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IPO Analysis : Aavas Financiers

Apurva Joshi
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IPO Rating - 48 (Invest with limited exposure)*

About the Issue

Aavas Financiers plans to raise up to Rs. 1734 cr through offer for sale (OFS) and fresh issue of shares. The OFS includes sale of 1.6 cr shares with face value of Rs 10. The fresh issue will be to raise ~Rs.400cr by issuing ~48.7 lakh shares. 

The price band is Rs.818 – Rs.821 per equity share with minimum lot size of 18 shares, which translates into minimum investment of Rs.14,724 – Rs.14,778. The offer opens from Sep 25- Sep 28.
 

Object of the Issue

Aavas Financiers issue provides exit route to its existing shareholders through OFS after deducing the offer expenses. For the fresh capital raised through IPO of Rs.400 cr, the company plans to augment its capital base for further expansion.

About Aavas Financiers

Aavas financiers is a retail housing finance company with strong presence in state of Rajasthan, Gujarat, Maharashtra and Madhya Pradesh. It mostly targets (60% of gross loan book) self-employed customers with salary of under Rs.50,000 per month and 34.76% of its customers are those who are new to credit. Loans are given in rural or semi-rural areas where there is lack of banking channels. The average ticket size of the loans is Rs.8.8 – 8 lakh.

It provides home loans for the purchase or construction of the residential properties and for the extension and repair of housing units. Most of the demand for loans emanate for self-use as the borrowers are mostly the single house dwellers.

Stupendous growth in the AUM and rising NIM%

The company has leapfrogged in the growth in its loan book, with the loan book growing at a CAGR of 78% over FY14-18 to touch Rs.4073cr in FY18. During the same period, advances and disbursements grew by CAGR of 67% and 65%, respectively. This led to proportional growth in revenue from Rs54.3cr in FY14 to Rs457.cr in FY18, a CAGR growth of 70% over the last four years. Due to better NIMs (current NIM of 7.25), net interest income grew at a 80% CAGR over the last four years. Due to better efficiency at branches and operating leverage, PAT increased at a CAGR of 96% to Rs. 92.9cr in FY18. 

The company’s GNPA and NNPA as a percentage of advances have been in the range of 0.22 to 0.79, with FY18 GNPA at 0.34 % . The ratio is far better compared to the industry peers.

The average yield on loans in FY18 was 13.99, down from 18.13 in FY14 due to declining interest rate scenario and lower borrowing costs from 12.28 in FY14 to 8.65 in FY18. This also shows improvement in the ability of the company to access funds at lower cost. Also, this helped company to stay competitive and at the same time increase its NIMs.



Key strengths of Aawas Financiers

1. Strong on ground presence and understanding of local requirements – Company has presence in 78.69% tehsils in Rajasthan, 70.67% in Gujarat and 52.38% in Madhya Pradesh.

2. Due to better financials, CRISIL rating of A+ Stable helped the company to get term loans at lower interest rate, which helped the company to further be competitive in its markets.

3. End-to-end direct sourcing and collection system - The company maintains direct touch points with the customers from sourcing to collections, which helps it in earning better margins and better reporting of even a day of outstanding loans. This has helped in reducing the time to 10-14 days in disbursements and better control on outstandings too.

4. Strong promoter background - The company’s holding company was AU Financiers till June 2016, which sold its stake to Lake District due to conversion to small finance bank. This led to establishing of strong risk management and technological backbone for the company.
 
Growing branch network 

The company has increased in branches from 35 in FY14 to 166 by Q1FY19, adding 50 in FY17 and 71 in FY18. Due to aggressive expansion in branch network, considering the CAGR AUM for the last three years, it is the fastest growing HFC, followed by Aadhar, Mahindra, Gruh and Repco.
 
It has the highest number of branches in Rajasthan -72, followed by Maharashtra – 34, Gujarat  - 27, Madhya Pradesh – 24.
 
As the branch network is mostly in rural and semi-urban areas, the target audience is new to credit, belongs to the mid-income group (MIG -26%), low income group (LIG -39%) and economically weaker section (EWS -22%).
 
Valuations and Outlook

We see that the company has witnessed stupendous growth. It has now achieved Tehsil presence of 79% in Rajasthan and would like to go upto 85% in all eight states where it is present. The company is operating in high risk business, considering the borrower profile and the lack of income predictability. The company has aggressive growth plans and would like to roll our 70 new branches in FY19. It plans to use the Rs.400cr raised through the issue to capitalise the Tier-I capital and believes it will be sufficient to fund the growth for the next 3-4 years.
 
On the valuation front, we see that the issue is priced at P/B of 5x which is at premium compared to Repco Finance and industry average of 2.5x. We see that considering the aggressive growth in branch network, strong management team and technology-driven risk management systems, the premium looks justified. Hence, we urge investors to subscribe with limited exposure for listing gains. 

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment 
  
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