Will Aavas Financiers debut on October 8 at a huge discount?

Non-banking finance company Aavas Financiers is set to debut on the bourses on October 8. The retail, affordable housing finance company, primarily serves low and middle income self-employed customers in semi-urban and rural areas in India.

The final issue price has been fixed at the higher end of the price band at Rs 821 per share. The Rs 1,734-crore public issue managed to garner 97 percent subscription during September 25-27.

Though anchor investors pumped in Rs 520 crore, the issue (excluding the anchor investors’ portion) failed to get fully subscribed.

Market experts told Moneycontrol that despite the company’s strong financials and its business model differing from other NBFCs, the real reason behind the tepid response was: 1) Wrong timing, given the weak market sentiment; and 2) Fears emanating the IL&FS crisis which weighed on NBFC stocks, including housing finance companies.

As a result, they expect the listing to be at sharp discount to its final issue price. “Looking at the current market scenario and deteriorating valuations of listed HFCs, Aavas Financiers may list at a discount of 15-20 percent lower,” Prashanth Tapse, AVP Research at Mehta Equities, said. “We expect the stock to trade below its issue price in the short term till the market settles.”

Astha Jain, Senior Research Analyst at Hem Securities, pegs the discount a tad lower at 10 percent from its issue price.

Expensive valuations
Aavas Financiers was demanding a FY18 price-to-book (P/B) multiple of four times compared to sub-three times that of its listed, larger peers. Its FY18 price-to-earnings (P/E) multiple stood at 69 times as against 20-40 times for its peers.

Tapse said the issue was aggressively priced given the intense competition, regional concentration of its loan portfolio and choppy stock market condition.

What should be investors’ strategy on listing day?
Tapse and Jain both advise investors to exit on the listing day itself, even if it lists below Rs 800 per share, as it looks overvalued at the current juncture. Raju Barnawal, Research Analyst at Arihant Capital Markets, recommends selling on listing. He feels the best time to enter the counter is at 2-3.5 times book.

If someone wants to buyExperts feel valuations will get comfortable when it starts trading around Rs 600 levels. “Those who want to enter the stock can enter if it is available around Rs 550-600 levels after listing,” Jain said. Tapse feels better and lower valuations would be available around Rs 650 levels.

Barnawal feels the company looks attractive for the longer term. “It has seen 78 percent compounded annual loan growth over the last four years, best assets quality among its peers and a cost effective asset liability management.”

Yuvraj Choudhary, Analyst – Institutional Equities at Anand Rathi Share & Stock Brokers, said Aavas Financiers’ large dependence on bank borrowing and non-convertible debentures in the current tight liquidity, high interest and low risk appetite scenario may result in rapid liability build-up and thereby cooling down of loan growth. “This would impact earning and book value growth of the company and thereby make the stock look more expensive on forward multiple basis than what most investors envisaged a month back.”