- Overview: AUB is a Jaipur based small finance bank (SFB) which operates in 3 business lines: vehicle finance; MSME and SME loans. They used to be an asset oriented NBFC earlier, and commenced SFB operations in Apr 2017 and launched new retail and rural focused loan services.
- Revenues and profit for FY17 were Rs. 1,431 cr. and Rs. 329 cr. It has 8,515 full time employees. AUB’s revenues, NII and PAT grew at 36.4%, 43.9% and 47.5% CAGR in 5 years.The gross AUM and disbursements of AUB for FY17 stood at 10,734 cr. and 6,730 cr. resp.
- 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.
- Risks: 1) Regional concentration: As of FY17 54% of the AUM was in the state of Rajasthan 2) Business concentration: Vehicle loans constitute 50% of AUM, making AUB dependent on this sector 3) The recent farm loan waivers by govts. may affect the credit behavior of farmers.
- Opinion: This IPO offering is an AVOID, investors can pass up this opportunity and instead look to pick up the shares at more reasonable levels in future.
Here is a note onAU Small Finance Bank (AUB) IPO.
- The IPO opens: 28-30th June 2017 with the Price band: Rs.355-358 per share.
- Shares offered to public number 5.34 cr. The FV of each is Rs. 10 and market Lot is 41.
Exhibit 1 – IPO Selling Shareholders
- The IPO in total will collect Rs 1,913 cr. while selling 18.8% of equity.
- The promoter &promoter group owns 36.03% in AUB which will fall to 32.87% post-IPO.
- The offer is a complete OFS and selling shareholders will receive IPO funds. Selling shareholders are Redwood Investments, IFC, Labh Investments, Ourea Holdings, Kedaara Capital and MYS Holdings.
- The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.
- The unofficial/ grey market premium for this IPO is Rs. 103-106/share. This is a positive.
- AUB is a Jaipur based small finance bank (SFB) that got the license recently, and was earlier a NBFC. It has been built in just 20 years from the first incorporation.
- Revenues and profit for FY17 were Rs. 1,431 cr. and Rs. 329 cr. It has 8,515 employees out of which 4,446 are into sales and 1,155 into collections.
- As an NBFC, AUB operates in 3 business lines: vehicle finance; MSME loans; and SME loans.Fig 2a.
- As they commenced SFB operations this year, they expanded product offerings to working capital facilities, gold loans, Kisan credit cards for farmers, loans for agriculture and against securities.
- AUB’s MSME and SME businesses are secured - MSME loans by immoveable property, and SME loans by immoveable property or receivables. Vehicle loans are secured by the vehicles they finance.
Exhibit 2 (a) – Loan products
Fig 2(b) – Gross AUM
Fig 2(c) - Disbursements
- The gross AUM and disbursements of AUBare displayed in Fig 2b and 2c.
- For FY17, total borrowings were Rs 7,071 cr. and the average cost of borrowings was 10.13%. This has reduced from 12.61% in FY13 to 10.13% in FY17.
- AUB conducts its operations through 269 branches, 121 asset centers, 1 central processing center and 10 offices in 10 states and 1 UT in India (May 2017). The decentralized two tiered hub and spoke business model has 55 branches asHubs and 246 asSpokes. This model helps AUB optimize turnaround time for customers, manage the credit requirements and associated risks.
- AUB plans to open 162 new branches to reach 431 branches in FY18.
- In FY17, AUB sold its subsidiary companies - Aavas Financiers Ltd. and Index Money Ltd. and associate companies M Power Micro Finance Pvt. Ltd. and Au Insurance Broking Services Pvt. Ltd. The profit from these was Rs. 670.3 cr. Now AUB has no subsidiaries.
- There is a Rajasthan concentration in business with 54% of AUM. Next largest are Gujarat, Mah. And MP,see Fig 3.
- Leadership is Sanjay Agarwal (MD-CEO), Deepak Jain (CFO) and Manmohan Parnami (Comp. Sec.).
Fig 3 – State wise AUM Distribution
News, Updates and Strategies of AUB
- AUB converted itself from NBFC to a SFB in Apr 2017 after it received the final license from RBI. It is the only asset finance NBFC which got an SFB license.
- PE firm Warburg Pincus (Redwood Investment) has sought approval from RBI to retain its 22% stake in AUB in Dec 2016. Per current rules, no single entity except promoters, can hold more than 10% of a bank. So Redwood Investment may have to lower their holding by Sept 2018. It currently holds 5.97 cr. shares (21% of equity) out of which it has tendered 1.48 cr. shares for the IPO. As a SFB, AUB has committed to a shareholding pattern which is like an institution within 2 years.
- As a SFBthe firm is required to extend 75% of adjusted net bank credit as PSL (Priority Sector Lending). As of now, just 35% is PSL. So AUB may need to limit securitizations and assignments to comply with this requirement. Thus the lending strategies will change sharply in future.
- As a SFB, money market and interbank borrowings will only be available to them once they become a scheduled commercial bank, which will require additional time after the start of SFB operations. Thus even on the borrowing side, the firm needs to go through a reset. AUB will have upto 3 years to comply with these two new SFB norms above. As AU becomes a SFB, it will also be required to meet regulatory requirements of Statutory Liquidity Ratios (SLR) and Cash Reserve Ratios (CRR).
- AUB partnered with Manipal Global Education Services to run a transformation program for 2,000 employees, and equip them with necessary banking and behavioral skills for transition to a SFB.
- The remuneration of Mr. Sanjay Agarwal for FY17 stood at Rs. 32.47 cr. The maximum annual salary is Rs 1.5 cr. but this year there is a special bonus in connection to the stake sale in subsidiary and associate companies. This is 9.88% of the adjusted PAT for FY17 which is high.
- AUB tied up with CRMNEXT in Jan 2017 to deploy 'Assisted Bank-in-a-Box' banking solution. CRMNEXT provides CRM solutions for financial services firms.
Indian Vehicle Finance Industry Outlook
- Financing needs in India have risen along with economic growth over the past decade. By complementing banks and other financial institutions, NBFCs help meet this need.
- Automobile sales are robust and grew by 8% inFY16. The vehicle finance industry grew faster by 13% during the same period, reaching a value of Rs. 4,73,800 cr.
- New vehicle financing is expected to be the key growth driver for vehicle finance NBFCs in the short term. As private spending is expected to increase, sales growth of new LCVs is expected to turn positive. Tractor sales are expected to grow in double digits, and cars and utility vehicle sales are expected to grow at a CAGR of 7% and 14%, respectively, between the FY16 and FY18.
- Vehicle finance is expected to grow at a CAGR of 15% over the next 2 years. Growth should rebound in FY18 helped by growth in the economy, lower interest rates and recovery from demonetization.
- Risks for vehicle finance NBFCs include the changing regulatory framework and higher provisioning requirements that will impact profitability and increasing competition, particularly from banks.
- Indian MSME Finance Industry Outlook
- Micro, small and medium enterprises (MSMEs) are key parts of the Indian economy, accounting for an estimated45% of India’s mfg. output and 40% of total exports for FY16.
- About 80-85% of NBFC lending is secured. In contrast, banks secure 60% to 70% of their lending portfolio. Security is through collateral such as plant and machinery, and current assets. To add to security, secondary collateral is collected in the form of immovable assets such as commercial and residential property and shares. Approval rates vary across NBFCs at between 70% and 75%.
- MSME credit rose at 11% CAGR between FY12-16, as organized financiers increased focus on MSME.
- It further expected to grow 10 to 12% annually over the next 2 years.
Financials of AUB
- AUB’s revenues, NII and PAT grew at 36.4%, 43.9% and 47.5% CAGR in 5 years, see Fig 4. This is excellent. The FY17 profits are adjusted for exceptional gains on the sale of stake in subsidiary cos.
- The diluted EPS has grown 4.7xin 5 years. This is outstanding and exceptional. PAT margins too have had an overall rising trend.
Fig 4 –Financials
- AUB has declared dividend no dividend till date, instead investing in the high growth business.
- AUB had a RoE of 42.1% in FY17 while the 3 year avg. RoE stood at 32.3% (FY15-FY17). The RoCE stands at 12.9%. These are high, however the RoE in FY17 saw a sharp jump due to exceptional items which inflated the PAT for that year. This will likely taper off next year.
- AUB has a reserves and surplus balance of Rs. 1,715 cr. which is Rs. 60.3/share.
- The NIM’s have risen sharply from 6.82% in FY13 to 9.67% in FY17. This is a positive. See Fig 5.
- The AUM growth slowed in FY17 as demonetization caused the GNPA’s and NNPA’s to rise sharply.
- AUB’s asset quality worsened after its transition from NBFC to SFB. By end FY17, it had total bad loans worth Rs 107.2 cr., up from Rs 37 cr. in FY16. This was partly due to change in the classification of NPA. Per RBI NPA norms for overdue payments are NBFC -150 days and SFBs - 120 days.
- NPAs should recover on account of improved demand, normal monsoon and post demonetization.
Fig 5 –Financial Metrics
We benchmark AUBagainst other NBFC’s and banks from the same sector. See Exhibit6.
Exhibit 6 – Benchmarking
- PE appears moderate at 30.9 times compared to peers. But the P/B ratio is high at 5.09 times. Established asset management NBFCs like Sundaram and Chola are in 3-4 range. The highest is Bajaj Finance at 8.08 times, but this firm has a long history of high quality lending business.
- The D/E ratio at 3.54is in the lower range. The CAR of AUB stood at 23.2% for FY17 as against RBI’s minimum requirement of 15%, which indicates that it is adequately capitalized.
- The RoE is the highest amongst its peers, which is a positive. ROCE is on the high side. However these numbers incorporate recent assets sale, and may look inflated this year.
- AUB has witnessed good sales and profit growth. The 3 year growth is high while not the best.
- Putting this together, we see that AUB has had a good record of growth and profits in the asset management space. In its new role as a SFB, AUB will need to transition into a very different firm with strong rural retail presence, small ticket loans and deposit taking bank branches and personnel.
Positives for AUB and the IPO
- The SFB status and license received by AUB was a great win and achievement. It is becoming an institution. RBI has reposed faith and confidence in AUB that it will be able to execute this new role.
- The promoter Sanjay Agarwal is a first generation entrepreneur and has achieved a lot by building AUB from scratch. He has a good team with him too, that are leaders in the organization.
- AUB is a growth leader. The growth of revenues, NII and PAT have been excellent. From 269 branches currently, it plans to open 162 additional branches in this FY.
- The recent profitable sales of subsidiaries and associates has added to the AUB balance sheet and these funds will add firepower to AUB’s planned corporate initiatives.
- AUB now has a diversified product portfolio. From its historical product offerings of vehicle finance; MSME loans; and SME loans, after approval of SFB it started offering working capital facilities, gold loans, agriculture loans, Kisan credit cards for farmers and loans against securities.
- The microfinance sector (MFI) has high potential. Penetration of loans is low. Current players such as Bandhan Bank, Bharat Financial Inclusion, Equitas and Ujjivan are growing fast.
- AUB has access to diversified sources of funding; the borrowings ofRs.7,071cr. comprise 50% of NCDs, 33% term loans, 6.8% of CP, 4.7% of subordinated debt, and 5.6% of working capital facilities.
- The asset quality of AUB is stable with NNPA’s at 1.05% for FY17. The financials of the company are good. This is a positive for long term investors.
Risks and Negatives for AUB and the IPO
- 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.
- 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. andKar. 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.
Overall Opinion and Recommendation
- The lending sector in India is an exciting space with presence of Universal, SFB and PBs, MFIs and NBFCs, yet still poor penetration levels for banking and loans.
- AUB has been a fast growing NBFC. The management is experienced and aggressive and has guided the firm well through multiple stages of business from inception till today.
- AUB is addressing high potential sectors of the economy such as microfinance and MSME.
- However AUB has a massive task ahead of itself. It has to rebuild itself within 3 years as a priority sector SFB institution. This involves setting up deposits infra in branches. It involves MFI loans which are high volume low value and reaching out into the villages. PSL to non PSL is 35:65% today and has to become 75:25% in 3 years. This requires retraining and fresh hiring of staff. New teams and processes have to be set up. AUB has to benchmark against current operating MFIs and SFBs. These changes are costly, time consuming and involve retraining. Other changes are on the borrowings side and the shareholders side, but these are easier to deal with.
- At a P/B of 5.09 timesTTM 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.
This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or known financial interests in AUBor any group company. Punit Jain does intend to apply for this IPO in the Retail category. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at firstname.lastname@example.org.
About Punit Jain
The author is a SEBI-registed Research Analyst (SEBI Registration No. INH200002747), and has a firm called JainMatrix Investments (www.jainmatrix.com) which offers an Investment Advisory Service. He can be contacted at email@example.com
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