AU Small Finance Bank Limited IPO Note

AU Small Finance Bank Limited will be the third company to sell its shares to the public after Chennai-based micro finance lender Equitas Holdings Ltd. and Bengaluru-based Ujjivan Financial Services Ltd. launched their IPOs almost a year ago. It primarily served low and middle-income individuals and businesses that have limited or no access to formal banking and finance channels. It is the only non-banking NBFC among the 10 entities to receive in-principle approvals to start small finance bank.

Offer Details

  • Total funds to be raised : Rs 1,912.5 crore
  • Fresh Issue: NA
  • Offer for Sale: 53,422,169 shares (Rs 1,912.5 crore)
  • Opening issue date: Jun 28, 2017
  • Closing issue date: Jun 30, 2017
  • Issue price range: Rs 355 – Rs 358 per Equity Share
  • Face Value per share: 10 per Equity share
  • Lot size: 41 shares
  • QIB (%): 50%
  • HNI (%): 15%
  • Retail (%): 35%
  • Listing At: BSE, NSE
  • Issue Type: Book Built Issue IPO


Syndicate structure

Book Building Lead Manager

  • ICICI Securities,
  • HDFC Bank,
  • Motilal Oswal Investment Advisors,
  • Citigroup Global Markets

Registrar to the Offer : Link Intime India

Sellers include managing director Sanjay Agarwal, members of the Agarwal family as well as Warburg Pincus, Kedaara Capital, MYS Holdings Pvt. Ltd, ChrysCapital Investment Advisors India and World Bank’ investment arm International Finance Corporation (IFC). This represents around 18.8% of the firm’s equity capital, as per draft papers.

The anchor allotment, in which institutional investors accept a one-month lock-in period for a sizeable allocation of shares and support a public offering, will open on 27 June, one day prior to the opening of the public issue.

Objectives of the Offer

  • To achieve the benefits of listing the Equity Shares on NSE.
  • To enhance its visibility and brand image and provide liquidity to its existing Shareholders.

 Shareholding pattern: Investments by Marquee Investors

Industry: Significant Untapped Potential


About the Company

  • AU Financiers is a small finance bank (“SFB”) that has recently transitioned from a prominent, retail focused non-banking finance company (“NBFC”), which primarily served low and middle-income individuals and businesses that have limited or no access to formal banking and finance channels.
  • It has received a license from the RBI to set up an SFB on December 20, 2016 and was the only NBFC categorized as an asset finance company to obtain such license. As an NBFC, it operated in three business lines: vehicle finance; micro, small and medium enterprises (“MSMEs”) loans; and small and medium enterprises (“SMEs”) loans. In addition to vehicle finance, MSME and SME offerings, their asset product offerings include working capital facilities, gold loans, agriculture related term loans, Kisan credit cards for farmers and loans against securities.
  • It will become the third small finance bank (SFB) to tap primary markets after Equitas Holdings Ltd and Ujjivan Financial Services Ltd. Au Financiers currently has 301 branches spread across 11 cities, and proposes to increase them to 400 by March 2018.


  • Diversified product portfolio and Revenue Streams
  • Customer centric organisational commitment
  • Significant presence in rural and semi-urban markets with focus on low and middle income customers
  • Robust and comprehensive credit assessment and risk management framework
  • Access to diversified sources of funding
  • Experienced managed team and qualified operational personnel
  • Significant untapped potential in the industry



  • Leverage company’s existing capabilities and customer base as they transition into retail focused SBF
  • Grow company’s SFB branch network in company’s existing market
  • Provide comprehensive suite of banking services
  • Leverage technology to grow company’s business
  • Enhance company’s brand presence


  • Company’s inability to successfully transition from an NBFC to an SFB may have an adverse effect on companies business, results of operations, financial condition and cash flows.
  • As an SFB, they will be unable to access some of the sources of funds that were available to them as an NBFC and inability to replace such sources of funds in an acceptable and timely manner, or at all, may have an adverse effect on the business, results of operations, financial condition and cash flows
  • Company’s inability to comply with laws and regulations applicable to an SFB may have an adverse effect on the business, results of operations, financial condition and cash flows.
  • If the company’s customers default in their repayment obligations, the business, results of operations, financial condition and cash flows may be adversely affected.
  • Company’s operations are concentrated in western India and any adverse developments in this region could have an adverse effect on the business, results of operations, financial condition and cash flows.
  • They have a substantial amount of outstanding indebtedness, which requires significant cash flows to service and are subject to certain conditions and restrictions in terms of financing arrangements, which restricts ability to conduct  business and operations in the manner desired
  • Any downgrade in credit ratings could increase the finance costs and adversely affect the business, results of operations, financial condition and cash flows.

Financial Analysis

Healthy AUM growth:

AUM growth of AU small Finance bank was healthy at 30% CAGR in FY13‐17 and AUM reached Rs 10,734 Crore. The company has a total of 2.8 lakh active loan accounts. State‐wise AUM distribution – Rajasthan, Gujarat, Maharashtra & Madhya Pradesh are the key states for AU Small Finance bank accounting for around 90% of total AUMs.


Diversified Product Portfolio and Revenue Streams



  • Au Financiers operate in 3 business lines namely Vehicle finance, Micro, small and medium enterprises (MSMEs) loans, Small and medium enterprises (SMEs) loans. It extends loans for new and pre-owned vehicles and for refinancing of vehicles across several vehicle categories. The vehicle finance business, accounted for 50.27% of the total AUM as of March 31, 2017. MSME loans and SME loans accounted for 30% and 20% respectively.
  • The Bank’s consolidated Net Interest Income (NII) grew 43.95% CAGR during FY13-17 to Rs. 916.66 crore along with the Net Interest Margin (NIM) improved by 285 bps to 9.67% in FY17 from 6.82% in FY13 due to a cut down in the cost of funds by 140bps to 16.5%.
  • Net Interest Margin (NIM) at 9.67% are strong which will contract going forward, once banking norms of CRR and SLR become applicable.


Asset quality is better compared to peers

  • NPA recognition till FY15 was on overdue for more than 180 days basis which moved to more than 150 days as at FY16 and more than 120 days as at FY17 in line with regulatory requirements. According to the RBI’s norms, an NBFC must classify a loan as non performing if interest or principal payments are overdue for a period of 150 days. For small finance banks, this number is 120 days.
  • This makes the NPA figures look inflated over the years. Though the Gross NPAs have risen, over 90% of its loans are secured and backed by income-generating assets. In FY17, it had gross NPAs of 1.6% and net NPAs of 1.1% with net worth of Rs 2,000 crore. The impact of demonetization is also one of the reasons of high NPA in FY17.
  • Further, the Gross NPA levels will remain elevated till FY18 despite a growth in economic activity, as the industry moves to a 90 days past due policy by FY18.

Return ratio is best amongst the peers

Note: *PAT, RoE and RoA are adjusted for the exceptional profit on sale of shares in subsidiaries during FY17

Peer Comparison

Authors Note

We believe growth momentum in existing Micro Finance business is likely to continue at healthy pace backed by strong growth outlook for industry.

AU Financiers IPO is a solid play in the secured financing sector while also promising significant growth potential after converting into SFB.

At the upper end of price band of Rs 358, the company is being valued at 5.3x FY17 P/ABV which is much higher than peers. However, AU Financiers’ return on net worth (RONW) of 21.7% (excluding the exceptional gains) which is balances valuations. Therefore it’s a good bet for long term investment.

-Report by Foram Ajani