AU Small Finance Bank Ltd - IPO Note - CSEC Research

Objects of the Offer

- The Company will not receive any proceeds from the Offer for Sale.

- The objects of the Offer are to achieve the benefits of listing the Equity Shares on the Stock Exchanges which will enhance company's visibility and brand and provide liquidity to its existing shareholders. Listing will also provide a public market for the Equity Shares in India.

Key Positives

- The company is a NBFC converted into Small Finance Bank. It primarily serves low and middle-income individuals and businesses that have limited or no access to formal banking and financial channels. It has created a niche play in asset based financing and is one of the 10 new small bank licensees.

- Gross AUM for FY17 grew by a robust 30%YoY to INR 107bn and its total disbursements rose 19% YoY to INR 67.3bn compared to FY16. The loan portfolio remains well diversified with Vehicle finance contributing ~50% of AUM (5-year CAGR of 21%), MSME loans contributing ~30% of AUM (5-year CAGR of 65%) & SME loans contributing ~20% of AUM (5-year CAGR of 56%).

Risks

- In the near term, Return ratios may fall slightly considering branch rollout plans and other banking-related costs.

- As a Small Finance bank starting April 2017, maintenance of SLR & CRR would result in margin compression.

- Failure to garner low cost CASA ratio.

- Concentration risk as ~56% of the portfolio is from Rajasthan.

Valuation: We believe the valuation at upper price band at 5.1X P/BV of FY17 looks pricey when compared with the other recently listed small finance banks and asset finance companies. However, considering the positive factors like future growth prospects, well-maintained asset quality and strong management team seems to justifying the valuations. Hence, we give out SUBSCRIBE recommendation on the IPO of AU Small Finance Bank Ltd.

Source : Equity Bulls

Keywords