AU Small Finance Bank: IPO Review

AU Small Finance Bank IPOAU Small Finance Bank IPO ( AU financiers in earlier avatar) intends to raise Rs 1,912 crore  from the market and involves an offer for sale of 5.34 crore shares at a price band of Rs 355-358.  The offer for sales comes for  PE investors Warburg Pincus, International Finance Corp (IFC), Chrys Cap, Kedaara Capital and promoters aggregating to 18.79% of the post issue paid-up share capital of the company. .AU Small Finance Bank received a license to set up an SFB (Small Finance Bank) on December 20, 2016 from the RBI and commenced SFB operations with effect from April 19, 2017. 

Related Post: AU Small Finance Bank IPO: Brokerage views & Run up to the IPO
AU Small Finance Bank Ltd: Issue Details
Issue Period Wednesday, June 28, 2017 to Friday, June 30, 2017
Price Band Rs.355 – 358
Minimum Bid Lot 41 Equity Shares 
Issue Size  Offer for Sale of 53,422,169 Shares 
  Offer for sale of 14,400,000 Equity Shares.
Total Issue Size ( Rs.) Rs. 1912.5 crores (at upper end of Price Band)
Issue Structure :  
QIB 50% of the Net Offer- Rs. 938 Cr
NIB 15% of the Net Offer Rs.  73 Cr
Retail 35% of the Net Offer  Rs.  657 Cr
Lead Manager ICICI Securities, HDFC Bank, Motilal Oswal, Citigroup Global
Registrar Link Intime India Pvt. Ltd.
AU Small Finance Bank  IPO – Schedule

27th June – Anchor List
28th June – Offer Opens
30th June – Offer Closes
05th July – Finalisation of Basis of Allotment
06th July – Unblocking of ASBA
07th July – Credit to Demat Accounts
10th July – Listing on NSE & BSE

AU Small Finance Bank: Salient Points
  • AU Small Finance Bank commenced operations in 1996 in Jaipur, Rajasthan and was registered as an NBFC with the RBI in 2000. In 2005, the Company became a commercial associate of HDFC Bank for originating and servicing vehicle loans .This  relationship assisted it to implement various processes and systems. The company  expanded its product portfolio to include MSME loans in  the year 2007 and entered housing finance in 2011 (a business which was subsequently  sold by the company) and SME loans in 2012. It commenced its  SFB operations with effect from April 19, 2017.
  • Shri Sanjay Agarwal is the Promoter, Managing Director and CEO of the company.   The other shareholders include marquee investors such as the International Finance Corporation, Redwood Investment Ltd (belonging to the Warburg Pincus group), Labh Investments Limited (a wholly owned subsidiary of ChrysCapital VI, LLC), Ourea Holdings Limited (a wholly-owned subsidiary of Kedaara Capital I Limited) and Kedaara Capital Alternative Investment Fund – Kedaara Capital AIF 1.
  • As of May 31, 2017, AU Small Finance Bank conducted its  operations through 269 branches and 121 asset centers in India, of which 189 branches and 89 asset centers were located in western India in the states of Rajasthan, Gujarat and Maharashtra. As of March 31, 2017, 79.29% of its Gross AUM was located in these western states with Rajasthan accounting for 53.78% of its Gross AUM.
  • AU Small Finance Bank AUM and Gross disbursements have grown at a rate higher than the industry average. This is depicted  below: 

AU Small Finance Bank

  • AU Small Finance Bank operates mainly in 3 business lines: Vehicle Finance; Micro, Small and Medium Enterprises (“MSMEs”) Loans and Small and Medium Enterprises (“SMEs”). The contribution of these three main sectors to its Gross AUM in the year ended 2017 is shown below: Loans as shown below. 

AU Small Finance Bank  areas of operation

  • In addition now its  asset product offerings include Working Capital Facilities, Gold Loans, Agriculture related Term Loans, Kisan Credit Cards for Farmers and Loans against Securities. The liability product offerings include Current Accounts, Savings Accounts, Term Deposits, Recurring Deposits and Collections and Payments Solutions for MSME and SME customers.The bank is  planning to have a total of 500 branches by 2018 and has already crossed 10000 crore Gross AUM in 2017.
AU Small Finance Bank : Shareholders & Offer for Sale
PE Backed AU Small Finance will see sale by private equity backers like Warburg Pincus, Kedaara Capital,ChyrsCapital Investment Advisors India, International Finance Corporation (IFC) besides share sale by promoters Sanjay Agarwal and family.The shareholders will sell a total 53.42 million shares representing 18.79% stake sale on a post IPO issue basis.
Top   Shareholders in the Company (prior to IPO)
Sno. Name of shareholder equity share capital (%)
1 Redwood Investment Ltd 21.03
2 Mr. Sanjay Agarwal 20.57
3 International Finance Corporation 10.66
4 Labh Investments Limited 7.93
5 Ourea Holdings Limited 7.44
6 Ms. Jyoti Agarwal 4.99
7 Ms. Shankuntala Agarwal 4.96
8 Mr. Chiranji Lal Agarwal 2.86
9 MYS Holdings Private Limited 2.62
 10 ICICI Prudential Life Insurance Company Limited 1.71
11 SBI Life Insurance Company Limited 1.71

After part exit by PE Investors and Promoters, by means of this IPO, the equity shareholding shall be as follows:

Holding of Selling Shareholders –  Post IPO
Name of Seller Shareholding Prior to IPO Holding (%) Post IPO Holding (%)
Redwood Investment Ltd. 21.03 15.82
International Finance Corp. 10.66 7.99
Labh Investment Limited 7.93 3.97
Ouerea Holdings Ltd.  7.44 3.79
Kedaara AIF-1 0.31 0.16
Sanjay Agarwal 20.57 19.69
Jyoti Agarwal 4.99 4.16
Chiranjji Lal Agarwal 2.86 2.4
Shakunatala Agarwal 4.96 4.16
MYS Holdings Private Ltd. 2.62 2.42
Objects of the Offer:

The objects of the Offer are to achieve the benefits of listing the Equity Shares on the Stock Exchanges and to provide a exit to Selling Shareholders. Further, the Company expects that listing of the Equity Shares will enhance its visibility and brand image and provide liquidity to  shareholders.

AU Small Finance Bank  IPO: Financials: 
Financials in Brief   ( Rs.  In Crores)
2017 2016 2015 2014 2013
Net Revenue from Operations 1416.99 1046.93 687.02 565.51 410.66
Revenue Growth (%) 35.35% 52.39% 21.49% 37.71%
Profit Before Tax & Exceptional Items 504.58 377.24 207.31 109.65 102.67
EBITDA Margin (%) 35.61% 36.03% 30.17% 19.39% 25.00%
Exeptional Items 670.35        
PBT 1174.93 377.24 207.31 109.65 102.67
Profit aft Tax 842.71 247.154 139.45 72.54 69.358
Face Value 10 10 10 10 10
Share Capital 284.25 44.08 44.08 42.96 40.47
Reserves 1715.309 956.585 722.37 554.789 401.393
Net worth 1999.56 1000.67 766.45 597.75 441.86
RoNW (%) 42.14% 24.70% 18.19% 12.14% 15.70%
NAV Per Equity share (Rs.) 70.34 227.01 173.87 139.13 109.18
EPS (Rs.)  11.96 9.34 5.31 2.99 3.40
IPO Price  in Rs. 358
PE ratio 29.93
P/BV ratio 5.09
CAGR Sales (2013-17) 36.29%
CAGR PBT & ex.Items  48.89%
Market Cap in Rs. Crore 10176.19
Market Cap/Sales Ratio 7.18
Other Financial Parameters & Ratios
Important Financial Parameters & Ratios ( Rs. Crore)
Key ratios/Year 2015 2016 2017
Gross AUM 5,568 8,221 10,734
Av. Gross AUM 5,008 6,894 9,478
Gross AUM Growth 25.14% 47.66% 30.56%
Net AUM 3,404 5,621 6,390
Disbursements 3,378 5,619 6,730
Disbursement Growth 25.79% 66.37% 19.78%
Capital Adequacy ratio 23.21 16.91 17.29
Tot Active Loan Accounts 1,89,175 2,25,713 2,80,349
Net Interest Income 405 652 917
Net Interest Margin 8.09% 9.45% 9.67%
Credit Cost / Average Gross AUM (%) 1.02% 0.39% 0.83%
Gross NPA % 0.92% 0.64% 1.61%
Net NPA % 0.44% 0.38% 1.05%
AU Small Finance Bank  IPO: Pros
    • The company has over 20 years of operating experience in rural and semi-urban markets of India and has Significant presence in rural and semi-urban Markets with Focus on Low and Middle Income Customer which have hitherto been devoid of services from large banks. 
    • AU Small Finance Bank  is targeting  a large segment of India’s rural and semi-urban population which  is currently un-served or  under served by formal financial institutions /Banks. As of March 31, 2017, 146 of its 301 NBFC branches were located in such rural and semi urban markets.
    • The company has adopted a strategy of contiguous expansion across region starting from Rajasthan and expanding to neighboring western states. This  has enabled it to increase its customer base.
    • Vehicle finance business has been a mainstay of company’s operations which was started in 1996, but the company has made efforts to increase revenue from other areas also. As a result Vehicle Finance which accounted for 79.11% of its  total AUM as of March 31, 2013, accounted for 50.27% of its total AUM as of March 31, 2017. Its Gross AUM for vehicle finance business grew from Rs. 29,305.98 million as of March 31, 2013 to Rs.53,956.82 million as of March 31, 2017 at a CAGR of 16.49%, constituting 50.27% of our total Gross AUM as of March 31, 2017. The vehicle loans are secured by the vehicles  financed  by the company.
    • The company ventured into MSME loan business in 2007 and its Gross AUM for our MSME loans business grew from Rs. 5,613.70 million as of March 31, 2013 to 32,163.38 million as of March 31, 2017 at a CAGR of 54.71%, constituting 29.96% of its total gross AUM as of March 31, 2017. Its MSME loans are secured by immovable property.
    • SME loans: AU Small Finance Bank commenced SME loan business in 2012 and its  Gross AUM for SME loans business grew from Rs. 2,123.56 million as of March 31, 2013 to 1,218.39 million as of March 31, 2017 at a CAGR of 77.79%, constituting 19.77% of its  total Gross AUM as of March 31, 2017. The SME loans are secured by immovable property or receivables.
    • AU Small Finance Bank has received a long-term credit rating of CRISIL A+ / Stable from CRISIL Ratings.
    • As an SFB, the company will be able to access to diversified sources of funding such as savings accounts, current accounts, term deposits and recurring deposits 
AU Small Finance Bank IPO: Cons
      • AU Small Finance Bank received a license to set up an SFB on December 20, 2016 from the RBI and commenced SFB operations with effect from April 19, 2017.  In its earlier avatar as AU Financiers it was functioning as a NBFC. Thus it has  no operating history or experience as an SFB and as such is exposed to several risks and uncertainties as it makes a  transition from an NBFC to an SFB.
      • As an SFB, it is required to extend 75% of its adjusted net bank credit (“ANBC”) to the sectors eligible for classification as PSL (Priority Sector Lending) and therefore may need to limit securitizations and assignments to comply with such requirement.
      • It faces risk of customers default in their repayment obligations. SFB cater to lower and lower middle class an chances of default could be more.
      • AU Small Finance Bank  has high concentration in Rajasthan and adjoing states. As of March 31, 2017, 79.29% of its Gross AUM was located in western states, with Rajasthan accounting for 53.78% of its Gross AUM.
      • At a P/B of 5.09 of FY17 Book Value, AU Small Finance Bank demanding a richer valuation than many of ts peers.
      • The company has not paid any dividend till date
AU Small Finance Bank IPO: Overall Assessment
      • AU Small Finance Bank (AU SFB) has established itself as a preferred lender to the under served segment in areas of vehicle, SME and MSME finance. As it is difficult for Banks to serve  this segment, this section has traditionally been ignored on account of need for more manpower resources, Operational  costs due to lower ticket sizes and difficulty in making assessment of credit risk involved. Thus this segment is not fully serviced and there exists the  huge unmet demand though it comes with with associated higher risks.
      • As of AU Small Finance Bank  GNPAs stood at  1.61% of its Gross Advances, while  Net NPAs accounted for 1.05% of its Net Advances. There has been slight increase in these figures compared to previous year aand reason gobven by management is due to different standards for measuring NPA’s  for a Bank from that of NBFC. 
      • On its path to become SFB,  company sold its home loan business, of Rs. 1,500 crore AUM, for approximately Rs. 950 crore in June 2016 and this is reflected as exceptional profits for this year and has boosted the Book value. 
      • AU Small Finance Bank  operations as AU Financiers have shown a good degree of Consistency in cash-flows and profitability. Though track record seems promising, how it fares in its transition to a SFB (small finance Bank) can not be predicted at this stage.
      • At the IPO price of Rs. 358/-, the AU Small Finance Bank  IPO is placed at a a P/E of about 30 and P/BV ratio of 5.08. Industry and its  average RoNW  for last 3 years ia around 32%. AU Small Finance Bank has however posted impressive growth (CAGR) in AU, Networth and Profits. While AU Small Finance Bank  looks costly on most of the parameters compared to peers, it has higher ROE(return on Equity) compared to most of its peers which is likely to moderate on its new operations as SFB.
      • On account of  substantially  high growth rates displayed in the past and in view of management’s aggressiveness, commitment and vision which is reflected in its ability to grow at a scorching pace, being the only asset base NBFC considered fit for SFB License and its ability to attract many respected  PE players one can hazard a guess that AU Small Finance Bank  overall loan book  will to continue to grow at a high rate than most other players.
      • Even though issue appears not only  fully priced but also seems to be  priced high compared to peers and comparison with likes of Indusond Bank or Shriram Transport & finance corporation is not justified and is even absurd, Iam going to risk an investment for short to long term in this company as it could be  poised for better prospects ahead and appears to be an agile company that can grow  faster than others. 

      • Last Minute: 

        A general fall in markets particularly the banks on account of RBI Diktat saw AU Small Finance Bank  take a dip in Grey Market Premium to Rs. 60 Levels. The sentiment has been further hit as the small finance bank was placed under the caution list by the Reserve Bank of India to monitor the foreign shareholding of the company which is hovering around the permissible limit of 49 percent. Even as the issue is quite overpriced on many parameters,  I intend to apply for it on account of its superior growth track record and feeling that promoters who have steered the company from scratch till this point can take it forward at the same pace. 

      • Watch this space for any further  update on the IPO.

Standard disclaimer: I am not a SEBI registered analyst. I may have vested interest in every stock I discuss. Please do your own due diligence as stock market investments have high degree of inherent risk.

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