IPO watch: AU Small Finance Bank issue valuations seem too high
At 5 times its FY17 book value, the issue looks expensive compared with all listed peers.
At five times its FY17 book value, the issue looks expensive compared with all the listed financial services stocks and may see limited upside after listing. Investors may seek an entry if the price drops once the stock is listed.
The valuation appears stretched even if one was to consider the fact that the company -erstwhile AU Financiers -was the only assetbacked non-banking finance company amongst 10 entities that were awarded small finance bank licence by the Reserve Bank of India (RBI) in 2015. Exceptional gains of about Rs 670 crore due to sale of investment in its subsidiaries including the housing finance business also aided the jump in FY17 earnings per share to Rs 29.6.
The IPO comprises offer for sale of 5.34 equity shares or 18.76% of share capital by promoters and existing shareholders, 34% of which is available for retail shareholders.
Before launching its small finance bank operations in April, the company as an NBFC lent for vehicle finance and MSME and SME loans. These segments accounted for 50%, 30% and 20% of the FY17 gross assets under management (AUM) of Rs 10,734 crore. As of May, AU SFB operates through 269 branches and 121 asset centres mainly from the states of Rajasthan, Gujarat, Maharashtra and Madhya Pradesh. State of Rajasthan ac counts for nearly 50% of its gross AUM but bank is planning to bring it down over the next few years.Financials: Between FY13-FY17, the former NBFC reported a strong 30% annualised growth in its gross AUMs while disbursements grew at a comparable 29% CAGR. The net interest income expanded at 44% CAGR during the period and profit before exceptional items grew at an annualised growth of 47%.
While the net interest margin of the company stood at a strong 9.67% in FY17, with the impact of com mencement of SFB operations, AU Small Finance Bank may also be forced to turn competitive in the interest rates it charges.
Gross non-performing asset ratio of the company hovered below 1% mark between FY15 and FY16. The measure jumped to 1.61% in FY17 after a three-fold jump in bad assets after recognition period for NPA shifted from 150 days to 120 days, Going ahead, further transition in NPA recognition period to 90 days past due in FY18 and stricter asset classification methods as SFB may impact bad asset proportion of the company.