AU Small Finance Bank - RSEC IPO Note - Emerging Star

AU Small Finance Bank - IPO Note - Emerging Star 

 

AU Small Finance Bank (AU SFB) – formerly known as AU Financiers Ltd. – is a diversified retail focused financial services player with presence across vehicle financing segment (50.3% of AUM), MSME segment (30% of AUM) and SME finance segment (19.8% of AUM). It started banking operation in Apr’17 after securing Small Finance Bank (SFB) licence from the Reserve Bank of India (RBI) in Dec’16. Diversified product portfolio provides AU SFB an edge in terms of AUM growth (30.5% CAGR to Rs107.4bn in FY13-17) and best-in-class asset quality (GNPA ratio of 1.6%) despite a challenging economic environment. Segments in which AU SFB operates are mostly under penetrated and growing in size, which provide a lucrative opportunity for growth, going forward. Adjusted PAT has increased at 47% CAGR to Rs3.3bn over FY13-17. On the back of healthy presence in high growth niche segments, higher margin profile, superior execution skills demonstrated by the management team and strong corporate governance track record, We recommend SUBSCRIBE to the Issue, as it provides favorable investment opportunity for the long-term investors.

 

Key Positives

• Small Finance Bank (SFB) licence is a long-term positive.
• Strong presence in high growth and underpenetrated segments i.e. vehicle finance, MSME and small enterprise finance. 
• Local market knowledge and customer focused product structure to aid  margin in the long-term.
• Lean operating model to contain operating cost.

 

Key Risks

• Key to the successful transition will be the build up of CASA base, which is challenging for any new entrant. Intensity of competition especially for liabilities is likely to go up further as target profile of customers of SFB is similar to that of the existing banks.
• Post conversion into small bank, AU SFB will have to comply with multiple regulatory requirements i.e. CRR, SLR and higher priority sector lending, which may negatively impact its operating performance during initial three years of operation.

 

Outlook & Valuation

Evolution from a DSA of HDFC Bank to a significant retail lending NBFC and outstanding performance track record suggest that AU SFB has the potential to emerge as one of the most successful SFBs in next 3-5 years.  Hence, we expect AU SFB to attract higher valuation premium compared to its peers led by sustainability of high growth in diversified business amid lower assets quality risk. At the upper price band of Rs358, AU SFB market capitalization would stand at Rs102bn, which gives it price-to-book multiple of 5.1x on Mar’17 book value and P/E of 31.2x on FY17 profit. We recommend SUBSCRIBE to the Issue, as it provides favorable investment opportunity for the long-term investors.

 

Central Depository Services (India) - RSec IPO Note - Solid, Predictable, Cash Generating Business

Central Depository Services (India) - IPO Note - Solid, Predictable, Cash Generating Business 

Central Depository Services (India) Limited – CDSL - is India’s leading depository in terms of incremental Beneficial Owner (BO) accounts over the last 4 years and by number of registered Depository Participants (DPs). In terms of market share, CDSL stands second to its only competitor i.e. National Securities Depository Limited (NSDL) with 44% BO account market share compared to 56% market share enjoyed by the latter as of FY17-end. On revenue market share, CDSL commands 42% share vs. 58% enjoyed by NSDL. 

CDSL offers dematerialisation for equity and preference shares, MF units, debt instruments and G-Secs. As agents of CDSL, the DPs offer demat services to BOs of securities. Registrar & Transfer Agents (RTAs) and Clearing Members (CMs) are other intermediaries involved in the process of issue and transfer of securities of BOs to CDSL’s platform. CDSL also offers facilities to corporates to credit securities to the BO’s demat accounts to give effect to corporate actions i.e. issue of bonus shares, stock-split, and conversion of securities. It also offers KYC services to MFs, electronic holding of policies of several insurance companies and other services like e-voting, e-Locker, National Academic Depository and drafting of succession wills. 

CDSL is coming up with an Initial Public Offering (IPO) of 35.2mn equity shares through 100% book building route. The IPO will open for subscription on Monday, June 19, 2017 and will close on Wednesday, June 21, 2017. The entire issue is an Offer for Sale (OFS) and CDSL will not receive any proceeds from the offer, as 100% of the proceeds will go to parent BSE and its sponsors, all of whom are selling part of their stake to comply with depositories regulations. While ~77% of the IPO proceeds will go to BSE, the balance 23% will go to other sponsors. The offer will constitute 33.7% of the post offer paid-up equity capital of CDSL. The price band for the issue has been fixed at Rs145 to Rs149. At the upper end of the price band, CDSL’s market capitalisation works out at Rs15.6bn, while at the lower end, it is pegged at Rs15.2bn. The shares will be listed on the NSE.

Outlook & Valuation

We believe CDSL is a predictable and profitable business with improving market share and better cost competitiveness, while newer business initiatives are likely to drive growth going forward. The company has a unique business model with no comparable listed peer, which can consistently generate cash and lead to regular dividend payouts. Such a business, we believe could command a PE multiple of ~24-25x. At the IPO price band, the issue comes at a PE multiple of 18.1x FY17 (trailing) earnings, which we believe leaves a lot on the table for investors. Thus, we recommend SUBSCRIBE to the Issue.

Eris Lifesciences - Rsec IPO Note - Proven Track Record & Strong Growth Potential

Eris Lifesciences Limited (Eris) – incorporated in January 2007 – develops, manufactures and commercialises branded pharmaceutical products within Chronic and Acute therapeutic segments i.e. Cardiovascular (CVS), Anti-diabetics, Vitamins, Gastroenterology, Anti-infectives and Gynaecology. Cash flow sticky Chronic segment contributed 65.6% to its revenues, while the Acute segment contributed the rest 34.4% in FY17.

Eris is promoted by Mr. Amit I. Bakshi, Mr. Himanshu J. Shah and Mr. Inderjeet Singh Negi having an average experience of more than a decade in pharmaceuticals industry. In FY17, Eric was ranked at 20th place out of 377 domestic and MNCs Chronic segment players of Indian pharmaceutical market in terms of revenues.

As of Mar’17, its product portfolio comprises of 80 mother brand groups with primary focus on niche therapies. Eris owns and operates a manufacturing facility in Guwahati (Assam) with capacity utilization of 30%. Assam plant contributes 85% to its revenue and outsourcing (~20 third party manufacturers) contributes the rest. As of Mar’17, the Company has 7 sales divisions with 1,501 marketing representatives.

Eris is coming out with an Initial Public Offering (IPO) with Offer for Sale (OFS) of 28.87mn equity shares of Rs1 each to raise up to Rs17.3-17.4bn. The Issue comprises of net offer to public up to 28.72mn equity shares with an Employee Reservation Portion of 15 lakh equity shares. Eris will not receive any proceeds from the Offer, as the proceeds will go to the selling shareholders, in proportion to the equity shares offered by the respective selling shareholders.

The Issue will open for subscription on Friday, June 16, 2017 and close on Tuesday, June 20, 2017. The price band of the Public Issue is fixed at Rs600 to Rs603 per share. At the upper end of the price band, Eris’ market capitalization works out at Rs82.91bn. The shares will be listed on BSE and NSE.

Outlook & Valuation

Eris has reported strong growth in sales (17% CAGR) and PAT (43% CAGR) with margin expansion of ~1,500bps to 37% over FY13-17. Further, RoE and RoCE ratios are very impressive at 45% and 38%, respectively. Looking ahead, we expect huge scope for margin improvement with increase in capacity utilization at Guwahati (Assam) plant from current level of 30%.

At the upper end of the IPO price band, the stock is valued at P/E ratio of 34x FY17 earnings of Rs17.6. Despite expensive valuation, we recommend SUBSCRIBE to the IPO as Eris is expected to be benefitted from imminent growth opportunity on account of secular growth in Indian pharma market led by favourable macro environment, high return ratios, and healthy earnings/EBITDA growth.