Fino Payments Bank Limited - IPO Note

Finance - Others

Fino Payments Bank Limited - IPO Note

Finance - Others

Price range
Rs. 560 - 577
Issue Period:
Oct 29, 2021
Nov 02, 2021
October 27, 2021

Stock Info

CNX Nifty
Face value (Rs.)
Market lot
Issue size
Rs. 1200.29 cr.
Public Issue
2.08 cr. shares
Market cap post IPO
Rs. 4,669 – 4,801 Crores cr.
Equity Pre - IPO
7.8 cr.
Equity Post - IPO
8.32 cr.
Issue type
Fresh Issue and Offer for Sale

Shareholding (Pre IPO)

Source: Ace equity, StockAxis Research

Shareholding (Post IPO)

Source: Ace equity, StockAxis Research

Key Strengths and Strategies

Distribution, Technology, and Partnership (DTP) Framework
The bank’s DTP enables it to serve target market efficiently and is designed to achieve improvements on three key challenges like scale, service, and sustainability associated with serving such target market. This framework creates a network effect and facilitates interplay between each of distribution, technology, and partnerships. With respect to:

Fino Payments Bank

Source: Company RHP

As per RHP, the framework differentiates the bank from its competitors, is difficult to replicate, promotes effective delivery of products, reinforces positive customer experiences, facilitates strong relationships, and improves operational and strategic decision making.

Asset Light Business Model
Banks’s merchant-led model is a capital light business strategy in respect of network expansion and except for referrals of third-party loan providers, Fino do not offer any lending products and it do not hold credit risk for loans. In addition, its technology platform allows it to service a pool of customers and cater to their diversified requirements. In addition, its focus on and use of technology helps Fino in expanding reach in India without incurring relatively higher costs associated with traditional bricks and mortar branch presence.

Fino incurs minimal capital expenditure costs in connection with on-boarding merchants, because the on-boarding and setup costs are borne by the merchant, and Fino’s technology simplifies merchant on-boarding and training process. This approach presents opportunities of high operating leverage. Further, once a merchant has been onboarded, it is possible for Fino to offer additional products through the same merchant. Over time, the merchant cross-sells new or third-party products, which increases the revenue per customer at minimal to no cost to Fino, which in turn, improves operating leverage and ability to achieve profitability.

Continued Innovation Leading to High Growth Products and Diversified Revenue Streams
Fino payments bank is committed to establish itself as a modern technology-enabled bank that offers a comprehensive suite of products to target market via a range of touch-points. It intends to target high growth products with high margins within existing offering, as well as exploring new products, in each case with a focus towards products offered through its “own” channel. Typically, the “own” channel products generate higher margins and the banks aims to expand this through new products and additional merchants. The bank has identified and expect that CASA and micro-ATMs have high growth potential. It is actively exploring the potential of tie-ups with third party financial institutions such as NBFCs for referral credit products designed for customers, where fino payments bank will earn fees on such referrals.

Expand and Deepen Customer Sourcing Capabilities
As of September, 2021, the Fino had presence in over 90% of districts, and during the last three financial years and three months ended June, 2021, it acquired ~6,96,500 merchants across its network (including “own” and API channel merchants). Additionally, it had several strategic relationships with businesses across the country, including with a State Road Transport Corporation where they introduced a near field communication-based contactless payments solutions for the mass transit system. With a goal to acquire more customers, it intends to continue expanding network to drive deeper penetration and sustainable operations in these regions and communities, focusing on underserved and unserved individuals and micro businesses that have limited or no access to formal banking channels.

It also intends to focus on increasing the adoption of CASA offering by customers as they believe this acts as a key customer sourcing gateway for certain of its other products. It expects that growth will come via further expansion of geographic footprint and deeper penetration in the regions it currently operates in. This is likely to be achieved by ensuring that more merchants are on-boarded, departure rates of existing merchants remain low, continuing to provide merchants with opportunities to cross-sell various products and ensuring that merchant commission paid per transaction increases.


High Concentration of Merchants in a Few States: Out of the total number of ‘own’ merchants, 46% of them are in three states of Uttar Pradesh (70,847), Bihar (58,452), and Madhya Pradesh (38,277) as of June 2021. Also, the revenue from these three states contributes 43% (FY21) and 47% (As of June 2021) to the total revenue. There can be no assurance that the demand for its products and services will grow in the future in these regions.

Attrition Rate of Business Correspondent Merchants: Though the overall merchants of the bank are growing over the years but attrition rate has also needed to be looked at. In FY19, FY20, FY21, and June 2021, the attrition rate of BC merchants was 69.06%, 32.88%, 11.38%, and 8.81%. In addition, to the extent these third-party entities violate laws, other regulatory requirements or act inappropriately in the conduct of their business, the bank’s business and reputation could be impacted, contracts may be terminated or penalties could be directly imposed (HDFC Bank has alleged certain irregularities by Fino Payments Bank and has filed a suit for damages of ~Rs. 1.86 crores).

Highly Competitive Industry: The banking and financing sector in India is highly competitive and Fino payments bank faces competition across all its products and services from other payments banks, certain fintech companies, micro finance institutions, small finance banks, as well as from scheduled commercial banks, public sector banks, private sector banks, NBFCs, and foreign banks in India.

Negative Cash Flows: In FY20 (-83.67 crores), FY21 (-32.22 crores), and as of June 2021 (-64.06 crores), the bank has negative cash flow from operations.

Offer for Sale: Only ~25% (~Rs. 300 crores) of the issue size of the IPO will come to the company and balance (~Rs. 900 crores) is OFS.

Company Description

Company Profile
The promoter of Fino Payments Bank Limited – Fino PayTech Limited – got RBI licence to set up payments bank in March 2017. Fino Payments bank is a fintech which offers a diverse range of financial products and services that are primarily digital and have payments focus. It operates an asset light business model that relies on fee and commission-based income generated from merchant network and strategic commercial relationships. These merchants also cross-sell other financial products and services which Fino offers such as third-party gold loans, insurance, bill payments, and recharges. As per the filings, Fino targets those customers which are typically been overlooked by most of the large Indian financial institutions. This section of Indian society is characterized by low levels of financial literacy and technology use, lack of financial inclusion and typically does not have access to even basic banking services.

The products and services which Fino offers include current accounts and savings accounts, issuance of debit card and related transactions, facilitating domestic remittances, open banking functionality, withdrawing and depositing cash (via micro-ATM or Aadhaar Enabled Payment System), and cash management services. In addition, in August, 2021 it launched Sampaan Current Account, the second current account in its suite of accounts offered to customers.


Outlook and Valuation
The Fino Payments bank is focused on financial inclusion and helping average Indian in remote areas to access banking services by going to nearby mom-and-pop store. From Q4FY20, it has started being profitable. Though it is seen that number of merchants are growing and number of transactions has also picked up, we believe the platform may not have high growth in near-to-medium term as financial inclusion will take more time. We also see that the bank faces competition from banks, NBFCs, other payment banks, among others which are also trying to tap the hinterland. We would like to track the performance of the bank for a few more quarters. At the upper price band of Rs. 577, the issue is richly valued at 16.7x of FY21 P/BV. The investor can give this issue a pass . We recommend AVOID on this issue.

Financial Highlights

Particulars FY19 FY20 FY21 Q1FY22
Own Merchants 96843 192464 335359 366861
Marchants on API Channel 4387 84935 306533 357810
Net Worth (Rs. Cr) 162 130 151 154
Deposits (Rs. Cr.) 48 118 243 251
Investments (Rs. Cr.) 73 128 504 558
Capital Adequacy Ratio % 65.45% 60.87% 56.25% -
Diluted EPS -8.00 -4.11 2.62 0.40
ROE -32.30% -21.90% 14.60% -
NAV - - 19.3 19.70

Peer Comparison

Particulars FY21 (Rs. in Cr) Deposits Net Worth CRAR (%) Branches Banking Touch Points Debit cards outstanding Volume of transaction at ATM & POS
PayTM Payments Bank 3450 480 62.4% (FY20) 6 2.1 6.377 4.606
India Post Payments Bank 855 570 79.2% 650 0.014 0.111 0.07
Airtel Payments Bank 596 320 90.2% (FY20) 31 0.05 0.172 0.446
Fino Payments Bank 251 150 54.8% 54 0.072 0.226 0.691
Jio Payments Bank 17 130 2347.0% 9 NA NA NA
NSDL Payments Bank 7 140 230.0% 1 NA 0.01 0.02

Source: Company RHP

Key Information

Use of Proceeds:
The total issue size is ~Rs. 1,200 crores, of which ~Rs. 300 crores are fresh issue and balance (~Rs. 900 crores) is OFS. The company will utilise the net proceeds from the fresh issue to augment its Tier – 1 capital base to meet future capital requirements.

Book running lead managers:
Axis Capital Limited, CLSA India Private Limited, ICICI Securities Limited, and Nomura Financial Advisory and Securities (India) Private Limited

Rishi Gupta (MD and CEO), Ashish Ahuja (Chief Operations Officer), and Ketan Dhirendra Merchant (Chief Financial Officer)