Analysis of upcoming IPO of AU Small Finance Bank has been loaded on www.sptulsian.com.
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IPO Analysis: AU Small Finance Bank
Verdict: Asking for gold!
Shriram Transport Finance, India’s largest asset financing NBFC specialising in used CV segment, with Rs. 79,000 crore loan book, is ruling at PBV multiple of 1.8x and PE of 16x, while M&M Finance, providing vehicle loans to rural India through a nationwide network of 1,200 branches and Rs. 42,000 core loan book is trading at PBV and PE multiples of 2.5x and 18x. 1,000 branches strong Shriram City Union, three-fourth of whose Rs. 23,000 crore AUM comprises of SME and 2wheeler loans, is ruling at PBV of 2.7x while another vehicle financer Cholamandalam Investment is trading at PBV of 3.4x, despite much larger loan portfolio of Rs. 29,000 crore.
Capital First, specialising in SME loans with AUMs of Rs. 20,000 crore, promoted by Warburg Pincus (same investor in AU) having current ownership of 36%, has long term credit rating of AAA (versus AU’s A+, which is four notches lower), higher growth rates (reported NII and PAT growth of 65% and 44% respectively in FY17 as against AU’s 41% and 32%), enjoys better asset quality (net NPA of 0.30% vis-à -vis AU’s 1.05%) with listed track record of nearly one decade, is available much cheaper, at PBV multiple of 2.6x and PE of 21x.
Bajaj Finance is the only NBFC ruling at a higher PBV of 6.5x which is justified by its 44% YoY PAT growth (32% for AU in FY17) and AUM growth of 36% on huge base of Rs. 44,000 crore (31-3-16) to Rs. 60,000 crore (31-3-17), versus AU’s AUM growth of 31% on much lower base of Rs. 8,000 crore (31-3-16). Moreover, Bajaj Fin’s asset quality is significantly better, with net NPAs of only 0.4% in relation to AU’s 1.05%. Well, both size and asset quality matter and AU has a lot of catching up before it can join the premium big league of the likes of Bajaj Finance!
While AU is an asset finance NBFC to start SFB operations, listed peers who have started SFB are Equitas and Ujjivan, being micro finance institutions, and ruling at nearly half of AU’s asking valuation. Equitas, operating its SFB since Sept 2016, is ruling at PBV of 2.2x, while Ujjivan, which launched SFB operations in Feb 2017, is trading at PBV of only 1.9x, with both having comparable AUMs of Rs. 6,000-7,000 crore. What also comes to light from the experience of these 2 companies is as SFB business expands, cost of operations rise, straining P&L for a few quarters, especially when serving unbanked areas (regulatory requirement of minimum 25% of total braches to be located there). Hence, AU will also see pressure on its P&L in FY18.
From the above, one can thus conclude that in relation to (practically all) NBFCs operating in vehicles and SME lending space, AU’s IPO is grossly overpriced.
While it will be futile to compare AU with banking heavy-weights, such as Indusind, Kotak, Yes or even HDFC Bank, in existence for so many years while AU is a new entrant yet to prove its mettle as a bank, different set of RBI regulations govern the two - take for example, priority sector lending at 40% versus 75% for small finance banks. The above four banks are all currently ruling at PBV multiples of less than 4 times, FY18 book. Despite all the investor fancy and spectacular run-up in share price, even RBL Bank, with Rs. 49,000 crore balance sheet, is ruling at PBV of 3.8x on FY18E BVPS, which fades away AU’s pricey valuation.
In short, by all parameters, AU Small Finance Bank IPO is expensively priced.
Benjamin Graham, revered in the investment community as the father of value investing, who has also mentored the most-admired-investor-of-our-times Warren Buffett, has, in his book The Intelligent Investor, said ‘A great company is not a great investment if you pay too much for the stock’. The above applies perfectly in case of AU Small Finance Bank. One wonders what prompted the company and merchant bankers to adopt such steep pricing!
While the company is good, posting strong growth, albeit with regional presence, pricing of the issue is very aggressive, making it an avoid.
Zerodha (Trading & Demat Account)
RHP
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