(Left to Right) Deepak Jain (Chief Financial Officer, AU Small Finance Bank Limited), Mr. Uttam Tibrewal (Executive Director, AU Small Finance Bank Limited), Mr. Kaizad Bharucha (HDFC Bank Limited), Mr. Sanjay Agarwal (MD & CEO, AU Small Finance Bank Limited), Mr. Raamdeo Agarwal (Motilal Oswal Investment Advisors Limited), Mr. Ravi Kapoor (Citigroup Global Markets India) and Mr. Mridul Mehta (ICICI Securities Limited) at the press conference of AU Small Finance Bank, Mumbai, India. (Source: BloombergQuint)

After 51% Listing Gains, AU Small Finance Bank India’s Most Expensive

The 51 percent listing day gain in the stock price of AU Small Finance Bank Ltd. has made it India’s most expensive lender.

At the issue price of Rs 358, the company was valued at 5.1 times its price-to-book value for financial year 2016-17. At its closing price of Rs 541 on Monday, the stock trades at valuation of 7.7 times FY17 price-to-book value. No bank in India trades at these valuations. It’s market capitalisation stood at more than Rs 15,000 crore as of Monday's closing.

Au Small Finance Bank is the most expensive bank based on FY17 price-to-book. Only Kotak Mahindra Bank comes close at 5.8 times its FY17 standalone book value.

After 51% Listing Gains, AU Small Finance Bank India’s Most Expensive

Among non-banking financial companies, which typically trade at higher valuations than banks, AU Small Finance Bank’s price-to-book ratio of 7.7 is second only to that of Gruh Finance.

After 51% Listing Gains, AU Small Finance Bank India’s Most Expensive

AU Small Finance Bank was initially an NBFC and started small finance bank operations only in April after receiving RBI licence.

Return Ratios

One reason for such steep valuation could be the superior return ratios of AU Small Finance Bank. Its return on assets (RoA) for FY17 stood at 10.5 percent and its return on equity (RoE) was 56.2 percent, among the highest in the industry.

Bernstein analysts concur in a recent report. The brokerage values the small finance bank at 40 times FY20 estimated earnings on the back of superior RoA and earnings growth.

We believe AU can quadruple its loan book in 5 years led by the small business lending opportunity. Au has a clear runway for growth for the next decade in its target geographies. We recognise that there is no room for missteps at the current valuation, but believe execution will remain strong and scalability will improve as a bank.
Bernstein Report

Besides, the lender may not need to raise further capital for the next 3-5 years, Sanjay Agarwal, managing director and chief executive officer had told BloombergQuint during the initial public offering (IPO), bringing down the risk of further equity dilution.

The Key Risks

However, it will have to maintain statutory lending ratio (SLR) and cash reserve ratio (CRR) according to the Reserve Bank of India’s (RBI’s) requirements and will have to incur additional costs to expand its branch network to raise liabilities, which will lead to some moderation in its return ratios going ahead.

In addition, there are concerns arising out of its regional concentration – 50 percent of the lender’s assets under management is in Rajasthan – and higher share of vehicle financing in its loan portfolio. Vehicle financing forms 50 percent of its total assets under management as on March 31, 2017.

The company’s small and medium enterprises (SME) and micro, small and medium enterprises (MSME) products were launched relatively recently are also a risk factor, given they are unseasoned and have not witnessed an adverse cycle.

The IPO had seen a strong response from investors, subscribed 53.6 times on an overall basis while the shares reserved for high net-worth individuals were subscribed 143 times.