AU Small Finance Bank - IPO Update - Unique Positioning - Nirmal Bang

AU Small Finance Bank (AUSFB) is entering the capital market with an issue of 53.42mn shares having a face value of Rs10 in the price band of Rs355-Rs358 per share. The issue opens on 28 June 2017 and closes on 30 June 2017. We recommend subscription to the initial public offer (IPO).

Focus on retail and small-ticket secured lending: AUSFB is highly focused on low and middle income individuals and businesses in rural, semi-urban and outskirts of urban markets that have limited or no access to formal banking and finance channels. The customer base for its business segment includes self-employed individuals, small road transport operators, MSME businesses with a turnover of over Rs1mn and SME businesses with a turnover of over Rs10mn.

Significant presence in rural and semi-urban markets: AUSFB focuses on customers in specific markets, particularly those without a credit history, who offer significant growth opportunity and loyalty. AUSFB's understanding of local characteristics of these markets and customers has allowed it to address the unique needs of the low and middle income customers and helped in penetrating deeper into such markets. The branch outreach allows the company to service existing customers and attract new customers as a result of personal relationships cultivated through proximity and frequent interaction by its employees.

Healthy asset quality: The ability to manage the quality of its loans is key driver of the company's operations. Although there has been a significant rise in gross nonperforming assets or GNPAs in FY17 to 1.6%, it was primarily on account of the change in classification of non-performing assets or NPAs from 150-day basis to 120-day basis. On 90-day basis, the GNPAs are expected to be ~1.9%-2%. Provision coverage ratio stood at 34.8%, while credit costs are 1.2%.

Leveraging existing capabilities and customer base: AUSFB intends to strategically expand its operations by offering a diverse suite of banking products and services at its branches. It has developed and set up additional branch architecture, improved technology backbone for small finance bank or SFB operations and established consumer branch footprint in existing geographical regions. Sustained focus on the goto-market approach to increase customer base, implementing customer reach programmes and encouraging existing customers to open bank accounts will pivot the NBFC into a full-fledged SFB.

Outlook and valuation: While the trailing valuation of 5.1x FY17 P/BV may look expensive after taking a first look, this is a unique model with no exact peers. An important distinguishing factor is that AUSFB is a small finance bank and can raise the deposits to keep its cost of funds low, unlike its peers. Therefore, in the long run the SFB model should do better compared to the NBFC model.

Source : Equity Bulls

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