IPO Note | Banking

June 27, 2017

AU Small Finance Bank Ltd SUBSCRIBE

Transitioned to offer diverse suite of banking products Issue Open: June 28, 2017
Issue Close: June 30, 2017
AU Small Finance Bank (AUSFB) was one of the ten NBFCs which had obtained
Is s u e D eta i ls
approvals from RBI for setting up a small finance bank (SFB). As a NBFC, it has a
history of successfully serving the low & middle income individuals and businesses Face Value: `10
having limited or no access to the formal banking and finance systems.
Present Eq. Paid up Capital: `284.3cr

Financing revenue generating assets the major focus: According to the Offer for Sale: **5.34cr Shares
management strategy of AUSFB, the bank has been historically financing assets
having revenue generating potential. Therefore, it has avoided lending to Fresh issue: ` 0cr
consumer finance and MFIs (Micro Finance Institutions), even though a lot of
Post Eq. Paid up Capital: `284.3cr
NBFCs across India have chased those segments in order to grow. Moreover, with
conversion to Small Finance Bank now it will have multiple products; however, the Issue size (amount): *`1,790cr -
area of focus will remain financing assets which have revenue generation ability. **1,913cr
Secured loans towards Vehicle, MSME & SME contributes to a stable book: The
Price Band: `355-358
loan book of AUSFB is largely concentrated towards secured loans in the Vehicle
Finance (50%), MSME (30%) and SME (20%) segments. The average ticket size of Lot Size: 41 shares and in multiple
the above segments is `3.4 lacs, `10.4 lacs and `2.2 cr respectively and each of thereafter
the segments still have enough scope for growth in India, and hence, we believe Post-issue implied mkt. cap: *`9,522cr -
AUSFB will continue to expand its book in the secured loan space without relying **`10,176cr
on the unsecured loan space for its growth. Promoters holding Pre-Issue: 36%
Fairly strong AUM growth at 30% CAGR over FY2013-17: Focused approach
Promoters holding Post-Issue: 32.9%
towards asset financing and the ability to find out gaps and the underserved
sections of the Vehicle Finance, SME and MSME segments has helped the *Calculated on lower price band
company in achieving a strong 30% CAGR in AUM over FY2013-17.
** Calculated on upper price band
Strong collection efficiency and underwriting the key to asset quality: Selective
and calculated risk taking coupled with a strong collection mechanism in place B o o k B u il d i n g
has ensured a strong asset quality for AU, with GNPA & NNPA of 1.61%/1.05% QIBs 50% of issue
respectively. Further, net slippages of 65 bps and credit cost of 83 bps for FY2017
is also best in class among the NBFCs. Non-Institutional 15% of issue

Outlook & Valuation: At the upper price band of `358 the issue is offered at 5.1x Retail 35% of issue
its FY2017 BV. However, AU has reported a strong 48% PAT CAGR over FY2013-
17, and we believe it has the potential to deliver 30% PAT CAGR over FY2017-
19, and based on our quick estimates on FY2019 BV, the issue is offered at 3.5x. Po s t Is s u e Sh a reh o l d in g Pa ttern
While the issue is offered at premium valuations, we believe the valuation is
Promoters 33%
justified given the historical track record and strong growth potential the SFB
offers. Hence, we recommend SUBSCRIBE to the issue. Others 67%
Key Financials
Y/E March (` cr) FY2013 FY2014 FY2015 FY2016 FY2017
NII 213 278 405 652 917
% chg 69 30 46 61 41
PAT 69 73 139 247 326
% chg 86 5 92 77 32
EPS 3.4 3.4 6.3 11.2 11.5
Book Value (`) 22 28 35 45 70
P/E 104.4 106.0 56.6 31.9 31.2
P/BV (x) 16.4 12.9 10.3 7.9 5.1 Siddhart Purohit
RoE (%) 15.9 12.5 18.6 25.3 16.9 +022 39357600, Extn: 6872
Source: RHP, Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at
siddhart.purohit@angelbroking.com
upper end of the price band, EPS and BV has been adjusted with bonus

Please refer to important disclosures at the end of this report 1

 AU Small Finance Bank | IPO Note

Company background
Formerly known as AU Financiers, it was promoted by first generation
entrepreneur Mr Sanjay Agarwal and it started operations in 1996. From a humble
background, the NBFC over a period of time has expanded into key products like
vehicle financing, MSME and SME financing. AU Financiers was one of the 10
NBFCs which obtained approval from RBI to start operations as a Small Finance
Bank. Prior to being granted the approval for commencing SFB, it was recognized
as a Systematically Important, Non Deposit Accepting Asset Finance Company
by RBI.

Exhibit 1: Business Segments

Vehicle Finance MSME Loans SME Loans
AUM (` Cr ) 5,396 3,216 2,122

% of AUM 50% 30% 20%

Average Ticket Size ` 3.4 Lacs `10.8 Lacs ` 2.2 Cr

4 Yr CAGR 16% 55% 78%

Loan Tenure Up to 5 Years Up to 12 YearsUp to 15 Years

Typical Clients Small Transport Operator Provision Stores Traders

First Time Users Hotels Wholesalers
Self Employed Restaurants Distributors
Source: RHP, Angel Research

Key Management Personnel

Mr Sanjay Agarwal Managing Director-Founder of the NBFC He has been the

driving force behind the establishment of AU Financiers and post conversion to
SFB, his two decades of experience in running the NBFC will be a key advantage
for AU SFB.

Mr Uttam Tibrewal Whole Time Director He has been associated with the
company for 13 years now, and has been instrumental in the growth of the
company.

Mr Krishna Kant Rathi Independent Director He has over 26 years of

experience. Previously he was the CEO of Future Consumer Ltd.

June 27, 2017 2

 AU Small Finance Bank | IPO Note

Issue details
AU Small Finance Bank Ltd is offering 5.34cr equity shares of `10 each via book
building route in the price band of `355-358/share, entirely comprising offer for
sale by current promoters GAIL and Investor (Redwood Investment Ltd, IFC, Labh
Investment, Ourea Holding, Kedaara Capital).

Exhibit 2: Top10 Shareholders Pre Issue

Name of shareholder Share Holding (%)
Redwood Investment Ltd 5,97,70,794 24.3
Mr.Sanjay Agarwal 5,84,77,128 23.8
Iernational Finance Corporation 3,02,88,678 12.3
Labh Investments Limited 2,25,37,530 9.2
Ourea Holdings Limited 2,11,49,064 8.6
Ms.Jyoti Agarwal 1,41,82,272 5.8
Ms.Shankuntala Agarwal 1,40,94,756 5.7
Mr.Chiranji Lal Agarwal 81,19,770 3.3
MYS Holdings Private Limited 74,60,466 3.0
ICICI Prudential Life Insurance 48,57,144 2.0
SBI Life Insurance Company Limited 48,57,144 2.0

Source: RHP, Angel Research

Exhibit 3: Shareholding Pattern

Pre Issue Post Issue
Particulars No. of Shares (%) No. of Shares (%)
Promoter 10,24,25,826 36.0% 9,34,25,826 32.9%
Other 18,18,25,080 64.0% 19,08,25,080 67.1%
Total 28,42,50,906 28,42,50,906
Source: RHP,, Angel Research

Objects of the Offer

Objects of the Offer are to achieve benefits of listing equity shares on stock
exchanges and to carry out the offer for sale. Listing of equity shares will
enhance AU Financiers brand name and provide liquidity to existing
shareholders. The listing will also provide a public market for the equity shares
in India.

June 27, 2017 3

 AU Small Finance Bank | IPO Note

Investment rationale
Financing revenue generating assets the major focus: According to AUSFBs
strategy, it has been historically financing assets having revenue generating
potential. Therefore, it has avoided lending to consumer finance and MFIs (Micro
Finance Institutions), even though a lot of NBFCs across India have chased those
segments in order to grow.

Exhibit 4: Loan Book Composition (%) Exhibit 5: Vehicle Finance Book Composition (%)

8%
20%
17%

50%
11%

30%

14%

Vehicle Finance MSME SME MUVs Cars Small CVs Others

Source: RHP, Angel Research Source: RHP, Angel Research

Vehicle Finance is the key strength: Despite competitive scenario Vehicle Finance
Loan book has reported 16% CAGR over FY2013-17. The loan book is largely
dominated (50% of AUM) by Vehicle Finance aimed at the first time buyers, small
time transport operators and self-employed professionals. The Vehicle Finance
book of the company is also well distributed across MUVs, Cars and Small CVs.
The average ticket size of loans in the Vehicle Finance segment is `3.4 lacs, with a
maximum tenure of 5 years.

MSME & SME would lead the next leg of growth : MSME is another area where AU
has developed strong expertise, reporting 55% loan CAGR over FY2013-17, with
an average loan ticket size of `10.8 lacs, the targeted customers are mainly
provision stores, hotels, restaurants, etc. In addition to the above, another area
which is growing fast (78% CAGR) for the company is SME loans. The average
ticket size here is `2.2 cr, targeted at traders, wholesalers & distributors. Each of
the segments has growth potential for multiple years.

June 27, 2017 4

 AU Small Finance Bank | IPO Note

Fairly strong AUM growth at 30% CAGR over FY2013-17: Focused approach
towards asset financing and the ability to find out gaps and the underserved
sections of the vehicle finance, SME and MSME segments has helped the company
in achieving a strong 30% CAGR in AUM over FY2013-17. Now that it has
transformed into a Small Finance Bank, it will start other types of loans as well,
however, the core focus of the organization will remain in the existing segments.

Exhibit 6: AUM Growth Trend ( ` Cr )

12,000 30.6 60.0

10,000 47.6 50.0

10,734
8,000 40.0

8,221
25.2
6,000 30.0
20.1

5,568
4,000 20.0

4,449
3,704

2,000 10.0

- 0.0
FY13 FY14 FY15 FY16 FY17

Gross AUM % Growth YoY

Source: RHP, Angel Research

Exhibit 7: Segmental Gross AUM (` Cr )

FY14 FY15 FY16 FY17
Vehicle 3,115 3,146 4,174 5,396
% Growth YoY 6% 1% 33% 29%
MSME 910 1,376 2,218 3,216
% Growth YoY 62% 51% 61% 45%
SME 423 1046 1829 2122
% Growth YoY 100% 147% 75% 16%
Total 4,448 5,568 8,221 10,734
% Growth YoY 20% 25% 48% 31%
Source: RHP, Angel Research

June 27, 2017 5

 AU Small Finance Bank | IPO Note

Higher NII CAGR vis--vis AUM growth is due to better yield: We believe that with
adequate infrastructure at place and strong capital base, AU in its new form as a
Small Finance Bank, will be able to report similar growth rate of ~30% over the
next 3-4 years. NII growth over FY2013-17 has been 44%, however, NII growth
could see some moderation, as it will have to maintain CRR and SLR being an SFB,
which will reduce the overall yield on the assets. However, the good part is that
being an SFB, it will be able take deposits now, which will also reduce the overall
cost of funds.

Exhibit 8: NII growth trend (` Cr )

1000 80
900 70
69
800 61
60
700
46 50
600 41
500 40
30
400 30
300
20
200
213

278

405

652

917
100 10
0 0
FY13 FY14 FY15 FY16 FY17

NII (Rs Cr ) % Growth YoY

Source: RHP, Angel Research

Exhibit 9: PAT Growth trend (` Cr )

350 120

300 92 100
86
250 77
80
200
60
150
32 40
100 5
50 20
139

247

326
69

73

0 0
FY13 FY14 FY15 FY16 FY17

Adj PAT ( Rs Cr ) % Growth YoY

Source: RHP, Angel Research

June 27, 2017 6

 AU Small Finance Bank | IPO Note

Secured loans towards Vehicle, MSME & SME contributes to a stable book a key
differentiator from other SFBs: The loan book of AU SFB is largely concentrated
towards secured loans in the Vehicle Finance (50%), MSME (30%) and SME (20%)
segments. Each of the segments still have enough scope for growth in India, and
hence, we believe AUSFB will continue to expand its book in the secured loan
space without relying on the unsecured loan space for its growth.
Among some of the NBFCs which obtained the approvals from RBI to form SFB,
many are involved in large scale Microfinance operations. While microfinance also
has been an emerging area for some NBFCs, post conversion to SFB they are also
putting efforts to reduce the exposure to the unsecured forms of lending. And this is
the key differentiator for AUSFB, as it has not ventured into the MFI segment.

Exhibit 10: Portfolio distribution (%)

120%

100% 6% 10% 19%

15% 19% 20%
80% 20%
25% 30% 30%
60%

40% 79%
70%
57% 51% 50%
20%

0%
FY13 FY14 FY15 FY16 FY17

Vehicle MSME SME

Source: RHP, Angel Research

Post conversion to SFB, NIM could see decline, still would be best in
class: The management of AU has always focused on financing the segments
which are underserved by the banks and other NBFCs, and hence, has been able
to generate higher yield, this has resulted in a strong NIM, the last three years
average NIM has been ~9.1%. However, we expect the NIM to moderate going
ahead due to the resultant yield on maintaining SLR and CRR.

Exhibit 11: NIM Trend (%)

12.00
9.45 9.68
10.00
8.09
8.00 6.82 6.82

6.00

4.00

2.00

0.00
FY13 FY14 FY15 FY16 FY17

NIM

Source: RHP, Angel Research

June 27, 2017 7

 AU Small Finance Bank | IPO Note

Strong collection efficiency and underwriting the key to asset quality:

Selective and calculated risk taking coupled with a strong collection mechanism in
place has ensured a strong asset quality for AU, with GNPA & NNPA of
1.61%/1.05% respectively. Further, net slippages of 65 bps and credit cost of 83
bps for FY2017 is also best in class among the NBFCs.
Compared to other Small Finance Banks, the asset quality for AU is much stronger
and this is largely due to the focus on secured lending. Some of the new SFBs like
Equitas and UJiijvan have seen stress on the book due to their high dependence
on the Microfinance loans, which are unsecured in nature. We believe that even
after it has migrated to become a SFB, AU will be able to contain its asset quality
under control.

Exhibit 12: Asset Quality (%)

1.80 1.61 1.20

1.60
1.00
1.40 1.23 1.05
1.20 0.80
0.92
1.00
0.60
0.80 0.64
0.53 0.62
0.60 0.40
0.44
0.40 0.38
0.20
0.20 0.27
0.00 0.00
FY13 FY14 FY15 FY16 FY17

GNPAs % NNPAs %

Source: RHP, Angel Research

Exhibit 13: Credit Cost Trend (%)

1.54
1.60
1.40
1.20
1.02
1.00 0.83
0.80
0.58
0.60
0.39
0.40
0.20
0.00
FY13 FY14 FY15 FY16 FY17

Credit Cost %

Source: RHP, Angel Research

June 27, 2017 8

 AU Small Finance Bank | IPO Note

Strong return ratios likely to remain decent going ahead as well:

As discussed earlier, the ability to finance productive assets at a higher yield and
controlled credit cost has been the key to the strong profitability of AU. The last five
years average ROE as an NBFC has been 17.8%. While the drop in NIM would put
some pressure in the RoE in the near term, we believe that the ability to raise
deposits will help negate some of the pressure and even as an SFB it has the
potential to deliver high double digit RoE for multiple years to come. Another key
factor one should watch for is the cost structure of the organization, as it migrates
to SFB.

Exhibit 14: Cost / Income (%) Exhibit 15: Cost / AUM (%)
50.0 44.7 4.0 3.7 3.7
45.0 40.0 3.5
37.2 38.6 37.5 3.0 3.0
40.0 2.7
3.0
35.0
30.0 2.5
25.0 2.0
20.0 1.5
15.0
1.0
10.0
5.0 0.5
0.0 0.0
FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17

Cost / Income Cost / Assets

Source: RHP, Angel Research Source: RHP, Angel Research

Exhibit 16: ROA Trend (%) Exhibit 17: RoE Trend (%)
4% 3.75% 30
3.58% 3.44% 25.3
4%
25
3% 2.78%
18.6
20 16.9
3% 15.9
2% 1.78% 15 12.5
2%
10
1%
5
1%
0% 0
FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17

ROA ROE

Source: RHP, Angel Research Source: RHP, Angel Research

June 27, 2017 9

 AU Small Finance Bank | IPO Note

Well capitalized to grow for next few years: The current issue is an offer for
sale, and hence, the company will not receive any proceeds from the issue.
However, looking at the strong capital adequacy of 23.2% of which Tier I itself is
21.1% we feel that the new SFB will not have to raise capital any time soon for
meeting its growth. Further, the internal capital generation of the organization is
also quite robust, which should support superior business growth going ahead.

Exhibit 18: Capital Adequacy (%)

25 23.2

20 18.3 18.7
17.3 16.9

15

10

0
FY13 FY14 FY15 FY16 FY17

CAR %

Source: RHP, Angel Research

Outlook & Valuation

At the upper price band of `358 the issue is offered at 5.1x its FY2017 BV.
However, AU has reported a strong 48% PAT CAGR over FY2013-17, and we
believe it has the potential to deliver 30% PAT CAGR over FY2017-19, and
based on our quick estimates on FY2019 BV, the issue is offered at 3.5x. While
the issue is offered at premium valuations, we believe the valuation is justified
given the historical track record and strong growth potential the SFB offers.
Hence, we recommend SUBSCRIBE to the issue.

June 27, 2017 10

 AU Small Finance Bank | IPO Note

Exhibit 19: Income Statement (` Cr)

P&L AC FY13 FY14 FY15 FY16 FY17
NII 213 278 405 652 917
- YoY Growth (%) 69 30 46 61 41
Other Income 2 6 2 5 14
- YoY Growth (%) 191 139 (59) 110 179
Operating Income 216 284 407 657 931
- YoY Growth (%) 70 31 44 61 42
Operating Expenses 96 113 151 254 349
- YoY Growth (%) 46 18 34 68 38
Pre - Provision Profit 119 170 256 403 582
- YoY Growth (%) 95 43 50 57 44
Prov. & Cont. 17 61 49 26 77
- YoY Growth (%) 187 262 (20) (47) 200
Profit Before Tax 103 110 207 377 505
- YoY Growth (%) 85 7 89 82 34
Exceptional Item 670
PBT Post Exceptional Item 1,175
Prov. for Taxation 33 37 68 130 332
- as a % of PBT 32 34 33 34 28
Reported PAT 69 73 139 247 843
Adj PAT 69 73 139 247 326
- YoY Growth (%) 86 5 92 77 32

Source: RHP, Angel Research

Exhibit 20: Balance Sheet

Y/E March (` cr) FY13 FY14 FY15 FY16 FY17
Share Capital 40 43 44 44 284
Reserve & Surplus 401 555 722 957 1,715
Net Worth 442 598 766 1,001 1,999
Borrowings 2,482 2,130 2,878 4,783 7,071
- Growth (%) (14) 35 66 48
Total Provisions 16 30 44 54 70
Other Liabilities 173 201 292 436 677
Total Liabilities 3,113 2,959 3,980 6,274 9,818
Cash and Cash equivalents 376 203 203 123 624
Investments 739 114 140 232 2150
Total Loans & Advances 1,855 2,517 3,523 5,789 6,608
- Growth (%) 120 36 40 64 14
Fixed Assets 17 17 19 25 276
Other Assets 127 108 95 104 159
Total Assets 3,113 2,959 3,980 6,274 9,818

Source: RHP, Angel Research

June 27, 2017 11

 AU Small Finance Bank | IPO Note

Exhibit 21: Key Ratios

FY13 FY14 FY15 FY16 FY17
Profitability ratios (%)
NIMs 11.5 6.8 8.1 9.5 9.7
RoA 3.7 1.8 2.8 3.6 3.4
RoE 15.9 12.5 18.6 25.3 16.9
Asset Quality (%)
Gross NPAs 9.9 31.3 32.7 37.1 107.2
Gross NPAs % 0.5 1.2 0.9 0.6 1.6
Net NPAs 5.0 15.6 15.5 22.2 69.3
Net NPAs % 0.3 0.6 0.4 0.4 1.1
Credit Cost 0.6 1.5 1.0 0.4 0.8
PCR % 50.0 50.0 52.5 40.2 35.3
Per Share Data (`)

EPS 17.1 16.9 31.6 56.1 11.5

BVPS 109.2 139.1 173.9 227.0 70.4
Adj BV 108.0 135.5 170.4 222.0 67.9
Normalized EPS 3.4 3.4 6.3 11.2 11.5
Normalized BV 21.8 27.8 34.8 45.4 70.4
Normalized Adj BV 21.6 27.1 34.1 44.4 67.9
DPS 0 0 0 0 0
Valuation Ratios
PER (x) 20.9 21.2 11.3 6.4 31.2
P/BVPS (x) 3.3 2.6 2.1 1.6 5.1
P/ABVPS (x) 3.3 2.6 2.1 1.6 5.3
Dividend Yield (%) 0 0 0 0 0
DuPont Analysis
Interest Income 22.2 13.9 13.7 15.2 15.0
Interest Expenses 10.6 7.1 5.6 5.7 5.3
NII 11.5 6.8 8.1 9.5 9.7
Other Inc. 0.1 0.1 0.0 0.1 0.1
Total Income 11.7 7.0 8.1 9.5 9.8
Opex 5.2 2.8 3.0 3.7 3.7
PPP 6.4 4.2 5.1 5.8 6.1
Provision 0.9 1.5 1.0 0.4 0.8
PBT 5.5 2.7 4.1 5.5 5.3
Taxes 1.8 0.9 1.4 1.9 1.9
RoA 3.7 1.8 2.8 3.6 3.4
Leverage 4.2 7.0 6.7 7.0 4.9
RoE 15.9 12.5 18.6 25.3 16.9
Source: RHP, Angel Research

June 27, 2017 12

 AU Small Finance Bank | IPO Note

Research Team Tel: 022 - 39357800 E-mail: research@angelbroking.com Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as Angel) is a registered Member of National Stock Exchange of India Limited,
Bombay Stock Exchange Limited and Metropolitan Stock Exchange Limited. It is also registered as a Depository Participant with CDSL
and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is a
registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number
INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing
/dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public
offering of securities of the company covered by Analyst during the past twelve months.

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should
make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the
companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine
the merits and risks of such an investment.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
fundamentals. Investors are advised to refer the Fundamental and Technical Research Reports available on our website to evaluate the
contrary view, if any.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable
sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way
responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot
testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.
While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be
regulatory, compliance, or other reasons that prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,
redistributed or passed on, directly or indirectly.

Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from
or in connection with the use of this information.

June 27, 2017 13