AU Financiers IPO Review: Amar Akbar Anthony?

Jaipur-based AU Small Finance Bank (formerly AU Financiers) will launch its IPO next week which will be third IPO of a microfinance company in recent times. Last year, Ujjivan Financial Services and Equitas Holdings launched their IPOs which went on to reward investors quite handsomely. As a result, investors have high hopes from AU Small Finance Bank IPO. Priced in the range of INR355 – 358 per share, AU Small Finance Bank IPO will open on 28 June and will remain open till 30 June. The IPO will be managed by ICICI Securities, HDFC Bank, Motilal Oswal Investment Advisors and Citigroup Global Markets India while Link Intime will be the registrar. Through AU Financiers IPO review, we try to find out if this much-awaited public offer can repeat the success of its predecessor. Here are some essential details about the IPO.

AU Financiers IPO Review: Full OFS and marquee names

Just like the recently concluded CDSL IPO (which saw a whopping subscription of 170 times), AU Financiers IPO will also be entirely an Offer for Sale (OFS) issue. In total, 53,422,169 shares are to be sold by existing shareholders. The share sale will be led by Redwood Investment (Warburg Pincus) which plans to offload 14,800,000 shares while International Finance Corporation (IFC) plans to sell 7,572,169 shares. Chrys Capital’s Labh Investments (11,250,000 shares) and Kedaara Capitals’ Ourea Holdings (10,365,368 shares) are other prominent investors participating in the IPO. It is good to see that none of the investors are fully exiting the company.

Among company promoters, founder and CEO Sanjay Agarwal will be the biggest seller with 2,494,769 shares, followed by Jyoti Agarwal (2,363,712 shares), Shakuntala Agarwal (2,274,326 shares) and Chiranji Lal Agarwal (1,290,449 shares). Needless to say, promoters are all family members!

AU Financiers IPO Review: Contiguous growth

AU Small Finance Bank primarily operates in Vehicle Finance, MSME (micro, small and medium enterprises) and SME (small and medium enterprises) loans. The company started with vehicle loans in 1996 before expanding into MSME loans in 2007 and SME loans in 2012. The company is present in 10 states and 1 union territory with 301 branches and 8,515 employees (including contract personnel) as of 31 March 2017. AU has over 20 years of experience in rural and semi-urban markets and out of its 301 branches, 146 are in such markets. The company’s primary focus is on serving low & middle income individuals and businesses that have limited or no access to formal banking and finance channels.

Starting operations from Rajasthan, it followed a contiguous expansion strategy and gradually expanded into other states in West. North and center India using a hub and spoke model. Despite its focus on underbanked sections, more than 90% of its lending is secured. This is not really surprising since 50% of its Assets Under Management (AUM) are related to vehicle finance. The company was one of the 10 NBFCs which received an in-principle approval from the RBI to set up Small Finance Banks (SFBs) last year. Following the RBI approval, the company started SFB operations in April 2017.

AU Financiers IPO Review: Financial performance

As one can deduce by going through the above text, the company’s business performance is rather well. This is indeed the case as standalone revenues more than tripled from FY2013 levels to INR1,430.5 crore in the year just ended. Similarly, profits also increased from just INR69.4 crore in FY2013 to INR842.7 crore in FY2017. The figure for the latest year is abnormally high as it includes exceptional income on account of sale of shares of Aavas Financiers Limited (formerly known as Au Housing Finance Limited), Index Money LLP (formerly known as Index Money Limited), M Power Micro Finance Private Limited and Au Insurance Broking Services Private Limited. Even after excluding the impact of these transactions, AU SFB’s earnings stood at INR326 crore in FY2017, representing a growth of 31.9% from previous year. In these years, AU’s net margins have also improved and never dipped below 20% in the last three years.

As of 31 March 2017, AU SFB had turned in strong operating performance, leading to a long-term credit rating of CRISIL A+/Stable. It had gross NPAs of only 1.6% and net NPAs of 1.1% with net worth of INR2,000 crore.

*Profit boosted by exceptional income. Profit and margin without one-off income are INR326 crore and 22.8%, respectively.

AU Financiers IPO Review: Should you subscribe?

Looking at the presence of private equity investors, their continued confidence in the company and the robust financial performance in recent years, it is not difficult to see that AU SFB is a growth story that will most likely continue to expand in coming years. This pretty much leaves the investment decision to valuations.

In FY2017, the company’s Earnings Per Share (EPS) were at INR11.74 which means that the company is asking for a price by earnings ratio (P/E ratio) of 30.2 – 30.5. It is worth highlighting that these valuations exclude the exceptional income for the year. Now a P/E ratio of 30 isn’t a screaming buy but isn’t too high for a high-growth business as well. This valuation is less than RBL Bank and Bajaj Finance and in line with IndusInd Bank and Equitas Holdings. At the end of FY2017, the company’s book value stood at INR70.34 per share which translates into price by book value (P/B) ratio of 5.04 – 5.09. This is quite high and trails only Bajaj Finance among its peers. However, AU Financiers’ high return on net worth (RONW) of 42.1% 16.3% (excluding onetime profits) balances valuations.

If Ujjivan and Equitas are Amar and Akbar of lending space, AU SFB is Anthony of the trio. The movie analogy is apt as another SFB licensee Janalakshmi has shelved its IPO plans. There are some things Anthony does better than anyone else. Although all the three featured in the list of 10 companies for SFB license, AU was the only asset finance company in the list. This distinction has a direct bearing to its low NPA levels as over 90% of its loans are secured and backed by income-generating assets. In Equitas Holdings review, we mentioned micro-finance is something that can easily become a political target, especially when loan defaults increase. There is no such risk with AU SFB and that’s a huge positive.

All in all, AU Financiers IPO Review reveals that the company is a solid play in the secured financing sector while also promising significant growth potential after converting into SFB. Please check out the IPO discussion page to know what fellow investors have to say about the IPO.