Aavas Financiers Ltd. (AFL) (incorporated as AU Housing Finance Pvt. Ltd.) is a retail, affordable housing finance company.
BUSINESS
The company primarily serving low and middle income self employed customers in semi-urban and rural areas in India. A majority of its customers have limited access to formal banking credit.
According to an ICRA Report, the company had the lowest Gross NPAs as of March 31, 2018 and the second highest growth rate of assets under management for the last three financial years, among affordable housing finance companies that had assets under management between Rs. 25 billion and Rs. 200 billion.
AFL offers customers home loans for the purchase or construction of residential properties, and for the extension and repair of existing housing units.
As of June 30, 2018, a majority of the home loans that company disbursed were for single-unit properties, almost all of which were to be occupied by the borrowers themselves.
In addition to home loans, it offers customers other mortgage loans including loans against property, which accounted for 24.18% of company’s Gross Loan Assets as of June 30, 2018. As of June 30, 2018, 61.22% of gross loan assets were from customers who belonged to the economically weaker section and low income group, earning less than Rs. 50,000 per month and 36.27% of gross loan assets were from customers who were new to credit.
As of June 30, 2018, 64.21% of gross loan assets were from self-employed customers. The average sanctioned amount of home loans and other mortgage loans was Rs. 0.87 million and Rs. 0.80 million, respectively, on its gross loan assets, as of June 30, 2018.
As of June 30, 2018, gross loan assets had an average loan-to-value of 50.33% at the time of the sanctioning of the loan. Since the commencement of its operations in March 2012, it has served more than 62,500 customers.
The company has adopted a strategy of contiguous on-ground expansion across regions and as of June 30, 2018, it conducted operations through 166 branches covering 95 districts in eight states of which it has a significant presence in four states of Rajasthan, Gujarat, Maharashtra and Madhya Pradesh.
Almost all customers are sourced directly by the company. As of June 30, 2018, it employed 1,996 personnel and had 57,049 loan accounts including securitized and assigned cases.
AFL is a technology driven company and it leverages information technology and data analytics for on boarding customers, underwriting analysis, loan monitoring, risk management and collection functions.
Between Fiscals 2014 and 2018, it invested Rs. 150.45 million in information technology systems that helps it for speedy process of its business needs.
With such niche style of operations, it enjoys average net margins of 6% plus on an average for last five fiscals. It has lowest net NPAs of below 0.5% for all these years.
ISSUE
To part finance its plans to increase Tier-I equity capital base, AFL is coming out with a maiden IPO of primary as well as secondary issue. The company is issuing fresh equity capital worth Rs. 400 cr. (approx. 4872114 shares at the upper price band) and offer for sale of 16249359 equity shares by existing stake holders.
Issue is being made via book building route and it has fixed a price band of Rs. 818 – Rs. 821 per share. With this issue, AFL mulls mobilization of Rs. 1727.74 cr. to Rs. 1734.07 cr. (based on lower and upper price bands).
Issue opens for subscription on 25.09.18 and will close on 27.09.18. The minimum application is to be made for 18 shares and in multiples thereafter.
Post allotment, shares will be listed on BSE and NSE. Issue constitutes 26.87% of post issue paid up capital of the company. BRLM’s to this issue are ICICI Securities Ltd., Citigroup Global Markets India Pvt. Ltd., Edelweiss Financial Services Ltd., Spark Capital Advisors (India) Pvt. Ltd. and HDFC Bank Ltd. Link Intime India Pvt. Ltd. is the registrar.
Having issued initial equity at par, it raised further equity in the price range of Rs. 50 to Rs. 430.50 per share between March 2014 and August 2018. Average cost of acquisition of equity shares for the selling shareholders viz. Lake District, ESCL, Master Fund, Kedaara AIF-1, Sushil Kumar Agarwal and Vivek Vig, are Rs. 245.07, Rs. 245.07, Rs. 245.07, Rs. 245.07, Rs. 201.76 and Rs. 251.24 per share respectively.
Post issue its current paid up equity capital of Rs. 73.72 cr. will stand enhanced to Rs. 78.60 cr. (approx.)
PERFORMANCE
On the financial front, for the last four fiscals, AFL has (on standalone basis) posted total revenue/net profits of Rs. 103.76 cr. /Rs. 19.08 cr. (FY15), Rs. 190.90 cr. / Rs. 32.78 cr. (FY16), Rs. 305.49 cr. / Rs. 57.13 cr. (FY17), Rs. 457.25 cr. / Rs. 92.93 cr. (FY18).
For Q1 of FY19 it has earned net profit of Rs. 29.00 cr. on total revenue of Rs. 143.87 cr. For last three fiscals, it has (on standalone basis) posted an average EPS of Rs. 12.68 and an average RoNW of 10.27%.
On a consolidated basis, it posted an EPS of Rs. 15.20 and RoNW of 8.46% for FY18. AFL has reported total revenue of Rs. 457.27 cr. with a net profit of Rs.92.88 cr. In Q1 of FY19, it earned a net profit of Rs. 29.01 cr. on total revenue of Rs. 143.89 cr.
If we consider consolidated FY18 Q1 earnings and attribute it on fully-diluted equity post-issue, then asking price is at a P/E of around 56 against industry average of 21.
Thus on a prima facie issue is priced aggressively. AFL has posted CAGR of 75% for AUM, 65% for disbursement, 64% in loan account, 105% in net worth respectively from FY14 to Q1 of FY19.
As per offer document, it has shown HDFC, Gruh Finance, Repco Home, Can Fin Homes, PNB Housing as its listed peers that are currently trading at a P/E of around 33, 60, 15, 14 and 24 respectively (as on 17.09.18).
However, all these peers are not strictly comparable with this company’s business model which is totally having a niche play for affordable/low cost housing for self employed rural masses which has largely being untapped .
On BRLM’s front, the five Merchant Bankers associated with the issue have handled 45 public issues in the past three years out of which 14 issues closed below the issue price on listing date.
CONCLUSION
Well, on prima-facie issue appears aggressively priced, but considering its unique business model and hugely untapped markets for such type of rural home loan financing, company holds bright prospects ahead. It can be considered as a “High Risk-High Yield” bet. Investors may consider it for long term investment. (Subscribe for long term).
