AU Small Finance Bank IPO - Should you subscribe? - Indian IPO Blog

Wednesday, June 28, 2017

AU Small Finance Bank IPO - Should you subscribe?

AU Small Finance Bank is entering the primary market with an IPO of 5.34 crore equity shares of Rs.10 each which will open for subscription from today

The IPO is offered in the price band of Rs.355 to Rs.358 per share. The IPO wpuld remain open for subscription till Friday, Jun 30, 2017.

About AU Small Finance Bank

AU Small Finance Bank, formerly AU Financiers, has transitioned from an asset financing NBFC providing loans for vehicle purchase, MSMEs and SMEs to a small finance bank (SFB) effective 19th April 2017.

The bank is having 269 branches and 121 asset centers across West and Central India, mainly in Rajasthan, Gujarat, Maharashtra, Madhya Pradesh, Chhattisgarh, with focus on low income and middle income group (LIG and MIG) customers. In June 2016, company sold its lucrative, high-growth, and current investor favourite mortgage (home loan) business, of Rs. 1,500 crore AUM, for approximately Rs. 950 crore, to enable its transition to SFB. 

Business is concentrated in its home geography, with 54% of gross AUMs in single state of Rajasthan

A look at earnings and financial ratios

In FY17, company’s total income grew 36% YoY to Rs.1,430 crore, while net interest income (NII) grew 41% YoY to Rs. 917 crore.

After accounting for provisions and write-offs of Rs. 77 crore and exceptional gains of Rs. 670 crore on sale of housing finance and other smaller businesses (insurance broking, micro finance), company reported PAT of Rs. 843 crore. Adjusting for this one-time gain, FY17 PAT rose came to Rs. 326 crore, thus resulting in EPS of Rs. 11.74, up from FY16’s Rs. 9.28.

The company has a healthy capital adequacy ratio of 23.21%, vis-à-vis regulatory requirement of 15%. Net interest margins (NIM) of the companh is 9.67%. However despite this appearing to be strong, it is expected to shrink as the banking norms become applicable to the company going forward. Also, Gross NPA at 1.61% and net NPA at 1.05%, at 120 days past due, as of 31-3-17 which is at higher end

Return on Net Worth (RoNW) of 21.7% and Return on Assets (RoA) of 3.4% are also quite impressive.

As on Mar 2017, the company's networth is around Rs.2000 crores which is double from last year. Book value of the compang is around Rs.70 per share

Analysis of Valuation

The shares are offered in a price band of Rs.355 to Rs.358 per equity share. If historic Book Value (BV) and EPS is considered, the shares are offered at an PE ratio of around 31 times which is at higher end. Even where book value is considered the Price to Book Value works out to be 5.1 times

All in all, the company is offered at an aggressive price. Although the euphoria in IPO market may sail this through at a premium listing and also considering that the company has done well in NBFC business, it might turn out to be decent in the long run, investors would need to maintain a watchful eye on it if subscribed. May be a good one to invest for listing gains initially and then re enter upon dips

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