Au Financiers (India) Ltd based in Jaipur, Rajasthan was incorporated in 1996, and was operating as a non-banking finance company focused on retail segment serving low and middle income individuals and businesses that have limited or no access to formal banking and finance channels. Au Financiers operates in 3 business lines namely Vehicle finance, Micro, small and medium enterprises (MSMEs) loans, Small and medium enterprises (SMEs) loans.
On December 20, 2016, Au Financiers received RBI license for Small Finance Bank (SFB), and commenced SFB operations with effect from April 19, 2017. With this along with its Vehicle, MSME and SME operations, the company has started to offer a diverse suite of banking products which includes current accounts, savings accounts, term deposits and recurring deposits and collections and payments solutions for MSME and SME customers. As of December 31, 2016, company had 300 branches spread across 10 states and one union territory in India, with significant presence in the states of Rajasthan, Gujarat, Maharashtra and Madhya Pradesh and employed 6,092 personnel serving 270,692 active loan accounts.
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.The company’s MSME loan business caters to the emerging needs of underserved customers and extends loans to MSMEs primarily for business expansion, working capital and the purchase of equipment. SME loan business extends loans to several types of small and medium sized businesses. Other asset product offerings by the company include working capital facilities, gold loans, agriculture related term loans and Kisan credit cards for farmers and loans against securities. Its liability product offerings include current accounts, savings accounts, term deposits and recurring deposits and collections and payments solutions for MSME and SME customers. It also intends to commence offering unsecured business loans and housing finance loans during the financial year 2018.
Customer Centric Organizational Commitment
The company is a customer centric organization and serviced 280,349 active loan accounts as of March 31, 2017. The company has developed strong relationships with its customers through in-person contact by addressing their financial needs, its knowledge of the local markets and its widespread network of branches. They hire local personnel as their personal contact with customers in rural and semi urban markets encourages repeat business, leads to business referrals and results in high collection efficiency. The company also establishes relationships with vehicle manufacturers and dealers. The company has set up call centers which operate in English and select regional languages. They have separate tele-calling teams for their vehicle finance and MSME loans business, which enables them to have a more focused approach towards their customers. The company has introduced customer retention programs such as ‘Dost Banaye Dost Programme’, which is a referral program for customers.
Significant Presence in Rural and Semi-Urban Markets with Focus on Low and Middle Income Customers
The company has over 20 years of operating experience in rural and semi-urban markets of India and as of March 31, 2017, 146 of its 301 NBFC branches were located in such markets. The company has adopted a strategy of contiguous expansion across regions, which has enabled it to increase its customer base in the 10 states and one union territory .Large segment of India’s rural and semi-urban population is currently unserved and underserved by formal financial institutions. According to the Global Findex Database 2014, India is home to 21% of the world’s unbanked adults. Through their decentralized model, the company has been able to optimize turnaround times for its customers while managing its credit requirements and associated risks. As of March 31, 2017, the NBFC branch network was structured along a two-tiered hub-and-spoke model with 55 of its branches classified as hubs and 246 as spokes and it has leveraged this network for its SFB operations to set up 269 branches.
Robust and Comprehensive Credit Assessment and Risk Management Framework
The company’s credit teams, through in-house field investigation officers, conduct an independent verification of customers and evaluate their business and financing needs, and analyze their ability to repay loans. For the vehicle finance and MSME loans business, they disburse loans primarily towards revenue generating assets, which they believe results in lower risk. As of March 31, 2017, its GNPAs accounted for 1.61% of its Gross Advances, while its NNPAs accounted for 1.05% of its Net Advances. As an SFB, the company has enhanced its risk management framework by setting up a Risk Management Committee of the Board and an IT & Operational Risk Management Committee as well as introduced new internal audits to ensure rigorous monitoring and compliance.
Access to Diversified Sources of Funding
As an SFB, the company will be able to access funds such as savings accounts, current accounts, term deposits and recurring deposits. They will also be able raise funds from liquidity adjustment facility and market stabilization fund, refinance facilities from financial institutions, capital market borrowings such as infrastructure bonds, tier II bonds and perpetual bonds. The company will continue to securitize and assign loans, which qualify as priority sector lending, as well as its non-priority sector loans through securitization or direct assignment to banks, financial institutions and mutual funds, etc. which enables it to optimize its cost of borrowings, funding and liquidity requirements, capital management and asset liability management. As of March 31, 2017, its total Borrowings were Rs. 70,709.78 million comprising 50.03% of NCDs, 32.94% of term loans, 6.78% of commercial paper, 4.67% of subordinated debt borrowings, and 5.58% of working capital facilities. Internal accruals constitute a significant portion of the net worth of the Company, total net worth as on March 31, 2017 was `19,995.60 million. The average AUM of the company as on 31st March 2017 was `94775 million.
* The company’s inability to successfully transition from an NBFC to an SFB may have an adverse effect on its business, results of operations, financial condition and cash flows.
* As an SFB, the company will be unable to access some of the sources of funds that were available to it as an NBFC and its inability to replace such sources of funds in a timely manner may have an adverse effect on its business, results of operations, financial condition and cash flows.
* The company’s inability to comply with laws and regulations applicable to an SFB may have an adverse effect on its business, results of operations, financial condition and cash flows.
* There are outstanding proceedings involving the Company, and certain of its Promoters and its Directors and any adverse outcome in any of these proceedings may adversely affect its profitability and reputation and may have an adverse effect on its business, results of operations, financial condition and cash flows.
* If the company’s customers default in their repayment obligations, its business, results of operations, financial condition and cash flows may be adversely affected.
Valuation & Recommendation
AU Small Finance Bank Ltd. stands to gain from operating leverage. At a P/B of 5.09xs of FY17 BV. We believe that AU Small Finance Bank Ltd. demands a discount to its domestic peers. We assign a Subscribe rating to the IPO.
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