Towers stand under construction in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Aavas Financiers Plans To Double Return On Equity As It Prepares For IPO

Housing finance firm Aavas Financiers Ltd. expects to more than double its return on equity as it prepares to launch an initial public offer.

That’s the word from Sunil Kumar Agarwal, the lender’s founder and chief executive officer. “The only thing that has changed in our business is leverage,” he told BloombergQuint on the sidelines of the company’s conference to announce the IPO plans. “With listing and… (hopefully) a rating upgrade, we can again go back to those levels (over 22 percent return on equity) in 3-5 years’ time.”

The retail lender plans to raise up to Rs 1,800 crore through its IPO that opens on Sept. 25, the price band for which is fixed at Rs 818-821. It also plans to improve its leverage ratio (debt-to-equity) —an indicator of the debt used to finance assets—in the next few years.

The financier’s return on equity fell to 11.1 percent as of March from 21.1 percent in the year ended March 31, 2016. That’s lower than the average return of 14.2 percent from other affordable housing finance companies. Aavas Financiers’ return on assets, however, rose 100 basis points to 2.4 percent during the same period. One basis point is one-hundredth of a percentage point.

Aavas Financiers was rated A+ with a stable outlook by the ratings agencies Crisil and India Ratings and Research in March. “Our management and board had consciously decided to reduce financial leverage from 7-8 times to 5-6 times until rating improved to ‘AA’,” Agarwal said. The lender, he said, hopes to receive another rating upgrade in the next 12-18 months, after which its leverage ratio may increase by 7-10 times.

The company’s capital base, after its IPO, would stand at Rs 1,098 crore which would cover the lender’s growth for the next three-five years, he said.

The IPO, a combination of fresh issue worth Rs 400 crore and an offer-for-sale of 1.62 crore shares, would see its promoters—Lake District Holdings Ltd., Partners Group Private Equity Master Fund LLC and Partners Group ESCL—selling about 20.32 percent of their shareholding in the company from the current 81.26 percent. The remaining will be offloaded by Kedaara Capital (0.32 percent), Sushil Agarwal (1.24 percent) and Vivek Vig (0.17 percent), non-executive nominee director of the company.

The book running lead managers for the issue are ICICI Securities Ltd., Citigroup Global Markets India Private Ltd., Edelweiss Financial Services Ltd. and Spark Capital Advisors (India) Private Ltd.

Expansion Plans

The lender, which is present in eight states—Rajasthan, Maharashtra, Gujarat, Madhya Pradesh, Haryana, Uttar Pradesh, Chhattisgarh and Delhi—plans to grow faster than its peers for the next 3-5 years without entering others states. The number of branches in these states, according to Agarwal, would increase from 165 to 300. “Next 15 years, we can grow even at 15 percent CAGR (annualised growth). That’s the scope of those areas.”

Catering mainly to low income group, the self-employed and first-time borrowers, Aavas Financiers disbursed loans amounting to Rs 2,051 crore as of March—47.4 percent higher compared with the previous year. Apart from home loans for purchase, construction and repair of residential properties, the company offers other mortgage loans, including those against property.

At 0.3 percent of its gross advances, Aavas Financiers’ gross non-performing loans was the lowest in the industry, according to ratings agency ICRA.