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June 21, 2017 | PM Securities
Our take:
AU financier a 21 year old NBFC has a consistent track record of growth along with good credit quality and reasonably low NPA’s. Transition of this NBFC operating for 21 years in rural areas into a small finance bank shall open up possibilities of higher volumes but shall keep the bottomline under pressure in the immediate 1-2 year term on account of higher operating costs resulting due to newly opened 300 branches to an estimated extent of ~Rs. 2000-2500 Mn per year. At ~5.1x P/B & 30.9 PE at upper price band we believe it is priced at the upper end of reasonable valuations. We have a NEUTRAL outlook on the IPO, although some listing gains are possible. We shall take a re-look at the company and its prospects at a later date.
Company Brief:
AU was launched in 1996 as a retail-focused non-banking finance company (NBFC) based in Jaipur. The company has diversified its lending portfolio since its conversion to a small finance bank in 2016, adding a variety of options including gold loans and agriculture related term loans to the original three business verticals – vehicle finance, micro, small and medium enterprises (MSME) loans and small and medium enterprises (SME) loans. HDFC Bank became the channel partner in 2005 for carrying the business of financing vehicles which gave them visibility.
Business Model:
1) Model as an NBFC (History):
The NBFC entity since inception has been focused on secured financing (90% is secured) of income generating assets pre-dominantly vehicles(~50%) and later in 2010 ventured into MSME (~28%) financing followed by SME (~22%) financing in 2012. ~ 70% of AU’s business comes from 3 states namely Rajasthan, Gujarat & Madhya Pradesh. Due to focus on income generating secured assets AU’s NPA’s typically have been under 2% (The gross and net NPA stood at 1.61% and 1.05% respectively as on March 31, 2017 based on the 120 days recognition). AU also operated a housing finance division which of which 92% holding is sold off at a valuation of Rs. ~9500 Mn and a profit of Rs. 6700 Mn inline with RBI guidelines with regards to Small Finance Banks.
2) Model as a Small Finance Bank (Here on):
In CY16 AU was given a go-ahead by RBI to operate as a small finance bank which shall convert its on going NBFC business to banking aiding better volumes. Currently AU has setup 301 branches spread across 10 states and one union territory in India for which Rs. ~1500 Mn of Capex has been incurred and shall be amortised over a period also an estimated Rs. 2000-2500 Mn shall be the operating cost of these branches both of which shall keep bottomline under pressure. Additional 162 SFB branches are planned to come up by 2018. The branches operate until 6pm each day and shall have abridged documentation aiding ease of operations. Interest rates offered over deposits are marginally higher at 5 to 6.5% on savings A/c although they have an option of monthly interest credit unlike any other bank & FD’s offer ~7%. AU’s superior understanding of small ticket financing and semi-urban operations shall favour their case against other SFB peers.
Disclaimer
This document has been prepared and compiled from reliable sources. While utmost care has been taken to ensure that the facts stated are accurate and opinions given are fair and reasonable, neither the Company nor any of its Directors, Officers or Employees shall in any way be responsible for the contents. The Company, its Directors, Officers or Employees may have a position or may otherwise be interested in the investment referred in this document. This is not an offer or solicitation to buy, sell or dispose off any securities mentioned in this document.
Copyright © 2017 Pankaj Mangaldas Securities pvt. ltd. , All rights reserved.
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