AU Small Finance Bank Ltd-edited - Angel Backofficeweb.angelbackoffice.com/research/archives/fundamental/company... · AU Small Finance Bank ... Business Segments ... driving force

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 lot of NBFCs across India have chased those segments in order to grow. Moreover, with 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 helped 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 FY2017 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 FY2017

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: `284.3cr

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 Bu ild ing

Fresh issue: ` 0cr

Issue Detai ls

Face Value: `10

Present Eq. Paid up Capital: `284.3cr

Offer for Sale: **5.34cr Shares

Siddhart Purohit

+022 39357600, Extn: 6872

[email protected]

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.


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


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.


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 (%)


Exhibit 5: Vehicle Finance Book Composition (%)


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


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 )


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%


3,7

04

4,4

49

5,5

68

8,2

21

10

,73

4

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


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 )


Exhibit 9: PAT Growth trend (` Cr )


21

3

27

8

40

5

65

2

91

7

69

30

46

61

41

0

10

20

30

40

50

60

70

80

0100200300400500600700800900

1000


NII (Rs Cr ) % Growth YoY

69

73

13

9

24

7

32

686

5

92

77

32

0

20

40

60

80

100

120

0

50

100

150

200

250

300

350


Adj PAT ( Rs Cr ) % Growth YoY


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 (%)


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 (%)


79% 70%57% 51% 50%

15%20%

25% 30% 30%

6% 10% 19% 19% 20%

0%

20%

40%

60%

80%

100%

120%


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


NIM


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 (%)


Exhibit 13: Credit Cost Trend (%)


0.53

1.23

0.92

0.64

1.61

0.27

0.62

0.440.38

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


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


Credit Cost %


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 (%)


Exhibit 15: Cost / AUM (%)


Exhibit 16: ROA Trend (%)


Exhibit 17: RoE Trend (%)


44.740.0

37.2 38.6 37.5

0.05.0

10.015.020.025.030.035.040.045.050.0


Cost / Income

3.02.7

3.0

3.7 3.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


Cost / Assets

3.75%

1.78%

2.78%

3.58% 3.44%

0%

1%

1%

2%

2%

3%

3%

4%

4%


ROA

15.9

12.5

18.6

25.3

16.9

0

5

10

15

20

25

30


ROE


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 (%)


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 18.717.3 16.9

23.2

0

5

10

15

20

25


CAR %


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


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



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



June 27, 2017 13

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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AU Small Finance Bank Ltd-edited - Angel Backofficeweb.angelbackoffice.com/research/archives/fundamental/company... · AU Small Finance Bank ... Business Segments ... driving force