Aavas Financiers IPO – High Priced – Should you invest?
Aavas Financiers IPO Review
Aavas Financiers IPO would open for subscription on 25th September, 2018. Aavas Financiers Limited is an affordable housing finance company, primarily serving low and middle income self employed customers in semi-urban and rural areas in India. Company revenues grew at 70% CAGR in the last 5 years. Its profits are increasing year on year. There is some buzz about this IPO in the market for some time. What are positive factors in this Aavas Financiers Limited IPO? What are the hidden factors in Aavas Financiers IPO? Should you invest in an Aavas Financiers IPO? Let me provide some insights about this IPO and do the review.
About Aavas Financiers Limited
They are a retail, affordable housing finance company, primarily serving low and middle income self employed customers in semi-urban and rural areas in India. A majority of their customers have limited access to formal banking credit. According to ICRA Report, the Company had the latest 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.
Aavas Financiers IPO Issue details
IPO opening date: 25-Sep-2018
IPO closure date: 27-Sep-2018
Face Value: Rs 10 per share
Issue price band: Rs 818 to Rs 821 per share
Issue size: 1,734 Crores
IPO Lot size: 18 shares and 18 shares, there-off
Minimum investment: Rs 14,778 on higher price band
Leading Managers: ICICI Direct, Citigroup Global Markets, Edelweiss Financial Services, Spark capital advisors, HDFC Bank
Listing: BSE / NSE
Download Aavas Financiers IPO RHP Prospectus at this link.
Objects of the Aavas Financiers IPO issue
The Objects of the issue are:
a) Offer for Sale: Each of the Selling Shareholders will be entitled to its respective proportion of the proceeds of the Offer for Sale after deducting their portion of the Offer related expenses and relevant taxes thereon
b) The object for which the Net Proceeds (as defined below) of the Fresh Issue will be utilized towards increasing Company’s Tier I capital base to maintain the minimum capital adequacy ratio in accordance with Regulation 30 of the NHB Directions and to meet its future capital requirements arising out of growth in its business.
3) Further, the Company expects that the listing of the Equity Shares will enhance its visibility and brand image among its existing and potential customers.
Company promoters are the Lake District and ESCL.
Company Financials (Standalone Reinstated)
1) The company generated revenue of Rs 54.3 Crores for the year ended Mar-14 and Rs 457.2 Crores for the year ended Mar-18.
2) The company posted a profit of Rs 6.3 Crores for the year ended Mar-14 and profit of Rs 92.9 Crores for the year ended Mar-18.
3) Its EPS for FY18 was Rs 15.87 and 3 years average EPS is Rs 13.
What are the key strengths of Aavas Financiers Limited?
Here are the key strengths of the company.
1) Strong Distribution Network with Deep Penetration Serving Underserved Customers in Rural and Semi-Urban Markets.
2) In-house Stheircing Model leading to Superior Business Outcomes.
3) Robust and Comprehensive Credit Assessment, Risk Management and Collections Framework.
4) Access to Diversified and Cost-Effective Long-Term Financing.
5) Effective Use of Technology and Analytics to build a Scalable and Efficient Operating Model.
6) Experienced Management Team.
What are the Strategies of Aavas Financiers Ltd?
Here are the company strategies.
1) Expand their Branch Network to Achieve Deeper Penetration.
2) Continue to Focus on Low and Middle Income Self Employed Customers.
3) Diversify their Borrowing Profile to Optimize their Borrowings Costs.
4) Increase their Product Portfolio and Improve Cost Efficiency through the Use of Technology and Data Analytics.
5) Enhance their Brand Recall to Attract New Customers.
What is the Grey Market Price (GMP) of Aavas Financiers?
As of the publication of this article, Aavas Financiers IPO Grey Market Premium (GMP) hasn’t started showing any movement till now.
IPO Grey Market Premium (GMP) helps in deciding the premium of the IPO Shares on listing day. It also allows investors to sell the IPO Shares or IPO Application at a certain premium before they list.
Reasons to invest in an Aavas Financiers IPO
1) Strong Revenue growth in the last 5 years, i.e. 70% CAGR.
2) Company’s margins are improving. Its profits grew at 95% CAGR in the last 5 years.
3) Company has a strong Distribution Network with Deep Penetration Serving Underserved Customers in Rural and Semi-Urban Markets. Company’s branches are predominantly located in rural and semi-urban areas and as of March 31, 2018, of the 165 branches, 133 branches were located in towns with a population of less than one million people. A large segment of India’s rural and semi-urban population is currently unserved and underserved by formal financial institutions.
Risk Factors / Reasons not to invest in a Aavas Financiers IPO
1) Its business requires substantial capital and any disruption in their sources of capital could have an adverse effect on Its business, results of operations, financial condition and cash flows.
2) The risk of non-payment or default by borrowers may adversely affect Its business, results of operations, financial condition and cash flows.
3) They are affected by changes in interest rates for their lending and treasury operations, which could cause their net interest income to decline and adversely affect its business and results of operations.
4) Any downgrade in their credit ratings could increase their borrowing costs, affect their ability to obtain financing, and adversely affect Its business, results of operations, financial condition and cash flows.
5) They may face asset-liability mismatches, which could affect their liquidity and adversely affect Its business and results of operations.
6) Their operations are concentrated in a few states of western India, particularly Rajasthan and any adverse developments in this region could have an adverse effect on Its business, results of operations, financial condition and cash flows.
7) The Indian housing finance industry is highly competitive and their inability to compete effectively could adversely affect Its business and results of operations.
8) Their inability to effectively manage their growth could have an adverse effect on Its business, results of operations, financial condition and cash flows.
9) They are exposed to operational and credit risks which may result in NPAs, and they may be unable to control or reduce the level of NPAs in their portfolio.
10) Their inability to maintain their capital adequacy ratio could adversely affect Its business.
11) The Indian housing finance industry is extensively regulated and any changes in laws and regulations applicable to HFCs could have an adverse effect on Its business.
12) Company and their Directors are involved in certain legal and other proceedings. Any adverse outcome in such proceedings may have an adverse effect on its business, results of operations and financial condition.
13) For complete internal and external risk factors, you can refer the DRP of the company.
Aavas Financiers IPO Schedule
25th September – Offer Opens
27th September – Offer Closes
3rd October – Finalization of Basis of Allotment
4th October – Unblocking of ASBA
5th October – Credit to Demat Accounts
8th October – Listing on NSE & BSE
Aavas Financiers IPO – Should you invest?
Let us look at the company valuations now. On FY2018 EPS of Rs 15.87 and on an upper price band of Rs 821, P/E works out to be 51.7x. On last 3 years average consolidated EPS of Rs 13, P/E works out to be 63.1x. Means company is asking the upper band of issue price of Rs 821 of P/E between 51.7x to 63.1x. Its listed peers like Gruh Finance share price is trading at P/E of 32x (Highest) and Canfin homes is trading at P/E of 13.6x (Lowest) and industry average is 21x. Considering this, Aavas Financiers IPO Price is high priced.
The company has strong revenue growth of 70% CAGR in the last 5 years. Its margins are on improvement mode. However the issue price is highly priced. Promoters got shares < 6 months back at Rs 430.5 per share, however currently they are asking at Rs 821 (upper price band). I would have been excited if such shares are available at low price. I would avoid this issue at this point of time and post listing if available at discounted price, I would subscribe to that.
Disclaimer: I do not have an interest in investing in this IPO and above analysis is based on my personal views. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.
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Aavas Financiers IPO – Should you avoid
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