A swot-analysis of the Aavas Financiers IPO amid NBFC carnage

The firm has already raised Rs 520 crore from anchor investors, which include the likes of AU Small Finance Bank, DSP Blackrock Tax Saver Fund, SBI Life, Morgan Stanley India Investment among others. It allocated 63.36 lakh equity shares at Rs 821 per share.

The book running lead manager for the issue are: ICICI Securities Ltd., Citigroup Global Markets India Private Ltd., Edelweiss Financial Services Ltd. and Spark Capital Advisors (India) Pvt Ltd.

Aavas started operations in March 2012 as retail affordable housing financier company. The company lends to the low-ticket, high yield segment and targets low-income rural and semi-urban self-employed customers.

The company's portfolio comprises of loans for purchase, construction, repair/renovation and top-up of residential units. It also offers mortgage loan including LAP which contributes about 24 percent of overall AUM as on June 2018.

Aavas operates from a network of 165 branches covering over 95 districts spread across eight states (Rajasthan, Gujarat, Maharashtra, MP, Haryana, Delhi, UP and Chhattisgarh), of which 46 percent loan book is from Rajasthan. Aavas has a loan book of Rs 43,59 crore as on June 2018 having average ticket size of nearly Rs 8.5 lakhs.

Avaas AUM stands at Rs 4,359, much lower than peers Repco Home Finance's over Rs 10,000 crore and CANFIN Homes' over Rs 16,000 crore. Avaas has a healthy net interest margin (NIM) of 8.12 percent vis-à-vis peers like Repco Home which has 4.6 percent NIM and CANFIN Homes at 1.94 percent.

Aavas' return of equity (RoE), however, is at 11.20 percent, half of CANFIN Homes' 22.34 percent. Repco Home Finance's RoE stands at 19.80 percent.

The housing finance company's return on assets at 2.40 percent is on par with peers. The price to average book value of Aavas is much better at 5.2 over Repco and CANFIN's 2.1 and 0.6 percent, respectively.

The company offers a unique business model for affordable housing with a presence in under-penetrated geography. Strong capitalisation will augur well for growth ahead and niche focus ensures low dependency on government actions. Aavaas has been able to finely balance the use of technology and human expertise in ensuring superior service delivery. A motivated employee base also provides the winning edge. Aavas is a success due to identifying the right customer profile, the right collateral and heavy usage of analytics, systems and process.

Risks associated with being regional players will come into play due to concentration in particular geographies. IPO is deemed to be expensive and overcapitalisation means lower RoEs. Only 15 percent of post IPO net worth will be generated through internal accrual.

There is scope for geographic expansion to aid growth as India remains under-penetrated in terms of affordable housing financing.

The progress in the affordable housing sector is really slow along with supply side constraints in the segment. The Reserve Bank of India has also raised red flags in the affordable housing sector for loans below Rs 2 lakhs.