Aavas Financiers IPO Recommendations: Expensive, but Subscribe


Aavas Financiers IPO RecommendationsAffordable housing finance lender Aavas Financiers launches its maiden public offer on 25 September as the 24th mainboard IPO in India this year. The Kedaara Capital-backed company has priced the public offer in the range of INR818 – 821 per share.

The company plans to raise INR400 crore to augment its capital base while existing shareholders Kedaara Capital, Partners Group ESCL, promoter Sushil Agarwal and others plan to sell as many as 16,249,359 shares. Here is a snapshot of major Aavas Financiers IPO recommendations:

Citing a high probability of RoE expansion, Emkay Global has recommended investors Subscribe to the IPO. “AAVAS has announced an IPO price band of Rs818-821. At an upper price band of Rs821, the stock is available at ~3.5x P/FY18 Book (post money) & ~56x P/FY18 earnings with ~10.2% FY18 ROEs (pre-dilution).

As the company accelerates its overall leverage, the likely probability of achieving superior RoEs of ~20% remains fairly high. Also with sufficient capital already in place, further risk of dilution is also quite limited. We recommend SUBSCRIBE to the IPO,” noted the brokerage house in its IPO note.

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Cholamandalam Securities feels the company has a healthy capital base to fund growth objectives in the long term. Tailwinds in the affordable housing segment would augur well for the loan book growth going ahead. Its target customers being self-employed individuals will aid in keeping the yields higher than peers and result in elevated NIMs. This coupled with stringent credit practices will keep the GNPAs lower and hence aid in scripting the earnings growth going ahead.

“The company will raise funds to the tune of INR 4bn through this issue, which will boost the capital adequacy further (CRAR will be 81%, considering RWA as at FY18). We believe the valuation of 4.16X FY18’s BV (on the upper limit of INR 821) is justified, given its loan growth potential, superior yields on assets and best in class asset quality. Hence we recommend a SUBSCRIBE to the issue,” said analyst Keerthi S in the IPO note.

Aavas Financiers IPO recommendations: Caution, long-term rule the ratings

Antique Stock Broking has a subscription recommendation but has warned of limited upside in the near term. “While the progress in affordable housing in India has been rather slow, with total outstanding loans at mere INR270bn (2% of mainstream housing), Aavas has crafted its own success story through a combination of identifying the right customer profile, the right collateral and heavy usage of analytics, systems and process.

However, valuations at 4.1x on post-money book and 43x on FY19e earnings do not leave much upside in the near term. Investors with long term outlook can look to subscribe,” said its research note.

Angel Broking voiced concern about the company’s high concentration in the state of Rajasthan. “On the valuation front, at the upper end of the IPO price band, Aavas demands price-book (PB) multiple of 4.3x on FY18 book value (considering Fresh Issue) and 69x FY18 EPS.

Established listed peers are trading in the range of 2.5- 3.5x of FY18 PB and in terms of PE these players are trading at valuation of 14-35x of FY18 EPS. Thus, considering the higher valuation, intense competition, and regional concentration of its loan portfolio we recommend NEUTRAL rating to Aavas Financiers,” said analyst Jaikishan J Parmar in the research note, adding to the list of caution in Aavas Financiers IPO recommendations.

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Choice Broking has advised investors to exercise caution, even though it is positive on the IPO. “On valuation front, Aavas is demanding a valuation of 5.9x to its FY18 adjusted book value, which is at a premium to its peer average of 4x.

The issue seems to be fully priced, thereby leaving little scope for listing gains. Additionally, considering the future business potential, profitability, stable asset quality and risk linked to the addressable target market, we are cautiously optimistic about the outlook of the company. Thus we assign a “Subscribe with Caution” rating for the issue,” said the brokerage house.

Hem Securities has also recommended investors take a long-term view. “The company is bringing the issue at p/b multiple of 3.94 on post issue book value at higher end of price band of Rs 818-821/share.

Company with its strong distribution network & deep penetration serving underserved customers in rural and semi-urban markets has shown decent financial performance over last few years. Hence, we recommend “Subscribe” on issue for long term purpose,” noted the research report.

As seen above, analysts are not unanimous in their Aavas Financiers IPO recommendations. Although the business is on a strong footing, the aggressive valuations demanded by the company leave little on the table for IPO investors (something we highlighted in our analysis) and a jittery secondary market isn’t helping matters either. This is reflected in the informal grey market where premiums have crashed.


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