The IPO Hurdle:
The IPO process hit a road block. In the DRHP filed by the Bank with SEBI in June 2015, it was disclosed that the bank’s previous management had inadvertently violated Section 67(3) of the Companies Act 1956. Simply put, this section requires any company to have an IPO if shares are offered to more than 49 individuals in any financial year. This limit was enhanced in the Companies Act, 2013 to 200 but this too did not help RBL Bank’s IPO since the bank had issued shares to 2,591 & 1,969 investors via rights issues in 2003 and 2006 respectively.
A few other IPOs were also stuck due to similar violations. In December 2015, the SEBI relaxed the rules for companies which had issued shares to more than 49 investors but upto 200 investors. The new rules required the erring companies to provide an exit opportunity to the investors who were issued the shares. RBL bank did not fit into this category as well.
Relief from SEBI.
It appears that the RBL management and its merchant bankers made representations to the SEBI that although there has been an inadvertent violation but this has not harmed the investors in any manner. Investor protection is one of the key objectives of these laws.
It appears that on 17th March 2016, the SEBI directed RBL Bank to provide an exit opportunity to the investors to whom shares were issued in violation to Section 67(3). Acting on this direction, on 6th April 2016, RBL bank wrote to is “Settlement Shareholders” under the “Settlement Purchase Scheme”, whereby the settlement shareholders were given an option to tender their shares to one of the merchant banker to be offered in the OFS. In return the settlement shareholders would be paid at 15% p.a. compounded interest which amount came upto ₹ 120 per share. The shareholders had time till 27th April to respond to this offer.
During this period, the RBL Bank shares were already trading in the unlisted secondary market between ₹ 190 to 205 per share. Hence it is no surprise that, if at all; not many shareholders have tendered their shares at 120.
The bank has now gone back to its shareholders to vote for a resolution to raise an enhanced amount ₹ 1,500 Crs in an IPO. The e-voting results will be declared on 8th June 2016 and you don’t need to be a seer to figure out what the voting results will be.
Post this, the filing of fresh DRHP, SEBI approval & the IPO should sail through smoothly. I expect the IPO and listing by August end. This will be a happy ending and as they say ... they lived happily ever after.
IPO Price Band / Valuation:
FY 15 EPS was ₹ 7 per share & Book Value was ₹ 76 per shares. The bank has made a Pre-IPO allotment of 2.5 cr shares at a price of ₹ 195 per share. This is a trailing multiple of about 28 time earnings (P/E) and 2.6 times book value (P/BV).
During the financial year the bank has increased the share capital by about ₹ 500 crs by the Pre-IPO placement, the PAT for the year is expected to be ₹ 280-300 crs and the bank has paid interim dividend or ₹ 1.5 per shareFY1. Taking all this into account, my expectation is as mentioned below:
FY16 Earning per share (EPS) – ₹ 9/-
FY16 Book Value per share (BV/S) – ₹ 95/-
Going by the Pre-IPO placement price and the trailing multiples, the equivalent price now should be about ₹ 245/-. If we assume that the Pre-IPO placement was at a 10% discount to the previously planned IPO price then the IPO price can be expected to be around ₹ 270/-
Well run private sector banks have been rewarded by the listed markets with Price to book multiples of 2.6 to 9 times!!
Given the quality of management, high growth (40%+), low NPLs, and peer valuation, I think that the RBL IPO lower end of the price band will be minimum ₹ 245 and depending upon the prevailing market conditions, it can push 280 as well.
This article is contributed by Altaf Siddiqui, MD & CEO, Enrich Advisors Pvt. Ltd. For more investment ideas follow @PreIPOequity on Twitter.