AU Small Finance Bank Launches IPO With Foreign Holding Already At Limit

AU Small Finance Bank’s initial public offering opens on Wednesday even as the lender has been put under the caution list by the central bank as its foreign shareholding hovers around the 49 percent cap.

The company is looking to raise up to Rs 1,912 crore by selling up to 21 percent post-issue stake. The offer for sale closes on Friday.

ICICI Securities, HDFC Bank, Motilal Oswal Investment Advisors and Citigroup Global Markets India are the lead managers for the issue.

The RBI in a notification said the total foreign shareholding through all sources in the company has reached the trigger limit. “Hence purchases of equity shares of this company would be allowed only after obtaining prior approval of the Reserve Bank,” the notification said.

Shareholders are looking to sell up to 53.42 million shares at Rs 355-358 apiece, in what is only an offer for sale. The lender raised Rs 563 crore from 34 anchor investors by allotting shares at the upper end of the band. Here’s all you need to know about the IPO…

Who’s Selling Stake

After the IPO, the promoter stake will come down by nearly three percentage points to 32.9 percent. Other shareholders selling stake include Redwood Investment, International Finance Corporation, Labh Investment Ltd., Ouerea Holdings Ltd. and Kedaara Capital AIF-1.

Business

Founded in 1996 as a non-deposit taking asset finance company by Sanjay Agarwal, AU Small Finance Bank was one of the 10 entities that received the licence from the Reserve Bank of India. It lends to low and middle-income individuals and small and medium businesses. The lender has 269 branches across 10 states, and Rajasthan contributes more than half of its assets under management. Vehicle loans contribute half of its advances, and it plans to enter gold, housing and farm lending segments.

Financials

The net interest income grew at a compounded annual growth rate of 33.9 percent from 2012-13 to Rs 917 crore the year ended March. Operating profit grew at a faster pace of 37.2 percent, while net profit rose 64.8 percent in the five-year period. Its gross assets under management rose 23.7 percent in the same period.

Pricier Valuations

At the upper price band of Rs 358, the issue is priced at 5.1 times its book value in the last financial year. That’s higher than its peers like Ujjivan Financial Services, Equitas Holdings Ltd., Shriram City Union Finance Ltd., Cholamandalam Investment & Finance Co. Ltd. and IndusInd Bank Ltd., which trade at 2.9 to 4.1 times.

Key Risks

Concentration Risk: About 56 percent of the lender’s portfolio is concentrated in Rajasthan, exposing the company to geographic risks. Also, 50 percent of its assets under management come from vehicle financing. Though the share of the segment has dropped from 79 percent in 2012-13, it still remains high.

Regulatory Requirements: Since April, AU Small Finance Bank has to comply with the cash reserve ratio (the amount of funds banks have to keep with the RBI) and statutory liquidity requirement (percentage of deposits that in government-specified securities). These could pose a challenge while raising deposits and ramping up the branch network.

Brokerage Recommendations:

Antique: Subscribe

Given the strong presence in niche segments, AU Small Finance Bank’s profitability will remain superior to most conventional banks. Estimated return on equity at 17 percent this financial year and 20 percent by 2019-20 will be better than better than its listed peers. As such, valuations at 3.2 times the book value in FY20 are reasonable.

KR Choksey: Subscribe For Long Term

Recommendation based on the management’s successful track record of scaling up the business, generating high returns, focus on optimising costs, well-established framework for controlling asset quality and well-thought future expansion strategy.

Angel Broking: Subscribe

A strong 48 percent growth in profit since 2012-13 and the potential to deliver compounded annual growth rate of 30 percent over the next two years. Premium valuation is justified given the track record and growth potential.

Prabhudas Lilladher: Subscribe With Long Term View

Valuation of 5.3 times its book value leaves little scope for any upside in the near term.

Nirmal Bang: Subscribe

Valuation may look expensive but AU’s has a unique model with no exact peers. An important distinguishing factor is that it is a small finance bank and can raise deposits to keep its cost of funds low, unlike peers.

Equirus Securities

Commands premium valuation given the consistent record of delivering high growth, better return on assets, and better asset quality issues than peers.