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.