Should You Invest in Au Financiers (India) Ltd?

Now for the record it’s the IPO shower out here. We have already been discussing on several IPOs that came in this month. Now it’s the tip of the iceberg here with AU Financiers (India) Ltd. AU Financiers (India) Ltd is a NBFC and a small bank based out of Jaipur. The issue size is roughly Rs 1913 Crores at a price of Rs 358 Rs per share and is being offered at a lot size of 41 shares. The issue opens on 28^th June 2017 and will be open till 30^th June 2017.

So the Golden Question again…. Should you invest in Au Financiers Ltd????

Lets do the run down one by one then… shall we…..

About the Company!!!

The company is a NBFC which serves the low and middle income groups who have limited or no access to banking channels. It helps India in achieving financial inclusion on an larger scale. The company focuses on three segments: Vehicle loans, MSME loans and SME Loans. The company is categorized as a “Systemically Important, Non-Deposit Accepting Asset Finance Company” (NBFC-ND-AFC) by the Reserve Bank of India.

Further a very important point is that the company has received licence from RBI to set up Small Finance Bank. Therefore the company is sort of a bank. Confused? Well let me clear out what it is. Small Finance Banks have the following scope:

1. The small finance bank shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
2. There will not be any restriction in the area of operations of small finance banks.

So it is also a bank, may be a traditional bank which accepts deposits and lends. But the most important part is that it can accept deposits and thereby its cost of borrowing decreases significantly. This can add further profits to the bank. Well I guess from here onwards I can refer it as a bank rather than a company. So the bank being a small finance bank another important thing to notice is that the Au Financiers (India) Ltd is the first of its kind to be listed. I don’t see any other small finance banks listed. So I guess everyone would wanna have a piece of it.

Utilization of Funds!!!

Since the Promoters are selling their stake through this IPO the company will not receive any proceeds from the offer.

Financials!!!

Now let’s have a peek inside its hood to know how much power this bank has got.

1.       The company’s total net worth as on 30.09.2016 was 1713.58 Crores which comprises of Capital of Rs 45.72 Crores and 1667.86 Crores. Looking at the reserves position for the past 5 years the company has had a good run of profits. The reserves have increased from Rs 289.08 Crores to Rs 1667.86 Crores. Surely very profitable.

2.       Well the bank being a bank there is no point in analyzing the debt equity ratio. Rest assured that the bank being under the regulatory authority of RBI, all capital adequacy related matters should be well taken care of.

3.       The company has a good amount of current investments worth Rs 262.53 Crores as on 30.09.2016.

4.       Lets get into the profits elements. Higher the power, higher the profits. The company has had a total Revenue of Rs 1051.95 Crores for the year 2015-16 which has resulted into a reported net profit after tax of Rs 130.09 Crores which is 12.37 % Net Profit ratio. So the company is doing good and going further with more deposits from the public the companys profits should increase further.

5.       The company doesn’t have much of tangible assets which is not required as well for a finance company and therefore is very much well placed.

6.       The company did have subsidiary and associates but since its in the process of selling its investments in them, it is noteworthy to see that these divestment from the company would bring in money to the company.

Valuations!!!

Coming to the most important part, is it worth buying the company at the price offered? Let’s look into the valuations. The company is offering the shares at a price of Rs 358 at the upper end. The company’s EPS is Rs  56.07 for the year 2015-16. However the company intends to issue bonus shares to its existing shareholders. Therefore the EPS post adjustment of bonus issue is Rs 9.34 for FY 2015-16. On a weighted average scale the EPS shall be 6.94. So the P/E ratio for the year 2015-16 the P/E shall be 38 times and on a weighted average EPS the P/E comes to 51.58 times. Which is very high. Now looking into companies like Cholamadalam the P/E is 23 but Magma Fincorp is trading at a P/E of 19.34 in the FY 2015-16. It is very much over priced at this PE. But then again this NBFC has a small finance bank license and the bank focus on rural and financially excluded people of the country. So looking into these factors I would say that the company is rightly priced. Further the IPO is placed at the right time where the market is flourishing and more money is coming into the market.

I would say that Au Financiers (India) Ltd is a subscribe.

Thank you for joining us.

-Richer Investor.

Written by Roger Vins Herman (CA, MCom)