AU Small Finance Bank's IPO opens; read what analysts say

Key Highlights: 

• AU SMall Finance Bank offers over 5.34 crore equity shares in IPO
• RBI's guidelines says small finance banks to be listed after reaching net worth of Rs 500 crore
• AU Small Finance Bank plans to raise about Rs 1,912.5 crore from this issue

AU Small Finance Bank (AU SFB) -- a small finance bank -- has commenced its initial public offering (IPO) by offering over 5.34 crore equity shares aggregating up to Rs 1912.5 crore.

IPO issue opened on June 28, 2017 and will be available till June 30, 2017. Price band for this has been fixed at lower end of Rs 355 per share and upper band of Rs 358 per share.

As per RBI guidelines, listing for small finance banks becomes mandatory once it reaches net worth of Rs 500 crore.

Book running lead managers for this IPO are ICICI Securities, HDFC Bank, Motilal Oswal and Citigroup Global Markets.

Rishabh Bhargava and Jignesh Shial, analysts at Quant Capital said, “At upper band, the company is valued at Rs10,100 crore, quoting at ~5.0x P/Book FY17, which is relatively expensive compared to peers like Shriram City Union Finance (SCUF) which is trading at ~3.1x P/Book FY17 numbers."

Hatim Broachwala, research analyst, Nirmal Bang added that though the offer looks expensive in first look, this is unique model with no exact peers.

Broachwala said ,“An important distinguishing factor is that AUSFB is a small finance bank and can raise the deposits to keep its cost of funds low, unlike its peers. Therefore, in the long run the SFB model should do better compared to the NBFC model.”

Digant Haria and Bhavik Mehta, analysts at Antique Stock Broking Limited said, “Given the strong presence in niche customer segments, AU SFB's profitability will be remain superior to most conventional banks. Despite the migration to SFB, we estimate that AU will report trough RoEs of ~17% in FY18 this will recover to 20% by FY20.”

The duo at Antique said, "As such, valuations at 3.2x book on FY20 are reasonable, and investors can expect strong upside over the next few years.”

Key things to know: 

The company mainly offers vehicle finance (50% of AUM), MSME (~30% of AUM) and SME loans (20%).

Total revenue and net profit of the company stood at Rs 1,430 crore and Rs 325 crore by end of FY17. 

AU SFB has delivered RoA/RoE (excluding exceptional item) of 3.46% and 21.67% respectively during the similar period. 

AU SFB has maintained stable asset quality with gross non-performing loans (GNPL) ratio of 1.61% and Net NPL ratio at 1.05% as at Mar‐2017. 

AU SFB has presence in 10 states of India; majorly in Rajasthan and operates  301 branches.