Based on the equity after the IPO and FY18 financials, the company demands price-book (P/B) multiple of 4.1 compared with the P/B of around three for some of the established bigger peers.
ET Intelligence Group: Jaipurheadquartered Aavas Financiers plans to raise Rs 400 crore through an initial public offering (IPO) to infuse capital in the lending business.
In addition, some of the existing stakeholders will sell shares worth upto Rs 1,334 crore in the primary market. The housing finance company (HFC) has reported fast business growth over the years without compromising on the asset quality. Its IPO valuation, however, appears to be on a higher side.
BUSINESS
An erstwhile subsidiary of AU Small Finance Bank, Aavas is now promoted by private equity companies, Kedaara Capital and Partners Group. It provides housing loans in smaller towns of eight western and northern Indian states with an average loan size of Rs 8 lakh. Incorporated in 2011, 85 per cent of its loan portfolio consists of individual houses thereby reducing the risk of default, which is often higher in the case of large apartment projects. Rajasthan contributes nearly half to the loan book.
The company serves customers largely untapped by the top HFCs. Its 134 out of 166 branches are located in towns with under 10 lakh population. Over 64 per cent of its borrowers are self employed compared with the sector average of 27 per cent. It operates in a highly competitive market. The number of HFCs registered with National Housing Bank shot up to 95 as of May 2018 from 57 in June 2013.
FINANCIALS
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Disbursements grew at a rapid pace of 65 per cent annually between FY14 and FY18 to Rs 2,050 crore. Its gross NPA was 0.34 per cent at the end of FY18. A better control of credit quality has resulted in improved credit rating to A+ in FY18 from BBB+ in FY14 allotted by rating agency CRISIL. This has lowered borrowing cost significantly to 8.6 per cent from 12.3 per cent during the period.
VALUATION & RECOMMENDATION Based on the equity after the IPO and FY18 financials, the company demands price-book (P/B) multiple of 4.1 compared with the P/B of around three for some of the established bigger peers. Also, Aavas demands a trailing price-earnings (P/E) multiple of 69.5 while peers trade at P/Es of 14-34. This makes the IPO valuation aggressive given the intense competition, regional concentration of its loan portfolio and the current choppy stock market condition. This IPO, hence, is more suitable to long term investors with high risk appetite.
