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Lower growth ahead due to higher base and competition catching up

We downgrade AWFIS from BUY to ADD and lower our target price from INR 860 to INR 750 now as we factor in slowing growth in seat addition: FY25-28E CAGR of 12% vs FY22- FY25 of 43%. We struggle to find a clear MOAT for AWFIS’s business model as there is a long tail of competitors (WeWork India, Tablespace, EFC, Redbricks, BHIVE, Indiqube etc) in the organized and unorganized segment which could compete aggressively with AWFIS. There is also an increasing likelihood of large developers in India who may foray into the Flex Space Market as this would be a related business for them. We now value AWFIS based on our EV to Adjusted EBITDA framework (IGAAP based).

* We forecast operational seat inventory for FY25-FY28E to grow at a 12% CAGR. We also forecast Adjusted EBITDA(IGAAP) per seat for FY25-FY28E to grow at a 19% CAGR. We expect contribution margins to increase marginally due to operating leverage benefit, premiumization and value added services etc..

* Valuation: We now incorporate an EV/Adjusted EBITDA framework where the adjusted EBITDA is IGAAP based. We value the stock at 1 year forward EV/Adjusted EBITDA multiple of 16X, which translates into a target price of INR 750 per share, implying an upside of 17%, with an ADD rating on the stock.

* Risks: Slowing demand from GCC and startups, decrease in blended occupancy levels and increasing competition from developers and peers are risks to out ADD rating.

Quarterly Discussion: Adjusted EBITDA growth QoQ is disappointing

* EBITDA (excluding OI) for Q4FY25 was reported at INR 1,159 Mn, up 73% YoY and 8% QoQ vs CEBPL estimates at 1,167 Mn. IGAAP- Adjusted EBITDA for Q4FY25 was 480 Mn, up 128.6% YoY and 2.1% QoQ.

* In Q4FY25, Total seats (Operational + Fitout) stood at 1,52,572 vs 1,42,697 in Q3FY25 and Total Operational Seats increased 10.7% QoQ and 41% YoY to 1,34,121.

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