked as Head of Consumer
Finance at DCB Bank. Mr. Vasudevan holds 3% stake in the company.
No. of shares (m)
MCap post issue
(INR b)
Founder and MD : MR. P N Vasudevan
Book running lead managers:
Axis Capital,
HSBC and Edelweiss
Registrars:
Link Intime
Objects of the issue
Investment into subsidiaries
to augment capital base for
growth requirements
Share holding pattern
FIIs
Public and
Others
Pre-issue
93
7
Post issue
35
65
Amount
(INR b)
[6.16]
Investment view
Equitas is a well-established player and has a strong management team that
can deliver business scalability. RoE (sub-10%) is likely to be subdued in
initial years due to dilution and initial cost of setting up banking operations.
However it has strong growth potential and can deliver +2% RoA. At INR110
stock is valued at 1.88x trailing post money book.
Financials snapshot: Equitas Holdings Consolidated
INRm
AUM
AUM Growth (%)
Net Profit
Yield (%)
Spread (%)
NIMs (%)
Opex / AUM
Gross NPA (%)
RoA (%)
RoE (%)
Leverage (x)
Earnings Per Share
Book Value Per Share
FY11
7,939
NA
285
31.7
18.3
21.9
14.1
0.7
3.32
9.95
1. 8
2.2
67.9
FY12
8,239
3.8%
-35
22.4
11.3
14.4
14.7
1.2
-0.4
-1.1
1.9
-0.3
68.0
FY13
14,838
80.1%
319
22.1
10.3
12.7
10.9
0.8
2.8
8.2
2.4
2.1
81.7
FY14
24,856
67.5%
743
21.9
9.8
12.4
8.1
0.7
3.2
12.2
2.6
4.0
102.1
FY15
40,099
61.3%
1,066
21.1
9.1
12.8
7.6
1.1
2.9
11.1
2.5
4.5
43.5
9MFY16
55,052
37.3
1,204
3
8.8
11.6
7.1
1.3
3.1
13.0
2.9
4.5
48.0
Sunesh Khanna
(Sunesh.Khanna@MotilalOswal.com); +91 22 3982 5521
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Equitas Holdings | IPO Note
Company background
Incorporated in 2007, Equitas Holdings is an NBFC focused on individuals and micro
and small enterprises (MSEs) that are underserved by formal financing channels. The
company is one of the 10 recipients of small finance bank (SFB) licenses by the RBI
and is the India’s first small finance bank to come up with an IPO.
Equitas’ target customers are low income and economically weaker individuals
operating small businesses, as well as MSEs with limited access to formal financing
channels. Equitas is a holding company and operates through its three subsidiaries.
Equitas Microfinance (EMFL) is engaged in microfinance lending, Equitas Finance
(EFL) in vehicle and MSE lending, and Equitas Housing Finance (EHFL) is in affordable
housing finance.
Equitas is headquartered in Chennai and has its operations spread across 11 states
through 539 branches, 8,067 employees and 2.88m customers as on 31 December
2015. On a consolidated level, it has AUMs of INR55b and a net worth of INR12.3b.
While the company started as an MFI, after four years of successful operations, it
diversified into other secured loan products, with different subsidiaries offering
vehicle finance, MSE finance, and housing finance. MFI contributes 53% of the loan
book, followed by vehicle finance (25.5%), MSE finance (17%), and housing finance
(4%).
Exhibit 1: Key financials
INRm
AUM
AUM Growth (%)
On-Book AUM
Off-Book AUM
Disbursements
Net Interest Income
Operating Expense
Net Profit
Yield (%)
Spread (%)
NIMs (%)
Opex / AUM
Gross NPA (%)
No of branches
No of employees
No of loan accounts (mn)
RoA (%)
RoE (%)
Leverage (x)
Earnings Per Share
Book Value Per Share
FY11
7,939
NA
6,268
1,671
9,024
1,532
986
285
31.5
18.3
21.9
14.1
0.7
281
2,492
1.4
3.32
9.9
1.8
2.2
67.9
FY12
8,239
3. 8%
6,160
2,079
7,682
1,169
1,187
-35
22.4
11.3
14.5
14.7
1.2
334
2,716
1.2
-0.4
-1.1
1.9
-0.3
68.0
FY13
14,838
80.1%
12,135
2,703
14,879
1,470
1,260
319
22.1
10.3
12.7
10.9
0.3
365
3,148
1.4
2.3
8.2
2.4
2.1
81.7
FY14
24,856
67.5%
21,232
3,625
23,844
2,460
1,618
743
21.9
9.8
12.4
8.15
0.7
432
4,477
1.9
3.2
12.2
2.6
4.0
102.1
FY15
40,099
61.3%
34,646
5,453
36,063
3,921
2,472
1066
21.1
9.08
12.0
7.61
1.0
505
6,275
2.5
2.9
11.1
2.5
4.5
43.5
9MFY16
55,052
37.3%
50,139
4,913
36,698
4,149
2,547
1204
20.3
8.8
11.6
7.1
1.3
539
8,067
2.8
3.1
13.0
2.9
4.5
48.0
Source: Company
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
2

Equitas Holdings | IPO Note
Key charts
Exhibit 2: AUM Mix: MFI loans form 53% of AUM
Housing
5%
MSE
17%
Exhibit 3: On-book loans over 90%
On Book (%)
21.0
25.2
18.2
Off Book (%)
14.6
13.6
8.9
Vehicle
Finance
25%
Microfinance
53%
79.0
74.8
81.8
85.4
86.4
91.1
FY11
Source: Company
FY12
FY13
FY14
FY15
9MFY16
Source: Company
Exhibit 4: Disbursements have grown +50% CAGR
Disbursements (INRb)
36.1
23.8
14.9
9.0
7.7
36.7
Exhibit 5: AUM has grown over 6x in last 4 years
AUM (INRb)
80.1
67.5
25
8
8
3.8
15
40
61.3
Growth (%)
55.1
FY11
FY12
FY13
FY14
FY15
9MFY16
FY11
FY12
FY13
FY14
FY15
9MFY16
Source: Company
Source: Company
Exhibit 6: Strong customer base with 2.88m loans a/c
Total Loan Accounts (mn)
2.88
Exhibit 7: Geographical mix: 77% of loans in TN & Maha. (%)
0.70 3.97 5.57
6.46
Gujarat
Karnataka
Madhya Pradesh
14.65
62.73
1.16
4.74
Maharashtra
Pondicherry
Rajasthan
Tamil Nadu
Source: Company
2.52
1.97
1.43
1.24
1.44
FY11
FY12
FY13
FY14
FY15
9MFY16
Source: Company
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
3

Equitas Holdings | IPO Note
Exhibit 8: Spreads have been coming down
Yield (%)
35
30
25
20
15
10
5
0
Spread (%) (rhs)
NIMs (%) (Lhs)
25
20
15
10
5
0
16.7
Source: Company
57.2
Exhibit 9: Borrowing Mix: Banks form 57% of funding (%)
26.1
NCD
Fis
Banks
Source: Company
Exhibit 10: AUM per branch is up 4x sinceFY12
Number of branches
AUM per branch (INR M)
505
79
539
102
Exhibit 11: Opex/AUM on a decline
Number of employees
14.1
14.67
10.92
2,492
2,716
6,275
4,477
8.15
7.61
7.14
Opex/AUM (%)
8,067
281
28
334
25
365
41
432
58
3,148
FY11
FY12
FY13
FY14
FY15
9MFY16
FY11
FY12
FY13
FY14
FY15
9MFY16
Source: Company
Source: Company
Exhibit 12: Consol. Asset quality healthy
Gross NPA (%)
1.19
0.68
0.39
0.27
0.18
0.12
FY12
FY13
FY14
FY15
9MFY16
0.73
0.61
Net NPA (%)
1.33
1.08
0.8
0.97
Exhibit 13: RoE low due to continuous dilution & low
leverage
RoA (%)
3.3
10.0
8.2
2.3
-1.2
FY11
-0.4
FY12
FY13
FY14
FY15
9MFY16
3.2
3.0
3.1
12.3
RoE (%)
11.2
13.0
FY11
Source: Company
Source: Company
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
4

Equitas Holdings | IPO Note
Microfinance business
Equitas started its business in 2007 as an MFI, focusing on transparency and
corporate governance. It is now the 5th largest MFI in India, with 377 branches
spread across seven states and one union territory. It offers loans for up to two
years, ranging from INR5,000 to INR35,000 through the Joint Liability Group (JLG)
model. Sourcing of customers happens through own employees and Equitas does
not involve any intermediaries. Collections happen on a fortnightly or monthly basis.
In 2007, when Equitas started, the MFI sector was completely unregulated. The
lending rate was high at 40%, though such rates were justified, as CoF was 14-15%
and opex cost was 15-20%. However, during the initial days, Equitas decided that
cost of growth would be borne by the investors and customers would only bear the
steady state opex cost (it estimated steady state opex at 7.5%). This led to lending
rate of ~25%, the lowest in the industry at that time.
To achieve low opex, the company relied heavily on technology and innovative
methods to bring down opex. However, it did not change the customer facing model
and stuck to the Grameen model (started by Dr Mohd Yusuf of Grameen Bank).
Equitas still follows the Grameen model for its MFI customers.
After the AP crisis, the RBI came up with regulations for the sector. It imposed a
lending cap of 26% (based on a simple formula of 10-12% margin or ‘base rate x
2.75’, whichever is less). RBI also allowed MFIs to charge 1% flat processing fees in
addition to interest. Equitas, which was already lending at 25%, did not face much
issue. However, it started charging 1% processing fees to build in additional buffer
for adverse times.
Exhibit 14: Financial snapshot: MFI business
INRm
AUM
AUM Growth (%)
Net Profit
Yield
Cost of Funds
Spread
Net Interest Margin
Gross NPA / On-Book AUM (%)
Net Profit
Total Loan Accounts
Number of branches
Number of employees
Return on Average Assets (%)
Return on Average Net Worth (%)
Earnings Per Share
Book Value Per Share
FY11
7,938
NA
300.9
31.7%
13.5%
18.3%
21.9%
0.7%
300.9
1,430,406
281
2,492
3.5%
10.5%
2.3
68.3
FY12
7,240
-8.8%
182.4
23.1%
11.2%
11.9%
14.9%
1.3%
182.4
1,241,453
264
2,159
2.0%
7.2%
1.16
11.2
FY13
11,347
56.7%
275.1
22.5%
12.0%
10.6%
12.3%
0.1%
275.1
1,428,752
286
2,402
2.5%
12.0%
1.5
12.8
FY14
15,030
32.5%
565.5
23.4%
12.4%
11.0%
12.2%
0.1%
565.5
1,935,003
323
3,074
3.6%
19.9%
2.8
15.7
FY15
21,440
42.6%
685.5
22.0%
12.7%
9.3%
11.8%
0.1%
685.5
2,449,694
361
3,922
3.5%
19.8%
3.5
19.1
9MFY16
29,348
36.9%
585.9
20.8%
11.9%
8.8%
11.1%
0.1%
585.9
2,782,147
391
5134
2.9%
19.1%
2.9
22.0
Source: Company
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
5

Equitas Holdings | IPO Note
Vehicle finance business
The vehicle finance business is conducted through the subsidiary, Equitas Finance
Limited (EFL). The used commercial vehicle finance customers are typically first-time
formal financial channel borrowers purchasing commercial vehicles. The customers
also include small fleet operators. As of December 31, 2015, the vehicle finance
business operations included a network of 134 branches in Tamil Nadu, Gujarat,
Maharashtra, Madhya Pradesh, Karnataka, Chhattisgarh, Rajasthan, Delhi, Haryana,
Punjab, Telangana and Andhra Pradesh. Most of these branches are in the same
premises as the microfinance branches at these locations. The vehicle finance
business had 52,274 loan accounts and AUM of INR14.05b as of December 31, 2015,
which forms 25.53% of the aggregate AUM.
Equitas also operates in the used CV space and provides loans to small fleet
operators. Such customers are typically first-time formal financial channel
borrowers, purchasing used commercial vehicles. However, they are required to
have the relevant driving license and knowledge about the vehicle being purchased.
These customers typically have limited access to bank loans for commercial vehicle
financing and mostly have limited or no credit history, but generally own assets such
as a house or property or vehicle.
Average ticket size is INR0.38m and average tenure is 3-4 years. Sourcing is done
through relationships with transporters and direct marketing activity in transport
hubs. Credit appraisal involves personal interview, guarantor, inspection of vehicle,
and document check.
Customers are sourced via field staff from their networks and relationships with
transporters through various means including telecalling and direct marketing
activities in transport hubs, where transporters tend to congregate. In addition,
Equitas enters into arrangements with dealers of used commercial vehicles.
Exhibit 15: Financial snapshot: Vehicle finance business
INR m
AUM
On-Book AUM
Off-Book AUM
AUM Growth (%)
Average AUM
Disbursements
Disbursement Growth (%)
Total Loan Accounts
Interest Income
Credit Cost
GNPA / On-Book AUM (%)
NNPAs / On-Book AUM (%)
Number of branches
Number of employees
Number of loan accounts
FY12
916.9
916.9
-
-
916.9
987.2
NA
3,100
53.7
5.7
0.5%
0.4%
62
491
3,100
FY13
3,045.2
3,045.2
-
232.1%
1,981.1
3,001.9
204.1%
11,051
424.8
27.2
1.0%
0.7%
71
674
11,051
FY14
8,014.7
7,562.9
451.7
163.2%
5,529.9
7,280.3
142.5%
26,877
1,100.4
124.4
1.8%
1.6%
98
1,292
26,877
FY15 9MFY16
11,754.0 14,056.2
11,508.5 14,032.0
245.5
24.2
46.7% 19.6%
9,884.3 12,905.1
9,015.2 8,298.8
23.8%
41,644 52,274
2,052.6 1,955.9
395.7
298.4
2.8%
3.8%
2.1%
2.8%
131
134
2,235
2,774
41,644 52,274
Source: Company
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
6

Equitas Holdings | IPO Note
Micro and small enterprise finance (MSE)
Equitas provides asset-backed financing, primarily focused on self-employed
individuals operating micro and small enterprises, typically in urban and semi-urban
locations. Most of its MSE finance business represents cross-sales to eligible higher
income microfinance business customers with a satisfactory track record. It has
presence in Tamil Nadu, Maharashtra, Madhya Pradesh, Gujarat, Rajasthan and
Karnataka.
As on December 31, 2015, MSE loan book was INR9.35b, with 46,000 customers and
average loan size of INR170k. Yields in this segment are 22% (similar to yields on MFI
loans). These loans are offered to top-end MFI customers, who have spent certain
time with the company and are credit-tested. These MSE loans are individual loans
and not group loans, and are secured by immovable property. Though the loans are
individual loans, group recommendation is required. The book is clean, with no NPA.
As income appraisal in this segment is tough, there are two layers of checks – credit
appraisal team and credit supervision team. The credit appraisal team consists of
the credit officer and the branch manager, who try to assess income through field
visits. The credit supervision team randomly scrutinizes the cases to see if the
income assessment is done correctly.
Exhibit 16: Financial snapshot: MSE business
INR m
AUM
AUM Growth (%)
Disbursements
Total Loan Accounts
Credit Cost
Gross NPA / On-Book AUM (%)
Net NPAs / On-Book AUM (%)
Number of branches
Number of employees
Number of loan accounts
Closing AUM per branch (INR M)
Closing AUM per employee (INR M)
Closing AUM per loan account ('000)
FY14
874
-
902
2,232
2
-
-
98
1,292
2,232
8.9
0.7
0.4
FY15
5,110
5
4,633
22,198
11
0.2%
0.2%
131
2,235
22,198
39.0
2.2
9MFY16
9,355
1
5,216
45,992
16
0.3%
0.3%
134
2,774
45,992
69.81
3.33
0.2
0.2
Source: Company
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
7

Equitas Holdings | IPO Note
Housing finance
Equitas provides housing finance through a wholly-owned housing finance
subsidiary, which extends micro-housing and affordable-housing loans to self-
employed individuals, who have limited access to loans from banks and larger
housing finance companies.
A significant percentage of micro-housing finance products are cross-sell products
offered to eligible higher income microfinance customers with good track record.
Customers in this segment typically run small enterprises and/or are employed in
the informal segment. The typical tenure of such loans is 3-20 years. As on
December 31, 2015, AUM was INR2.3b (4.16% of consolidated AUM), with average
ticket size of INR0.26m and customer base of 4,022.
Exhibit 17: Financial snapshot: Housing finance
INR m
AUM
AUM Growth (%)
Disbursements
Total Loan Accounts
Cost of Funds
Credit Cost
Yield
Spread
Net Interest Margin
Operating Expense / Average AUM
Gross NPA / On-Book AUM (%)
Net NPAs / On-Book AUM (%)
Net Profit
Return on Average Assets (%)
Return on Average Net Worth (%)
Earnings Per Share
Book Value Per Share
FY12
82
-
82
77
-
0.3
2.9%
2.9%
2.9%
72.3%
-
-
-47
-44.0%
-45.4%
-5.9
7.5
FY13
446
4.4
385
398
3.7%
1.9
14.1%
10.4%
13.0%
21.7%
-
-
7
2.1%
2.8%
0.2
8.9
FY14
937
1.1
607
1,617
10.4%
2.2
16.5%
6.1%
10.1%
9.3%
0.57%
0.49%
15
1.9%
4.1%
0.4
9.3
FY15
9MFY16
1,795
2,292
0.9
0.3
1,124
758
3,111
4,022
11.9%
11.3%
7.7
8.6
16.4%
15.8%
4.5%
4.5%
6.6%
5.9%
6.1%
5.6%
1.7%
3.0%
1.4%
2.5%
22
12
1.4%
0.7%
5.8%
4.0%
0.5
0.3
9.8
10.1
Source: Company
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
8

Equitas Holdings | IPO Note
Competitive strengths
Among the top-5 microfinance companies in India
Equitas is among top-5 MFIs in India; its microfinance operations span across
391 branches in seven states.
Microfinance business AUM increased at a CAGR of 43.60% from INR7.2b as of
FY12 to INR29.3b as of 9MFY16 and forms 53.47% of aggregate AUM
Its large customer base helps the company to cross-sell other products to
existing clients.
Exhibit 18: Equitas among top 5 MFI operations in India
Bandhan
SKS Microfinance
Janalakshmi
Ujjivan
Equitas
AUM
102.4
48.0
45.0
35.0
29.3
Client base
6.7
3.7
2.7
2.5
2.8
Source: RHP
Successful track record in underserved customer segment, offering
significant growth opportunities
India is home to 21% of the world’s unbanked adults and there are approximately
57.70m small business units, mostly individual proprietorships, which operate
manufacturing, trading or services activities. Equitas has developed an
understanding of this segment and focuses on the individual and MSE customer
segments that are underserved by formal financing channels. Given the significant
growth opportunities, Equitas intends to continue expanding its product portfolio to
cater to the various financing requirements of these customer segments.
Governance standards and transparent operations lead to investors’
confidence and customer goodwill
Corporate governance standards and transparent operations have enabled Equitas
to strengthen its relationships with target customer segments, and leverage its
reputation and goodwill to expand operations and product portfolio. The company
has received the CRISIL Governance and Value Creation Level-2 rating. Its high
governance standards and stringent operational controls have enabled it to
generate confidence among, and attract significant equity support from, several
investor groups including international development finance institutions such as IFC,
CDC, FMO and DEG as well as various private equity investment funds.
Diversified product offering and markets, with significant cross-selling
opportunities
Diversification of business and revenue base with respect to product offerings and
markets served is a key strength. Equitas offers a range of financial products and
services, including microfinance, used commercial vehicle finance, MSE finance and
housing finance, that provide cross-selling and up-selling opportunities. For
example, a majority of MSE finance business and a significant percentage of the
micro-housing segment business represent cross-sales opportunities to eligible
higher income microfinance customers with satisfactory track record.
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
9

Equitas Holdings | IPO Note
Experienced management
The senior management team has significant experience in the financial services
industry. It has developed and implemented its business strategy and is committed
to to fair and transparent business practices while maintaining effective risk
management and competitive margins. Managing Director, Mr PN Vasudevan and
other members of the senior management team have significant experience in the
financial services sector.
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
10

Equitas Holdings | IPO Note
Business strategies
Leverage existing network and customer base:
Equitas intends to leverage its large
branch network and large customer base across India to develop its proposed SFB
operations. It is already offering diversified products and has experience in the
same. It will add only one new product, Gold Loans once the bank starts, as there is
good demand from farmers. The product is already offered on a pilot basis from 5-6
branches. The management is targeting to start banking operations by October-
November 2016, though the deadline is April 2017.
Expand operational network and strengthen marketing and sourcing partnerships:
Equitas continues to expand its operations in target markets by establishing
additional branches across India, particularly for its microfinance and vehicle finance
businesses, with other financing products following into such new markets. It
intends to further increase penetration in the western and northern states of India
as well as commence operations in eastern states of India. Its customer origination
and servicing efforts strategically focus on building long-term relationships with its
customers and address specific requirements in a particular region. In addition,
Equitas continues to expand its customer origination network for its vehicle finance,
MSE finance and housing finance business across India by entering into sourcing
arrangements with used commercial vehicle dealers, direct sourcing agents and
other intermediaries.
Leverage large customer base, operational network and industry experience:
Equitas intends to further diversify its product portfolio by growing MSE finance,
vehicle finance and housing finance businesses. It continues to leverage its large
customer base, branch network across India, and experienced employee-base to
offer additional financing products to existing customers and expand its customer
base. In addition to the microfinance business, its used commercial vehicle and MSE
customer segments provide significant opportunities for cross-sales of two-wheeler
loans. Its fast growing business and network with commercial vehicle owners,
potential commercial vehicle purchasers, vehicle dealers, and various market
intermediaries including direct selling agents provide significant opportunities for
the development of an e-platform to enable manufacturers, traders and distributors
to effectively engage with and negotiate freight terms with transporters. EHFL has
set up a subsidiary, ETPL in October 2015, to develop such an e-platform to support
settlement freight transactions on a fee based model. In addition, it intends to
deploy real-time tracking systems in commercial vehicles using such services to
enable real-time freight status information.
Continue to reduce operating costs and improve operational efficiencies:
Equitas’
operating expenses as a percentage of its AUM have been declining in recent years,
and it continues to identify and implement measures that will enable it to sustain
and further decrease its operating expenses. It continues to invest in its technology
platform and technology-enabled operating procedures to increase operational and
management efficiencies and ensure strong customer credit quality. Further, it
intends to implement mobile-based applications to make the loan application
process convenient to its customers and streamline credit approval, administration
and monitoring processes.
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
11

Equitas Holdings | IPO Note
Key challenges
Challenges in conversion to small finance bank include compliance with the
shareholding pattern, maintenance of statutory ratios, ability to raise deposits and
ramping up the branch network to make in compliant with bank standards. Below is
our take on each of them:
Building deposit franchise:
Buling a deposit franchise will be the biggest challenge,
while Equtias has a strong customer base of 2.88m; however this segment is not a
big saver. Moreover once restrictions on inter-bank borrowings kick-in, Equitas will
have to depend on deposits to fund its growth. While garnering low cost CASA
deposits will be a slow process, Equitas could resort to bulk deposits by offering
slightly higher rates than commercial
Maintenance of statutory ratios:
Starting March 2017, Equitas would have to
comply with CRR and SLR norms. This would be a negative carry on as the blended
cost of funds is over 11% as of now and building CASA would take time.
Complying with shareholding norms:
To reduce the FII stake from 93% to below
49%, Equitas has come up with an IPO, where FIIs would sell a part of their stake to
domestic investors. At the same time, there would be some fresh equity infusion,
where all the subscribers would be domestic. This would help build net worth and
lower leverage, but would also suppress RoE for a few years.
Ramping up branch network:
Existing network of 539 branches are inadequate to
handle all the functions of a small bank. Reasonable investments would be needed
to scale up the branch infrastructure to make it compliant to banking standards.
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
12

Equitas Holdings | IPO Note
Key risks
No operating history in the banking business:
Equitas has no operating history or
experience in the banking business. Accordingly, inability to manage the business
risks and uncertainties associated with setting up any new business venture may
adversely affect its operations, financial condition and prospects.
Business model and regulatory framework governing SFBs are untested in India:
The RBI issued the SFB Guidelines on November 27, 2014 to license SFBs in the
private sector to, inter-alia, supply credit to micro and small enterprises and
agriculture and provide banking services in unbanked and underbanked areas in
India. The RBI granted SFB In-Principle Approval through a letter dated October 7,
2015 to Equitas. It cannot be assured that such SFBs will be able to provide credit
and banking services to the unbanked or underbanked populations in a profitable
manner or at all or that the products and services offered by such SFBs would
achieve market acceptability. While Equitas intends to rely on its experience in the
microfinance, vehicle finance and housing finance businesses to develop and
implement certain processes and policies for the proposed SFB, it cannot be assured
that such policies and processes will be effective.
Concentration in the state of Tamil Nadu:
Approximately 60% of its overall portfolio
is in the state of Tamil Nadu. This exposes Equitas to the risks and rewards of being
overly dependent on a single state. Deficient rainfall, unfavorable political
environment, and slowing state economy could impact its ability to grow and
operate in that state. We also note that outstanding credit per household is
amongst the highest in Tamil Nadu and could imply slower growth in the coming
years. It also implies that the borrower leverage is relatively high in the state.
Ability to convert itself into a small bank:
Conversion to small finance banks
involves multiple challenges such as complying with shareholding norms, re-
vamping the branch network, ability to manage liabilities and statutory
requirements. This would require management bandwidth that is far different than
the one required for managing an NBFC.
Rising NPAs in relatively unseasoned vehicle finance book:
Approximately
70% of
its vehicle finance book has been disbursed in the past twelve months, implying that
the book is largely unseasoned. Despite this, GNPAs have increased to 3%. While 3%
GNPAs are not unusual for NBFCs operating in used CV space, we will monitor the
NPA levels, as the book gets seasoned.
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
13

Equitas Holdings | IPO Note
Financials and valuations
INCOME STATEMENT
Y/E MARCH
Interest Income
Interest Expense
Net Interest Income (Incl Sec.)
Change (%)
Other income
Net Income
Change (%)
Operating Expenses
Pre Provision Profits
Change (%)
Provisions (excl tax)
PBT
Tax
Tax Rate (%)
Add: Prior period adjustments
Profits for Equity SH
Change (%)
Proposed Dividend
BALANCE SHEET
Y/E MARCH
Equity Share Capital
Reserves & Surplus
Networth
Borrowings
Change (%)
Other liabilities
Change (%)
Total Liabilities
Receivables
Change (%)
Investments
Net Fixed Assets
Other assets
Total Assets
E: MOSL Estimates
2011
2,220
688
1,532
172
1,704
986
717
277
440
151
34.3
-4.0
285
0
2012
1,811
642
1,169
-23.7
176
1,344
-21.1
1,187
158
-78.0
50
108
148
136.9
5.1
-35
-112.2
0
2013
2,546
1,076
1,470
25.8
286
1,755
30.6
1,260
496
214.1
89
406
79
19.5
-8.0
319
-1,018.2
0
2014
4,355
1,895
2,460
67.4
480
2,940
67.5
1,618
1,322
166.8
184
1,138
397
34.8
1.9
743
133.0
0
(INR Million)
2015
6,868
2,947
3,921
59.4
691
4,612
56.9
2,472
2,140
61.9
504
1,636
566
34.6
-3.3
1,066
43.4
0
(INR Million)
2015
2,689
9,019
11,708
30,322
64.0
2,619
63.3
44,649
34,646
63.2
1,757
467
7,778
44,649
2011
444
2,574
3,018
5,919
734
9,671
6,268
2
230
3,172
9,671
2012
444
2,578
3,023
5,638
-4.7
948
29.1
9,608
6,160
-1.7
2
250
3,196
9,608
2013
578
4,142
4,719
12,744
126.0
1,076
13.6
18,539
12,135
97.0
75
236
6,093
18,539
2014
726
6,694
7,420
18,492
45.1
1,604
49.0
27,516
21,232
75.0
36
272
5,976
27,516
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
14

Equitas Holdings | IPO Note
Financials and valuations
RATIOS
Y/E MARCH
Spreads Analysis (%)
Avg Yield on loans
Avg Cost of funds
Spreads on loans
NIMs on AUM
Profitability Ratios (%)
RoE
RoA
RoA on AUM
Cost to Income
Empl. Cost/Op. Exps.
Asset-Liability Profile (%)
Net NPAs to Adv.
Debt/Equity (x)
Average leverage
2011
31.7
11.6
20.0
19.3
2012
25.7
11.1
14.6
14.4
2013
19.1
11.7
7.3
12.7
2014
19.2
12.1
7.0
12.4
2015
18.5
12.1
6.4
12.1
9.4
2.9
3.6
57.9
45.8
10.2
0.4
2.0
2.0
-1.2
-0.4
-0.4
88.3
53.8
12.3
0.1
1.9
1.9
8.2
2.3
2.8
71.8
61.9
9.0
0.2
2.7
2.4
12.2
3.2
3.7
55.0
62.0
7.0
0.6
2.5
2.6
11.1
3.0
3.3
53.6
62.7
6.9
0.8
2.6
2.6
1 April 2016
For additional information & risk factors refer to the Red Herring Prospectus
15

Equitas Holdings | IPO Note
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For additional information & risk factors refer to the Red Herring Prospectus