Aavas Financiers IPO opens today. Should you subscribe?

The initial public offer (IPO) of Aavas Financiers, a housing finance company opens today. The IPO comes amid choppy markets, which have been on a downward spiral over the past few trading sessions on the back of liquidity concerns regarding non-bank finance companies (NBFCs).

Though most analysts have suggested investors subscribe to the issue from a long-term perspective, A K Prabhakar, head of research at IDBI Capital feels investors would be better off staying away from the primary markets and especially issues of from NBFCs / housing finance companies (HFCs) till the time concerns regarding IL&FS are resolved.

Sudip Bandyopadhyay, group chairman, Inditrade Capital agrees. “There is nervousness in the market owing to IL&FS fiasco and the jitters are likely to continue till the matter is addressed,” he says.

THE BUSINESS

According to an ICRA report, the company had the lowest gross NPAs as of March 31, 2018 and the second highest growth rate of assets under management (AUM) for the last three financial years, among affordable housing finance companies that had AUM between Rs 25 billion and Rs 200 billion.

Presently, Aavas operates in eight states namely Rajasthan, Gujarat, Maharashtra, Madhya Pradesh, Delhi, Uttar Pradesh, Chhattisgarh and Haryana. It is engaged in three types of products under its housing finance business, viz Finance for Purchase, Finance for Construction and Finance for Home Extension.

ISSUE DETAILS

The Jaipur-based home financier is offering around 21 million shares, which consists of fresh issue of 4.87 - 4.89 million shares and offer for sale (OFS) of 16.25 million shares. The price band has been fixed between Rs 818 – 821 per share with the face value of Rs 10 each. The minimum lot size for the IPO is 18 shares.

ICICI Securities, Citigroup, Global Markets India, Edelweiss Financial Services, Spark Capital Advisors and HDFC Bank are the book running lead managers of the issue while Link Intime India is the Registrar. Its promoter holds 81.26 per cent stake in the company and post IPO this will come down to 57.17 per cent. Public holding will increase from current 18.74 to 42.83 per cent.

VALUATION

With an estimated Rs 4 billion capital infusion through a fresh issue of share capital, Aavas would be trading at price-to-adjusted book value (P/ABV) of 4.1x FY18 at the expected upper price band of Rs 821. Its book-value growth has remained above 60 per cent in the past five years. Even with modest deceleration in book-value growth, the valuation multiple would look more reasonable at FY20 P/ABV. “In addition, Aavas offers high growth, strong NIM and reasonable asset quality,” says Anand Rathi Financial Services. The brokerage has ‘subscribe’ rating on the issue.

Emkay Global Securities says the company is on a stronger footing on growth and product profile with most of its asset portfolio categorized under Priority Sector Lending and is attracting lower risk weight. The company also has favourable ALM (asset and liability management) profile with low risk on margin profile.

As the company accelerates its overall leverage, the likely probability of achieving superior return on equity (RoE) of nearly 20 per cent remains fairly high. Also with sufficient capital already in place, further risk of dilution is also quite limited. The brokerage too, has subscribe rating to the IPO.

However, analysts at Choice Broking remain cautious and suggest that 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 ‘subscribe with caution’ rating for the issue,” it said in an IPO note.

KEY STRENGTHS

• Strong distribution network with deep penetration serving underserved customers in rural and semi-urban markets;

• In-house sourcing model leading to superior business outcomes;

• Robust & comprehensive credit assessment, risk management and collections framework;

• Access to diversified and cost-effective long-term financing

RISK AND CONCERNS

• Subdued economic activities

• Higher exposure to self-employed customers in low income group;

• Volatility in borrowing and lending rates;

• Difficulty in attracting cost effective funding;

• Deteriorating credit quality of loans and higher provisioning;

• Intense competition