Majority of brokerage houses advised subscribing to Aavas Financiers issue with long-term perspective, but not for listing gains as the issue is fairly priced and FY19 earnings multiple do not leave much upside in the near term.
Aavas Financiers, the housing finance company, opened its Rs 1,734-crore initial public offering for subscription on Tuesday.
The public issue comprises a fresh issue of up to Rs 400 crore and an offer for sale of up to 1,62,49,359 equity shares by Lake District Holdings, Partners Group ESCL, Kedaara Capital Alternative Investment Fund – Kedaara Capital AIF 1, Partners Group Private Equity Master Fund LLC, Sushil Kumar Agarwal and Vivek Vig.
The price band for the issue is fixed at Rs 818-821 per share. The subscription will close on September 27.
The company raised Rs 520.22 crore from 34 anchor investors on Monday. Net proceeds of the fresh issue will be utilised towards increasing company’s Tier I capital base to maintain the minimum capital adequacy ratio and to meet future capital requirements arising out of growth in business.
Aavas is a retail, affordable housing finance company, primarily serving low and middle income self-employed customers in semi-urban and rural areas in India.
Majority of brokerage houses advised subscribing the issue with long term perspective but not for listing gains as the issue is fairly priced and FY19 earnings multiple do not leave much upside in the near term.
Here are views from several brokerage houses:
ABM Equity Research
We believe the company is well-poised to deliver strong earnings growth in the forthcoming years considering the under-penetrated housing finance market, niche presence of Aavas, well-managed risk matrix and efficient usage of technology.
Expect the company to command rich valuations as competition intensity remains on lower side in the space Aavas operates; and the visibility of healthy 5 percent spread, stable asset quality and 2.5 percent return on assets (RoA) remains high.
The company is adequately capitalized for superlative growth with CAR at around 61.6 percent as on FY18. With further capital infusion from IPO, the case is well-set for a rating upgrade which will further improve business prospects.
At an upper price band of Rs 821, the stock is available at around 4.1x FY18 P/ABV and P/E ratio of 65.4x on post money basis. We recommend investors to Subscribe the issue and hold the stock from long term perspective. Listing gains may get limited considering the recent mayhem in NBFC space.
Asic C Mehta
Aavas Financiers is a retail housing finance company with operations across Rajasthan, Gujarat, Maharashtra, MP, UP, Haryana, Delhi and Chhattisgarh. Focused on rural and semi-urban areas, the company plans to expand its presence in the respective states with efficient operations.
At the upper price band, asking price is at a P/BV of 5.23X at FY18 book value of Rs 157, making the issue fairly priced. We recommend to Subscribe the issue from a long-term perspective.
Antique Stock Broking
While the progress in affordable housing in India has been rather slow, with total outstanding loans at mere Rs 27,000 crore (2 percent of mainstream housing), Aavas has crafted its own success story through a combination of identifying the right customer profile, the right collateral and heavy usage of analytics, systems and process.
However, valuations at 4.1x on post-money book and 43x on FY19e earnings do not leave much upside in the near term. Investors with long term outlook can look to subscribe.
With an estimated Rs 400 crore capital infusion through a fresh issue of share capital the stock would be trading at a P/ABV of 4.1x FY18 book value at the expected upper price band of Rs 821 which appears high. Yet, most financial inclusion plays (Bandhan Bank, Bharat Financial and Gruh) generally command richer valuations than mainstream peers.
Risk factors for the company include concentration (Rajasthan) risk, scalability concerns, regulatory (interest -cap) risk, threat of competition and asset-quality concerns (due to risky clientele and lack of seasoning). As per our overall assessment, we recommend Subscribe.
On valuation front, Aavas is demanding a valuation of 5.9x to its FY18 adjusted book value, which is at a premium to its peer average of 4x. The issue seems to be fully priced, thereby leaving little scope for listing gains.
Additionally, considering the future business potential, profitability, stable asset quality and risk linked to the addressable target market, we are cautiously optimistic about the outlook of the company. Thus we assign a Subscribe with Caution rating for the issue.
AFL has a healthy capital base, to fund growth objectives in the long term, (pre issue CRAR is at 61.55 percent). Tailwinds in affordable housing segment would augur well for the loan book growth going ahead. Its target customers being self-employed individuals, will aid in keeping the yields higher than peers and result in elevated NIMs. This coupled with stringent credit practices will keep the GNPAs lower and hence aid in scripting the earnings growth going ahead.
We believe the valuation is justified, given its loan growth potential, superior yields on assets and best in class asset quality. Hence we recommend a Subscribe to the issue.
Visible signs of pick-up in demand for mortgage loans led by improving affordability, attractive incentive from PMAY scheme and improving legal framework augur well for sustained growth in Aavas' loan book over next 5 years.
Looking ahead, we expect Aavas Financiers to deliver strong performance on the back of strong demand for mortgage loan in rural and urban India. The issue provides a healthy investment opportunity for the long-term investors. Thus, we recommend Subscribe to the issue.
Canara Bank Securities
Aavas Financers has shown good growth traction in past 3 years. The company has created a niche for itself in the rural and semi urban housing finance market.
We believe that the stock is aggressively priced, leaving very limited headroom for any potential upside on listing. One may subscribe to this IPO for long term gains.
Arihant Capital Markets
Compared to its peers, Aavas Financiers business is relatively fairly valued and the key positive areas of Aavas are sharp growth in its loan-book, superior assets quality, low risk on margin profile and strong capital adequacy ratio.
We have a '3 star' rating for the issue.
Aavas has strong business momentum (65 percent disbursements/78 percent loan growth in FY14-FY18) with greater thrust on operational efficiency, strong credit quality marked by in-house business sourcing, wider usage of analytics, risk management and collection framework with resultant GNPA at mere 0.5 percent (Q1FY19).
Such superior metrics have led to ratings upgrade from BBB+(FY14) to A+(FY18) resulting into cost of funds (CoF) decline from 12.3 percent (FY14) to 8.6 percent (Q1FY19). However, at trailing book and upper price band, valuations stand at a significant premium vis-à-vis peer set (quality HFCs trading at around 3x) pricing in all the positives.
Further, elevated CAR at 61 percent, challenging market conditions, coupled with higher valuations entail greater risk to sustenance of high growth and improved RoE’s.
Although long term prospects look positive, valuations are stretched and leave scope for negative surprise. Avoid.Disclaimer: The views and investment tips expressed by brokerage houses on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.