Please refer to important disclosures at the end of this report
1
AU Small Finance Bank (AUSFB) was one of the ten NBFCs
which had obtained
approvals from RBI for setting up a small finance bank (SFB). As a NBFC,
it has a
history of successfully serving the low & middle income individuals and businesses
having limited or no access to the formal banking and finance systems.
Financing revenue generating assets the major focus:
According to the
management strategy of AUSFB, the bank has been historically financing
assets
having revenue generating potential. Therefore,
it has avoided lending to
consumer finance and MFIs (Micro Finance Institutions), even though a
NBFCs across India have chased those segments in order to grow. Moreover, w
ith
conversion to Small Finance Bank now it will have multiple products;
however, the
area of focus will remain financing assets which have revenue generation ability.
Secured loans towards Vehicle, MSME & SME contributes to a stable book:
The
loan book of AUSFB
is largely concentrated towards secured loans in the Vehicle
Finance (50%), MSME (30%) and SME (20%) segments
. The average ticket size of
the above segments is `3.4 lacs, `10.4 lacs and `
2.2 cr respectively and each of
the segments still have enough scope for growth in India, and hence,
we believe
AUSFB will continue to expand its book in the secured loan space without relying
on the unsecured loan space for its growth.
Fairly strong AUM growth at 30% CAGR over FY2013-17:
Focused approach
towards asset financing and the
ability to find out gaps and the underserved
sections of the Vehicle Finance, SME and MSME segments has help
ed the
company in achieving a strong 30% CAGR in AUM over FY2013-17.
Strong collection efficiency and underwriting the key to asset quality:
Selective
and calculated risk taking coupled
with a strong collection mechanism in place
has ensured a strong asset quality for AU, with GNPA &
NNPA of 1.61%/1.05%
respectively. Further, net slippages of 65 bps and credit cost of 83 bps for FY20
17
is also best in class among the NBFCs.
Outlook & Valuation: At the upper price band of `358 the issue is offered at 5.1x
its FY2017 BV. However, AU has reported a strong 48% PAT CAGR over FY2013-
17, and we believe it has the potential to deliver 30% PAT CAGR over FY2017-
19, and based on our quick estimates on FY2019 BV,
the issue is offered at 3.5x.
While the issue is offered at premium valuations, we believe the valuation is
justified given the historical track record
and strong growth potential the SFB
offers. Hence, we recommend SUBSCRIBE to the issue.
Key Financials
Y/E March (` cr) FY2013 FY2014 FY2015
FY2016
F
Y2017
NII 213 278 405
652
917
% chg 69 30 46
61
41
PAT 69 73 139
247
326
% chg 86 5 92
77
32
EPS 3.4 3.4 6.3
11.2
11.5
Book Value (`) 22 28 35
45
70
P/E 104.4 106.0 56.6
31.9
31.2
P/BV (x) 16.4 12.9 10.3
7.9
5.1
RoE (%) 15.9 12.5 18.6
25.3
16.9
Source: RHP, Angel Research; Note: Valuation ratios based on pre-
issue outstanding shares and at
upper end of the price band, EPS and BV has been adjusted with bonus
AU Small Finance Bank Ltd
Transitioned to offer diverse suite of banking products
IPO Note | Banking
June 27, 2017
SUBSCRIBE
Issue Open: June 28, 2017
Issue Close: June 30, 2017
QIBs 50% of issue
Non-Institutional 15% of issue
Retail 35% of issue
Promoters 33%
Others 67%
Post Issue Shareholding Pattern
Post Eq. Paid up Capital:
`284.3
cr
Issue size (amount): *
`
1,790cr -
**1,913cr
Price Band:
`355
-358
Lot Size: 41 shares and in multiple
thereafter
Post-issue implied mkt. cap: *
`9
,522cr -
**
`
10,176cr
Promoters holding Pre-Issue: 36%
Promoters holding Post-Issue: 32.9%
*Calculated on lower price band
** Calculated on upper price band
Book Building
Fresh issue:
` 0
cr
Issue Details
Face Value:
`10
Present Eq. Paid up Capital:
`284.3
cr
Offer for Sale: **5.34cr Shares
Siddhart Purohit
+022 39357600, Extn: 6872
siddhart.purohi[email protected]broking.com
AU Small Finance Bank | IPO Note
June 27, 2017
2
Company background
Formerly known as AU Financiers, it was promoted by first generation
entrepreneur Mr Sanjay Agarwal and it started operations in 1996. From a humble
background, the NBFC over a period of time has expanded into key products like
vehicle financing, MSME and SME financing. AU Financiers was one of the 10
NBFCs which obtained approval from RBI to start operations as a Small Finance
Bank. Prior to being granted the approval for commencing SFB, it was recognized
as a “Systematically Important, Non Deposit Accepting Asset Finance Company”
by RBI.
Exhibit 1: Business Segments
Vehicle Finance
MSME Loans SME Loans
AUM (` Cr )
5,396 3,216 2,122
% of AUM 50% 30% 20%
Average Ticket Size ` 3.4 Lacs `10.8 Lacs ` 2.2 Cr
4 Yr CAGR 16% 55% 78%
Loan Tenure Up to 5 Years Up to 12 YearsUp to 15 Years
Typical Clients Small Transport Operator Provision Stores Traders
First Time Users Hotels Wholesalers
Self Employed Restaurants Distributors
Source: RHP, Angel Research
Key Management Personnel
Mr Sanjay Agarwal Managing Director-Founder of the NBFC He has been the
driving force behind the establishment of AU Financiers and post conversion to
SFB, his two decades of experience in running the NBFC will be a key advantage
for AU SFB.
Mr Uttam Tibrewal Whole Time Director He has been associated with the
company for 13 years now, and has been instrumental in the growth of the
company.
Mr Krishna Kant Rathi Independent Director He has over 26 years of
experience. Previously he was the CEO of Future Consumer Ltd.
AU Small Finance Bank | IPO Note
June 27, 2017
3
Issue details
AU Small Finance Bank Ltd is offering 5.34cr equity shares of `10 each via book
building route in the price band of `355-358/share, entirely comprising offer for
sale by current promoters GAIL and Investor (Redwood Investment Ltd, IFC, Labh
Investment, Ourea Holding, Kedaara Capital).
Exhibit 2: Top10 Shareholders Pre Issue
Name of shareholder Share
Holding (%)
Redwood Investment Ltd 5,97,70,794
24.3
Mr.Sanjay Agarwal 5,84,77,128
23.8
Iernational Finance Corporation 3,02,88,678
12.3
Labh Investments Limited 2,25,37,530
9.2
Ourea Holdings Limited 2,11,49,064
8.6
Ms.Jyoti Agarwal 1,41,82,272
5.8
Ms.Shankuntala Agarwal 1,40,94,756
5.7
Mr.Chiranji Lal Agarwal 81,19,770
3.3
MYS Holdings Private Limited 74,60,466
3.0
ICICI Prudential Life Insurance 48,57,144
2.0
SBI Life Insurance Company Limited 48,57,144
2.0
Source: RHP, Angel Research
Exhibit 3: Shareholding Pattern
Pre Issue
Post Issue
Particulars No. of Shares (%)
No. of Shares (%)
Promoter 10,24,25,826 36.0%
9,34,25,826 32.9%
Other 18,18,25,080 64.0%
19,08,25,080 67.1%
Total 28,42,50,906
28,42,50,906
Source: RHP,, Angel Research
Objects of the Offer
Objects of the Offer are to achieve benefits of listing equity shares on stock
exchanges and to carry out the offer for sale. Listing of equity shares will
enhance AU Financiers’ brand name and provide liquidity to existing
shareholders. The listing will also provide a public market for the equity shares
in India.
AU Small Finance Bank | IPO Note
June 27, 2017
4
Investment rationale
Financing revenue generating assets the major focus: According to AUSFB’s
strategy, it has been historically financing assets having revenue generating
potential. Therefore, it has avoided lending to consumer finance and MFIs (Micro
Finance Institutions), even though a lot of NBFCs across India have chased those
segments in order to grow.
Exhibit 4: Loan Book Composition (%)
Source: RHP, Angel Research
Exhibit 5: Vehicle Finance Book Composition (%)
Source: RHP, Angel Research
Vehicle Finance is the key strength: Despite competitive scenario Vehicle Finance
Loan book has reported 16% CAGR over FY2013-17. The loan book is largely
dominated (50% of AUM) by Vehicle Finance aimed at the first time buyers, small
time transport operators and self-employed professionals. The Vehicle Finance
book of the company is also well distributed across MUVs, Cars and Small CVs.
The average ticket size of loans in the Vehicle Finance segment is `3.4 lacs, with a
maximum tenure of 5 years.
MSME & SME would lead the next leg of growth : MSME is another area where AU
has developed strong expertise, reporting 55% loan CAGR over FY2013-17, with
an average loan ticket size of `10.8 lacs, the targeted customers are mainly
provision stores, hotels, restaurants, etc. In addition to the above, another area
which is growing fast (78% CAGR) for the company is SME loans. The average
ticket size here is `2.2 cr, targeted at traders, wholesalers & distributors. Each of
the segments has growth potential for multiple years.
50%
30%
20%
Vehicle Finance MSME SME
17%
14%
11%
8%
MUVs Cars Small CVs Others
AU Small Finance Bank | IPO Note
June 27, 2017
5
Fairly strong AUM growth at 30% CAGR over FY2013-17: Focused approach
towards asset financing and the ability to find out gaps and the underserved
sections of the vehicle finance, SME and MSME segments has helped the company
in achieving a strong 30% CAGR in AUM over FY2013-17. Now that it has
transformed into a Small Finance Bank, it will start other types of loans as well,
however, the core focus of the organization will remain in the existing segments.
Exhibit 6: AUM Growth Trend ( ` Cr )
Source: RHP, Angel Research
Exhibit 7: Segmental Gross AUM (` Cr )
FY14 FY15
FY16
FY17
Vehicle
3,115
3,146
4,174
5,396
% Growth YoY 6% 1%
33%
29%
MSME
910
1,376
2,218
3,216
% Growth YoY 62% 51%
61%
45%
SME 423 1046
1829
2122
% Growth YoY 100% 147%
75%
16%
Total
4,448
5,568
8,221
10,734
% Growth YoY 20% 25%
48%
31%
Source: RHP, Angel Research
3,704
4,449
5,568
8,221
10,734
20.1
25.2
47.6
30.6
0.0
10.0
20.0
30.0
40.0
50.0
60.0
-
2,000
4,000
6,000
8,000
10,000
12,000
FY13
FY14
FY15
FY16
FY17
Gross AUM
% Growth YoY
AU Small Finance Bank | IPO Note
June 27, 2017
6
Higher NII CAGR vis-à-vis AUM growth is due to better yield: We believe that with
adequate infrastructure at place and strong capital base, AU in its new form as a
Small Finance Bank, will be able to report similar growth rate of ~30% over the
next 3-4 years. NII growth over FY2013-17 has been 44%, however, NII growth
could see some moderation, as it will have to maintain CRR and SLR being an SFB,
which will reduce the overall yield on the assets. However, the good part is that
being an SFB, it will be able take deposits now, which will also reduce the overall
cost of funds.
Exhibit 8: NII growth trend (` Cr )
Source: RHP, Angel Research
Exhibit 9: PAT Growth trend (` Cr )
Source: RHP, Angel Research
213
278
405
652
917
69
30
46
61
41
0
10
20
30
40
50
60
70
80
0
100
200
300
400
500
600
700
800
900
1000
FY13
FY14
FY15
FY16
FY17
NII (Rs Cr )
% Growth YoY
69
73
139
247
326
86
5
92
77
32
0
20
40
60
80
100
120
0
50
100
150
200
250
300
350
FY13
FY14
FY15
FY16
FY17
Adj PAT ( Rs Cr )
% Growth YoY
AU Small Finance Bank | IPO Note
June 27, 2017
7
Secured loans towards Vehicle, MSME & SME contributes to a stable book a key
differentiator from other SFBs: The loan book of AU SFB is largely concentrated
towards secured loans in the Vehicle Finance (50%), MSME (30%) and SME (20%)
segments. Each of the segments still have enough scope for growth in India, and
hence, we believe AUSFB will continue to expand its book in the secured loan
space without relying on the unsecured loan space for its growth.
Among some of the NBFCs which obtained the approvals from RBI to form SFB,
many are involved in large scale Microfinance operations. While microfinance also
has been an emerging area for some NBFCs, post conversion to SFB they are also
putting efforts to reduce the exposure to the unsecured forms of lending. And this is
the key differentiator for AUSFB, as it has not ventured into the MFI segment.
Exhibit 10: Portfolio distribution (%)
Source: RHP, Angel Research
Post conversion to SFB, NIM could see decline, still would be best in
class: The management of AU has always focused on financing the segments
which are underserved by the banks and other NBFCs, and hence, has been able
to generate higher yield, this has resulted in a strong NIM, the last three years
average NIM has been ~9.1%. However, we expect the NIM to moderate going
ahead due to the resultant yield on maintaining SLR and CRR.
Exhibit 11: NIM Trend (%)
Source: RHP, Angel Research
79%
70%
57%
51%
50%
15%
20%
25%
30%
30%
6%
10%
19%
19%
20%
0%
20%
40%
60%
80%
100%
120%
FY13
FY14
FY15
FY16
FY17
Vehicle
MSME
SME
6.82 6.82
8.09
9.45
9.68
0.00
2.00
4.00
6.00
8.00
10.00
12.00
FY13
FY14
FY15
FY16
FY17
NIM
AU Small Finance Bank | IPO Note
June 27, 2017
8
Strong collection efficiency and underwriting – the key to asset quality:
Selective and calculated risk taking coupled with a strong collection mechanism in
place has ensured a strong asset quality for AU, with GNPA & NNPA of
1.61%/1.05% respectively. Further, net slippages of 65 bps and credit cost of 83
bps for FY2017 is also best in class among the NBFCs.
Compared to other Small Finance Banks, the asset quality for AU is much stronger
and this is largely due to the focus on secured lending. Some of the new SFBs like
Equitas and UJiijvan have seen stress on the book due to their high dependence
on the Microfinance loans, which are unsecured in nature. We believe that even
after it has migrated to become a SFB, AU will be able to contain its asset quality
under control.
Exhibit 12: Asset Quality (%)
Source: RHP, Angel Research
Exhibit 13: Credit Cost Trend (%)
Source: RHP, Angel Research
0.53
1.23
0.92
0.64
1.61
0.27
0.62
0.44
0.38
1.05
0.00
0.20
0.40
0.60
0.80
1.00
1.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
FY13
FY14
FY15
FY16
FY17
GNPAs %
NNPAs %
0.58
1.54
1.02
0.39
0.83
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
FY13
FY14
FY15
FY16
FY17
Credit Cost %
AU Small Finance Bank | IPO Note
June 27, 2017
9
Strong return ratios – likely to remain decent going ahead as well:
As discussed earlier, the ability to finance productive assets at a higher yield and
controlled credit cost has been the key to the strong profitability of AU. The last five
years average ROE as an NBFC has been 17.8%. While the drop in NIM would put
some pressure in the RoE in the near term, we believe that the ability to raise
deposits will help negate some of the pressure and even as an SFB it has the
potential to deliver high double digit RoE for multiple years to come. Another key
factor one should watch for is the cost structure of the organization, as it migrates
to SFB.
Exhibit 14: Cost / Income (%)
Source: RHP, Angel Research
Exhibit 15: Cost / AUM (%)
Source: RHP, Angel Research
Exhibit 16: ROA Trend (%)
Source: RHP, Angel Research
Exhibit 17: RoE Trend (%)
Source: RHP, Angel Research
44.7
40.0
37.2
38.6
37.5
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
FY13 FY14 FY15 FY16 FY17
Cost / Income
3.0
2.7
3.0
3.7 3.7
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
FY13 FY14 FY15 FY16 FY17
Cost / Assets
3.75%
1.78%
2.78%
3.58%
3.44%
0%
1%
1%
2%
2%
3%
3%
4%
4%
FY13 FY14 FY15 FY16 FY17
ROA
15.9
12.5
18.6
25.3
16.9
0
5
10
15
20
25
30
FY13 FY14 FY15 FY16 FY17
ROE
AU Small Finance Bank | IPO Note
June 27, 2017
10
Well capitalized to grow for next few years: The current issue is an offer for
sale, and hence, the company will not receive any proceeds from the issue.
However, looking at the strong capital adequacy of 23.2% of which Tier I itself is
21.1% we feel that the new SFB will not have to raise capital any time soon for
meeting its growth. Further, the internal capital generation of the organization is
also quite robust, which should support superior business growth going ahead.
Exhibit 18: Capital Adequacy (%)
Source: RHP, Angel Research
Outlook & Valuation
At the upper price band of `358 the issue is offered at 5.1x its FY2017 BV.
However, AU has reported a strong 48% PAT CAGR over FY2013-17, and we
believe it has the potential to deliver 30% PAT CAGR over FY2017-19, and
based on our quick estimates on FY2019 BV, the issue is offered at 3.5x. While
the issue is offered at premium valuations, we believe the valuation is justified
given the historical track record and strong growth potential the SFB offers.
Hence, we recommend SUBSCRIBE to the issue.
18.3
18.7
17.3
16.9
23.2
0
5
10
15
20
25
FY13
FY14
FY15
FY16
FY17
CAR %
AU Small Finance Bank | IPO Note
June 27, 2017
11
Exhibit 19: Income Statement (` Cr)
P&L AC FY13 FY14 FY15 FY16
FY17
NII 213 278 405 652
917
- YoY Growth (%) 69 30 46 61
41
Other Income 2 6 2 5
14
- YoY Growth (%) 191 139 (59) 110
179
Operating Income 216 284 407 657
931
- YoY Growth (%) 70 31 44 61
42
Operating Expenses 96 113 151 254
349
- YoY Growth (%) 46 18 34 68
38
Pre - Provision Profit 119 170 256 403
582
- YoY Growth (%) 95 43 50 57
44
Prov. & Cont. 17 61 49 26
77
- YoY Growth (%) 187 262 (20) (47)
200
Profit Before Tax 103 110 207 377
505
- YoY Growth (%) 85 7 89 82
34
Exceptional Item
670
PBT Post Exceptional Item
1,175
Prov. for Taxation 33 37 68 130
332
- as a % of PBT 32 34 33 34
28
Reported PAT 69 73 139 247
843
Adj PAT 69 73 139 247
326
- YoY Growth (%) 86 5 92 77
32
Source: RHP, Angel Research
Exhibit 20: Balance Sheet
Y/E March (` cr)
FY13
FY14 FY15
FY16 FY17
Share Capital
40
43 44
44 284
Reserve & Surplus
401
555
722
957
1,715
Net Worth
442
598
766
1,001
1,999
Borrowings
2,482
2,130
2,878
4,783
7,071
- Growth (%) (14) 35
66 48
Total Provisions
16
30 44
54 70
Other Liabilities
173
201 292
436 677
Total Liabilities
3,113
2,959
3,980
6,274
9,818
Cash and Cash equivalents
376
203 203
123 624
Investments
739
114 140
232 2150
Total Loans & Advances
1,855
2,517
3,523
5,789
6,608
- Growth (%)
120
36 40
64 14
Fixed Assets
17
17 19
25 276
Other Assets
127
108 95
104 159
Total Assets
3,113
2,959
3,980
6,274
9,818
Source: RHP, Angel Research
AU Small Finance Bank | IPO Note
June 27, 2017
12
Exhibit 21: Key Ratios
FY13 FY14 FY15 FY16
FY17
Profitability ratios (%)
NIMs 11.5 6.8 8.1 9.5
9.7
RoA 3.7 1.8 2.8 3.6
3.4
RoE 15.9 12.5 18.6 25.3
16.9
Asset Quality (%)
Gross NPAs 9.9 31.3 32.7 37.1
107.2
Gross NPAs % 0.5 1.2 0.9 0.6
1.6
Net NPAs 5.0 15.6 15.5 22.2
69.3
Net NPAs % 0.3 0.6 0.4 0.4
1.1
Credit Cost 0.6 1.5 1.0 0.4
0.8
PCR % 50.0 50.0 52.5 40.2
35.3
Per Share Data (`)
EPS 17.1 16.9 31.6 56.1
11.5
BVPS 109.2 139.1 173.9 227.0
70.4
Adj BV 108.0 135.5 170.4 222.0
67.9
Normalized EPS 3.4 3.4 6.3 11.2
11.5
Normalized BV 21.8 27.8 34.8 45.4
70.4
Normalized Adj BV 21.6 27.1 34.1 44.4
67.9
DPS 0 0 0 0
0
Valuation Ratios
PER (x) 20.9 21.2 11.3 6.4
31.2
P/BVPS (x) 3.3 2.6 2.1 1.6
5.1
P/ABVPS (x) 3.3 2.6 2.1 1.6
5.3
Dividend Yield (%) 0 0 0 0
0
DuPont Analysis
Interest Income 22.2 13.9 13.7 15.2
15.0
Interest Expenses 10.6 7.1 5.6 5.7
5.3
NII 11.5 6.8 8.1 9.5
9.7
Other Inc. 0.1 0.1 0.0 0.1
0.1
Total Income 11.7 7.0 8.1 9.5
9.8
Opex 5.2 2.8 3.0 3.7
3.7
PPP 6.4 4.2 5.1 5.8
6.1
Provision 0.9 1.5 1.0 0.4
0.8
PBT 5.5 2.7 4.1 5.5
5.3
Taxes 1.8 0.9 1.4 1.9
1.9
RoA 3.7 1.8 2.8 3.6
3.4
Leverage 4.2 7.0 6.7 7.0
4.9
RoE 15.9 12.5 18.6 25.3
16.9
Source: RHP, Angel Research
AU Small Finance Bank | IPO Note
June 27, 2017
13
Research Team Tel: 022
-
39357800
E
-
mail: research@angelbroking.
com Website:
www.angelbroking.com
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