AU Small Finance Bank IPO, which opened for subscription yesterday, has received positive reviews from most analysts. However, not everyone is convinced as JainMatrix Investments has recommended investors to avoid the public offer. In its report, which is available further down the page, the Bangalore-based research firm has outlined its reasons for negative AU Small Finance Bank IPO Rating, although it mentions strong grey market premium as a positive.
- AUB has a massive task ahead of itself to rebuild itself within 3 years as a priority sector SFB institution. This involves setting up deposits infra, giving MFI loans which are high volume low value and reaching out into the villages. Priority Sector Loans PSL to non PSL is 35:65% today and has to become 75:25% in 3 years. These changes are costly, time consuming and involve retraining.
- At a P/B of 5.09 times TTM FY17, the valuations of the IPO are high and aggressive. Further the book value per share rose sharply in FY17 due to the sales of subsidiaries and associates, and BVPS growth may not sustain operationally. Thus on the P/B parameter, AUB is overvalued.
- The valuations are expensive in terms of P/B at 5.09 times. The book value per share has grown at a CAGR of 40.21% from FY13 through FY17 including a sharp increase in FY17 due to sale of firms. Benchmarking in Exhibit 6 indicates asking IPO price P/B is very high. MFI peers such as Ujjivan and Equitas are available for 50% less P/B, and they are also transitioning from NBFCs to SFBs.
- The unofficial/ grey market premium for this IPO is Rs. 103-106/share. This is a positive.
- Current loans of AUB are big ticket vehicle, working capital and SME loans. Just 35% of current loan book can be reclassified as PSL. There is a 3 year window to AUB to build this to 75%. This is a massive challenge involving virtually starting up afresh as a MFI including rural branches, selling and servicing networks and a high volume, low value transaction structure. While current asset business may not suffer, this PSL business needs to grow 300-400% in 3 years for AUB to meet norms.
- To upgrade to a SFB, AUB has to set up deposit taking facilities at its branches at high cost in terms of employee retraining and systems and procedures changes.
- On the borrowings side, the RBI norms will kick in, so AUB needs to make many changes. AUB will be required to maintain CRR and SLR, which may have an adverse impact on their business operations.
- The loan waiver trend in state govts. set off by UP and extending to Mah. and Kar. will spoil the credit behavior of farmers. MFI firms will need to address farmer loan requests carefully.
- AUB as a firm does not gain financially from this IPO as only some current investors are exiting.
- AUB’s operations are concentrated in western India and any adverse developments in this region could have an adverse effect on their business. As of FY17, 79.3% of Gross AUM was located in such states, with Rajasthan accounting for 54% of their Gross AUM.
- AUB significantly depends on its vehicle finance business and any adverse developments in this sector could adversely affect their business. For FY17, the Gross AUM of their vehicle finance business accounted for 50.27% of their total Gross AUM. AUB provides unsecured trade advances to vehicle dealers to promote their business. This is a riskier part of their loan portfolio.
AU Small Finance Bank IPO Rating: AVOID
At a P/B of 5.09 times TTM FY17, the valuations of the IPO are high and aggressive. Very few BFSI firms in India are able to command such high valuations. The ones that do have outstanding multi-year records of good execution as listed firms. Further the book value per share has risen sharply in FY17 partially due to the recent sales of subsidiaries and associates. The BVPS growth may not sustain operationally. Thus on the P/B parameter, so important for BFSI firms, AUB is overvalued.
Opinion: This IPO offering is rated AVOID. Investors can pass up this opportunity and instead look to pick up the shares at more reasonable levels in future.
Read the full report on AU Small Finance Bank IPO rating here