Aavas Financiers

Second fastest-growing affordable housing financier

Caters to semi-urban and rural areas, with a direct loan sourcing model, and has the lowest gross NPAs among comparable peers

CM RATING

47/100

Aavas Financiers was incorporated in Jaipur, Rajasthan, on 23 February 2011. The retail and affordable housing finance company primarily serves low- and middle-income self-employed customers in semi-urban and rural areas with limited access to formal banking credit. Gross non-performing assets (NPAs) were the lowest end March 2018 and assets under management (AUMs) were second-fastest growing in the last three financial years among affordable housing finance companies with AUMs between Rs 2500 crore and Rs 20000 crore.

The original promoter was Au Financiers, now known as AU Small Finance Bank (AuSFB). AuSFB sold 90.10% of the outstanding equity interest after conversion to a small finance bank to Lake District Holdings, Kedaara Capital AIF 1, Partners Group ESCL and Partners Group Private Equity Master Fund Llc in June 2016. The name was changed from AU Housing Finance to Aavas Financiers in March 2017.

Sushil Kumar Agarwal is the founder, whole-time director and CEO and has more than 17 years experience in retail financial services. He was previously associated with AuSFB as Business Head-SME & Mortgages. Ghanshyam Rawat is the co-founder and chief financial officer (finance and treasury) and has over 23 years of experience in finance, fund-raising, treasury management, forex and interest risk management and mergers and acquisitions. The key managerial personnel hold 7.19% of the outstanding equity interest.

Aavas Financiers offers home loans to purchase or construct residential properties and for extension and repair of existing housing units. A majority of the home loans disbursed end June 2018 were for single-unit properties. Almost all were to be occupied by the borrowers. In addition to home loans, on offer are other mortgage loans including loans against property, accounting for 24.18% of the gross loan assets end June 2018.

The economically weaker section and low income group comprised 61.22% of the gross loan assets and new-to-credit customers 36.27% of gross loan assets end June 2018. The self-employed customer segment contributed 64.21% to the gross loan assets. The average sanctioned amount of home loans was Rs 8.7 lakh and other mortgage loans were Rs 8 lakh. Gross loan assets had an average loan-to-value of 50.33% at the time of the sanctioning of the loan. Since the commencement of operations in March 2012, more than 62,500 customers have been served.

The strategy is continuous on-ground expansion across regions. The network consists 166 branches covering 95 districts in eight states. There is significant presence in Rajasthan, Gujarat, Maharashtra and Madhya Pradesh. Almost all the customers are sourced directly. There were 57,049 loan accounts including securitized and assigned cases end June 2018. The employee base stood at 1,996 personnel.

Information technology and data analytics are leveraged for on-boarding customers, underwriting analysis, loan monitoring, risk management and collection. Nearly Rs 15.05 crore was invested in the information technology systems between the fiscal year ended March 2014 (FY 2014) and FY 2018.

The long-term credit ratings have improved to Crisil A+/Stable currently from Crisil BBB+/Stable in August 2012.

Offer and the objects

The initial public offer (IPO) is to collect between Rs 1729.20 crore by issuing 2.114 crore shares at the lower band of Rs 818 per share (face value Rs 10 per share) and Rs 1734.07 crore by issuing 2.112 crore shares at the upper band of Rs 821 per share.

The issue consists of a fresh issue of equity shares (0.487 – 0.489 crore shares) aggregating up to Rs 400 crore and offer for sale (OFS) of 1.62 crore equity shares aggregating up to Rs 1329.2 – 1334.1 crore.

The OFS comprises an offer aggregating 0.882-crore equity shares by promoter Lake District Holdings, 0.428-crore equity shares by promoter Partners Group ESCL and 0.188-crore equity shares by promoter Partners Group Private Equity Master Fund LLC. The OFS also consists an offer aggregating 0.024-crore equity shares by investing shareholders Kedaara Capital Alternative Investment Fund, 0.091-crore equity shares by Sushil Kumar Agarwal and 0.013-crore equity shares by Vivek Vig.

The net proceeds of the fresh issue are proposed to be utilized for increasing the Tier I capital base to meet future capital requirement that are expected to arise out of growth of business and assets, primarily housing loans and other mortgage loans, and to ensure compliance with the National Housing Board guidelines. Further, there will be the benefits of listing of the equity shares on the stock exchanges, enhancement of the brand name and creation of a public market for equity shares in India. The net proceeds will be sufficient to satisfy the Tier- I capital requirements for FY2019.

Strategies

The goal is to grow the loan portfolio, reduce the cost of borrowings, improve cost-efficiency and maintain asset quality through expansion, deeper penetration in the existing eight states and setting up of an additional 70 branches in FY2019. Tehsil-level penetration envisages approximately 85% presence in all the existing eight states. Operations are to commence in Uttarakhand in FY2019.

The focus will be on low- and middle-income self-employed customers and increase the market share of existing products in the rural and semi-urban markets of India. The intention is to increase fee income through the distribution of third-party life, general and health insurance products.

The aim is to continue to increase the lender base and obtain funding from insurance, pension and provident funds, overseas lenders, external commercial borrowings and through the issue of commercial paper.

The IT systems are to be leveraged to support growth and reduce operational expenditures. Initiatives will be undertaken to increase the strength and recall of the Aavas brand to attract new customers.

Strengths

The presence is predominantly in rural and semi-urban areas with 134 branches out of 166 branches located in towns with a population of less than one million people. Operations are in 757 tehsils across 95 districts in eight states, with a point of presence in 78.69% of the tehsils in Rajasthan, 70.67% in Gujarat, 54.90% in Maharashtra and 47.95% in Madhya Pradesh. A large segment of India's rural and semi-urban population is currently unserved and underserved by formal financial institutions and offers significant growth opportunities and customer loyalty.

Customers will be sourced directly on-going relationships and contact will be maintained with them. A direct sourcing and collection system enables to optimally price offerings and maintain asset quality. The end-to-end control of the processes has helped to reduce the average turn-around-time from 21 days in FY2014 to 13 days in FY2018. The end-to-end control of the collections process has helped reduce one day past due from 14.51% end March 2014 to 4.65% end June 2018 of gross advances.

The gross AUM recorded a CAGR of 78% to Rs 4359.09 crore end March 2018 from Rs 406.22 crore end March 2014. Disbursements registered a strong CAGR of 65% to Rs 2051.16 crore in FY2018 from Rs 279.94 crore in FY2014.

The asset quality is healthy, with the net NPA ratio at 0.38% end June 2018.

Revenues notched CAGR of 70% to Rs 457.25 crore in FY2018 from Rs 54.32 crore in FY2014. CAGR of net interest income was 82% to Rs 267.29 crore in FY2018 from Rs 24.14 crore in FY2014, with strong net interest margins of 7.25% for FY2018. Net profit recorded CAGR of 96% to Rs 92.93 crore in FY2018 from Rs 6.34 crore in FY2018, with substantially lower credit cost.

 Weaknesses

The focus is on low- and middle income customers in semi-urban and rural areas that have limited access to formal banking credit. The customers often do not have credit histories supported by tax returns and other documents, making precise credit risk analysis difficult. The reliance is on a system of customer referrals and the value of the property provided as underlying collateral rather than on the credit profile of the customers.

Operations are concentrated in four states of western India, particularly Rajasthan, and any adverse developments in the region can have an adverse effect on the business. About 92.50% of the gross loan assets were located in Rajasthan, Maharashtra, Madhya Pradesh and Gujarat, with Rajasthan accounting for 46.63% of the gross loan assets.

Receivables securitized and assigned as a percentage of gross loan assets were 20.36% end June 2018. Any change in the Reserve Bank of India or other government regulations covering assignments and securitizations by housing finance companies can have an adverse impact on the assignment and securitization program.

Valuation

The annualized EPS on post-issue equity works out to Rs 11.82 for FY2018. At the price band of Rs 818 to Rs 821, P/E is 69.2 to 69.4 times of FY2018 EPS.

Post-issue, the book value (BV) will be Rs 208.8 at the lower issue price of 818 and Rs 208.9 at the upper issue price of Rs 821. The adjusted BV net of net non-performing assets at the upper band of the issue price works out to Rs 207.2 per share.

The price to BV is 3.93 times and the price to adjusted BV 3.96 times at the upper price band. Among peers, Gruh Finance is trading at P/BV of 16.2 times, Repco Home Finance at P/BV of 2.4 times, PNB Housing at P/BV of 3.3 times and Indiabulls Housing Finance at P/BV of 3.7 times.

Though P/BV looks in line with the peers, return on net worth (RoNW) is very low. That makes the issue costly.

The lower leverage ratio (borrowings to networth) has suppressed the RoNW. The RoNW was just 8.5% for FY2018. Among peers, Gruh Finance's RoNW was 26.3%, Repco Home Finance 15.5%, PNB Housing 13.2% and Indiabulls Housing Finance 27.7%.

The return on assets (RoA) was 2.43% for FY2018. Among peers, Gruh Finance's RoA was 2.62%, Repco Home Finance 2.51%, PNB Housing 1.44% and Indiabulls Housing Finance 3.50%.

Aavas Financiers : Issue highlights

 Aavas Financiers : Financials

Aavas Financiers : Operational and financial parameters