Home / Markets / Mark To Market /  AU Small Finance Bank’s valuations look dearer in run-up to QIP

AU Small Finance Bank Ltd has launched its qualified institutional placement (QIP) this week to raise funds and would price its issue on 15 March. The lender’s valuations, which were already at high levels, have risen even more in the run-up to the QIP issue.

Shares of AU Small Finance Bank have gained over 40% since January, which has triggered concerns over valuation. The stock trades at a multiple of 6.13 times its estimated book value for FY22, according to Bloomberg consensus estimates. This dwarfs the valuation multiple of 0.9 times and 1.78 times for peers Equitas Small Finance Bank and Ujjivan Small Finance Bank, respectively. Both Equitas and Ujjivan have a holding company structure, and have a large share of micro loans on their book given their earlier microfinance business.

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Not having a holding company structure and a different loan mix predominantly of vehicle loans has helped AU Small Finance Bank’s valuations vis-à-vis its peers.

Stressful times
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Stressful times

But the high share of vehicle loans also put its valuations at risk given recent asset quality issues. For the December quarter, 48% of the fresh slippages came from this segment, and 36% came from small business loans. Both segments together form more than 80% of its assets under management. Fresh slippages for the December quarter were over 2% of its loan book,once the benefit of the judicial standstill on bad loan recognition was removed. That said, the outlook on asset quality is not dire. Restructured loans are likely to be around 1.5% of its total loan book, which is lower than earlier expectations. The lender reported a swift recovery in repayment collections across segments.

Even so, analysts at Emkay Global Financial Services Ltd said valuations are high. “Currently, we have a hold rating on the stock, given rich valuations. Asset-quality movement too remains a key monitorable given its relatively vulnerable portfolio," they wrote in a note.

To be sure, the lender’s performance on loan growth has been healthy. Its loan book showed growth of 14% during the December quarter, while total disbursements grew by a healthy 34%. The bank’s management, too, has guided for further recovery in growth.

The bank sold its stake in Aavas Financiers Ltd in November last year and used the proceeds to make provisions against stressed loans. The flip side of this stake sale is that the lender does not have any non-core business besides its main lending business now for growth.

This, and persisting concerns over asset quality, are likely to have a bearing on QIP valuations. According to a BloombergQuint report, the bank is looking to raise 600-700 crore from the issue, though it has an approval from its board to raise 2,500 crore capital through various routes.

Its capital adequacy ratio was 18.8% as of December, higher than the regulatory requirement of a minimum of 15%.

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