Analysts positive about AU SFB IPO


AU Small Finance Bank (SFB) IPO will open for subscription on 28 June. Priced in the range of INR355 – 358 per share, the IPO will raise INR1912.5 crore at the upper end of the price band. The full OFS (Offer For Sale) will offer an exit to existing shareholders Warburg Pincus, International Finance Corporation (IFC), Chrys Capital, and Kedaara Capital. Early reviews and ratings of the upcoming IPO are positive. Here is a snapshot of what brokerage houses have to say in their AU SFB IPO recommendations.

Antique Stock Broking noted that AU SFB has adopted a strategy of contiguous expansion across regions, which ensures better risk controls. The brokerage house also mentioned that its decentralized hub & spoke model and robust risk assessment helped the company in maintaining high yields.

“Given the strong presence in niche customer segments, AU SFB’s profitability will be remain superior to most conventional banks. Despite the migration to SFB, we estimate that AU will report trough RoEs of ~17% in FY18 this will recover to 20% by FY20. This is significantly better than its listed peers which are currently reporting single digit RoEs. As such, valuations at 3.2x book on FY20 are reasonable, and investors can expect strong upside over the next few years,” analysts noted in the research note while offering the IPO a subscribe rating.

GEPL Capital has also added to positive AU SFB IPO recommendations. “AU Small Finance Bank Ltd. stands to gain from operating leverage. At a P/B of 5.09xs of FY17 BV, we believe that AU Small Finance Bank Ltd. demands a discount to its domestic peers. We assign a Subscribe rating to the IPO,” said its note on AU SFB IPO.

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While analysts at Prabhudas Lilladher have placed a subscribe rating on the IPO, they found valuations don’t leave much on the table. “At the upper end of the band at Rs358 AU SFB will trade at 5.3x FY17 P/ABV of Rs68 which we believe is fully valued with little scope of return in the near term. We recommend investors to subscribe to the issue with a long term investment objective,” noted the report.

Analysts at Equirus Securities noted that conversion to SFB will allow AU to raise low cost liabilities thereby bringing down the overall cost of funds. “Transitioning to SFB, could lead to ROE bottoming out in low double digits. In our view, AUSFB offers a good play on the vast aspiring underbanked segments. AU’s deserves a superior valuation viz peers on account of better loan growth, earnings and asset quality. At the upper end of the price band, AU is valued at 5.1x FY17 BV and we recommend SUBSCRIBE with a long term view,” said the report further contributing to positive AU SFB IPO recommendations.

Angel Broking has also written positively about the upcoming IPO. “At the upper price band of `358 the issue is offered at 5.1x its FY2017 BV. However, AU has reported a strong 48% PAT CAGR over FY2013- 17, and we believe it has the potential to deliver 30% PAT CAGR over FY2017- 19, and based on our quick estimates on FY2019 BV, the issue is offered at 3.5x. While the issue is offered at premium valuations, we believe the valuation is justified given the historical track record and strong growth potential the SFB offers. Hence, we recommend SUBSCRIBE to the issue,” said its research note.

The company’s evolution from a DSA of HDFC Bank to a significant retail lending NBFC has impressed Reliance Securities which has added to positive AU SFB IPO recommendations. “We expect AU SFB to attract higher valuation premium compared to its peers led by sustainability of high growth in diversified business amid lower assets quality risk. At the upper price band of Rs358, AU SFB market capitalization would stand at Rs102bn, which gives it price-to-book multiple of 5.1x on Mar’17 book value and P/E of 31.2x on FY17 profit. We recommend SUBSCRIBE to the Issue, as it provides favorable investment opportunity for the long-term investors,” opined the report.

Nirmal Bang feels AU SFB’s unique positioning helps in balancing valuations. “While the trailing valuation of 5.1x FY17 P/BV may look expensive after taking a first look, this is a unique model with no exact peers. An important distinguishing factor is that AUSFB is a small finance bank and can raise the deposits to keep its cost of funds low, unlike its peers. Therefore, in the long run the SFB model should do better compared to the NBFC model,” said the firm in its research note while suggesting investors to subscribe to the offer.


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