Mumbai: Aavas Financiers Ltd’s initial public offering (IPO) to raise up to 1,734 crore opens on Tuesday, amid the mayhem in the non-banking finance companies (NBFCs) space. The stretched valuations make the Aavas IPO look affordable largely from a long-term perspective and, given the recent meltdown in the NBFC pack, investors could be a bit cautious on the offer.

Aavas, earlier known as AU Housing Finance, was the mortgage lending business of Jaipur-based small finance bank AU Small Finance Bank Ltd. In February 2016, Partners Group and Kedaara Capital had acquired it for 900-1,000 crore.

Aavas has fixed its price band at 818-821, aiming to raise up to 1,734 crore at the upper end of the price band.

Arun Kejriwal, director of Kejriwal Research and Investment Services Pvt. Ltd, said the price-to-book value, or net asset value, is at 5.22 times, which is substantially higher than its peers, including HDFC Ltd, Can Fin Homes Ltd, PNB Housing Finance Ltd and Repco Home Finance Ltd, even though it is substantially cheaper than Gruh Finance Ltd.

“The firm has roughly one-fourth of AUM (assets under management) from loan against property, which is at the centre of the crisis triggered on Friday. The issue looks expensive in the given circumstances and could be looked at on listing," said Kejriwal.

In a note on Monday, IIFL said that Aavas has achieved impressive scale and profitability since its inception. “Having grown the branch count by nearly 4 times since FY16 and given its plans for further substantial addition, the asset growth should remain robust in coming years too."

IIFL said that considering the long duration of borrowings, positive funding gap and low competitive pressure, Aavas should be able to maintain loan spreads even in a hardening rate environment.

“We see the business geared for 2.5% RoA (return on assets) and 18-20% RoE (return on equity) in the longer run. Post-money valuation of 3.9 times P/ABV (price to average book value) seems attractive for long term investors. We recommend subscribe," said IIFL analysts in a note.

While there were a few buy recommendations from Emkay Global Financial Services Ltd, Anand Rathi Shares and Stock Brokers Ltd and a few others, some were not impressed and recommended to avoid the issue. “High capital adequacy (61%) will not only depress RoE in near-term (current RoE at 11%), but elevated valuations would require high growth to improve ratios and justify valuations," Prabhudas Lilladher Pvt. Ltd said in a note.

“Market conditions are challenging with high interest rates, bond yields volatility and anaemic property market. Although technological driven processes (data analytics for onboarding customers, risk management, collection framework), regional expansion and stepping-up leverage signal bettering operational efficiencies in long term, valuations leave little scope for a negative surprise," said Prabhudas Lilladher analyst Shweta Daptardar.

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