Aavas Financiers, a housing finance company catering to low-income group, launched its initial public offering (IPO) on Tuesday at a time when non-banking finance company (NBFC) space is reeling under trouble on Dalal Street. But, given company's good track record, well-capitalised balance sheet and stable asset quality, most brokerages have recommended subscribe on the issue even as the IPO has been valued at a premium against industry peers.
The Jaipur-based HFC is planning to raise nearly Rs 1,734 crore with fresh issuance of up to Rs 400 crore and an offer for sale (OFS) of up to 1.62 crore equity share. The price-band of the shares has been fixed at Rs 818-821. The company will utilise the net proceeds of the IPO towards increasing its tier I capital base to maintain the minimum capital adequacy ratio in accordance with Regulation 30 of the NHB Directions and to meet future capital requirements arising out of growth in the business. The issue will close on Thursday.
Premium valuation vs peers At the upper end of the price band, the price/book ratio of the company is as high as 5.23 as compared to the average industry peer group ratio of 5.92. The management, however, justifies the premium valuation.
"Our high-quality franchise - comparable to Gruh, HDFC, Bajaj Finance and AU Small Finance Bank-secular underlying growth (no under construction loans, only self-occupied residential property, no builder financing risk), best in class management team, which is highly incentivised and aligned and robust operating metrics against comparables justifies the valuation," told Sushil Kumar Agarwal, founder & CEO, Aavas Financiers to Business Today.
"Besides, entry price of one of the promoters kedaara and partner group was 5x LTM P/BV Which is the same as IPO multiple, he added.
Aavas Financiers vs peers: Key metrics
Brokerage Emkay Global noted that Aavas is on a stronger footing on growth and product profile with most of its asset portfolio categorised under Priority Sector Lending, which attracts lower risk weight.
"As the company accelerates its overall leverage, the likely probability of achieving superior RoEs of 20 per cent remains fairly high. Also with sufficient capital already in place, further risk of dilution is also quite limited. We recommend SUBSCRIBE to the IPO," the brokerage said in a pre-IPO note.
Antique Stock Broking pointed out that although Aavas remains one of the best stories in the affordable housing space, investors may have to look beyond FY20 for generating meaningful returns.
"While the progress in affordable housing in India has been rather slow, with total outstanding loans at mere Rs 270 billion (2 per cent 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," it said.
Chola Securities also recommended subscribe on the issue. "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," it said.
Aavas Financiers was initially incorporated as a subsidiary of AU Small finance Bank and later sold off to private firms Lake District Holdings, Kedaara Capital AIF and Partners Group ESCL, which are now the promoters. Through OFS, Lake District Holdings will sell 88.15 lakh shares, Partners Group ESCL will be selling 42.81 lakh shares and Kedaara Capital Alternative Investment Fund will offload 2.36 lakh shares. Partners Group Private Equity Master Fund LLC will sell 18.79 lakh shares, while CEO Sushil Kumar Agarwal will put 9.11 lakh shares on sale.