Aavas Financiers IPO today; Is affordable housing a money making opportunity?

Affordable housing finance service provider Aavas Financiers Ltd (Aavas) has opened its initial public offering (IPO) today on stock exchanges, by offering 1,47,85,027 equity shares in order to raise about Rs 400 crore. Investors can subscribe to this IPO up till September 27. 

Price band of Aavas Financiers IPO has been fixed at lower end of Rs 818 per piece and upper end of Rs 821 per piece. 
 
Companies like ICICI Securities Limited, Citigroup Global Markets India Private Limited, Edelweiss Financial Services Limited, Spark Capital Advisors (India) Private Limited and HDFC Bank Limited are acting as book running lead managers (BLRM) for the issue. 

At trailing book and upper price band (Rs 821), P/E of 52x, P/B of 5.0x and post infusion at 4.1x P/B (FY19), valuations stand at a significant premium vis-à-vis peer set (quality HFCs trading at ~3x) pricing in all the positives.

On investing in this IPO, Prabhudas Lilladher said, “With close to 50% loan mix concentrated in Rajasthan region and continued deeper penetration plans would retain this high mix. Going by the peer-set experiences (Tamil Nadu, Karnataka regions) and challenging market environment, Aavas’ business is prone to geographic concentration risks in near to medium term.” 

Analysts at Prabhudas explained that, high capital adequacy (61%) will not only depress RoE in near term (current RoE at 11%) but elevated valuations would require high growth to improve ratios and justify valuations. 

They added, “Market conditions are challenging with high interest rates, bond yields volatility and anemic property market.” 

Thereby in Prabhudas’ views, “Although technological driven processes (data analytics for onboarding customers, risk management, collection framework), regional expansion and stepping-up leverage signal bettering operational efficiencies in long term, valuations leave little scope for a negative surprise. AVOID.”