Why Au Small Finance Bank is India’s most expensive?
The bad news in India has been banks. The good news in India is Au Small Finance Bank.
The bank was not in existence a year ago. The day it listed, it was valued in excess of ~15 billion. The promoter’s holding of 32 per cent was now worth more than ~50 billion.
When much of the country’s banking is being considered bad news, why was Au Small Finance Bank’s IPO subscribed 54 times? When a number of IPOs gradually lose their pricing froth, why did Au Small Finance Bank move from an offer price of ~358 to open at ~520 and then peak at ~700? What makes Au Small Finance Bank possibly India’s most expensive bank?
One, the remarkable IPO success of this small finance bank is a signal that investors seek to distance from large public sector behemoths and would rather back smaller, faster and more dynamic entities. Two, the IPO success is a validation of how the robust India growth story will be increasingly serviced by smaller and nimbler financial entities (following the sustained outperformance story of India’s NBFC sector).
Three, the IPO success was possibly inspired by the fact that small finance banks will deepen their regional presence, venturing where their larger equivalents have never been and in doing so, create new markets. Four, the bank validated its management bandwidth by emerging as the quickest to translate its license into reality and then rolling out 250 branches the day it opened for business.
Five, the promoter’s capacity to create businesses of value — its fledgeling wholly- owned mortgage finance company grew so rapidly that it was valued in excess of ~15 billion in less than a half a decade from start out. Six, the management clarity with which it responded to the Reserve Bank of India’s stipulation to either merge the mortgage finance business or divest; the management recognised that divestment would do two things: validate that the company possessed the capability to build and monetise value; generate an inflow of around ~9 billion, helping strengthen it’s net worth to ~19 billion, a robust foundation to scale a profitable business.
Seven, a major chunk of the bank’s disbursement book is now driven by net worth (as opposed to debt), translating into possibilities of sustainable profitability that could encourage the management to never contemplate another equity dilution. Eight, this is possibly the only asset-based bank after Kotak Mahindra Bank as opposed to being born out of microfinance (inspiring the ‘the next Kotak comment’).
Finally, the bullishness comes down to the promoter Sanjay Agarwal himself: Motilal Oswal Private Equity bought into his story a decade ago at a valuation of ~550 million when it discovered that he calculated NPA (bad loans) by quantum (not percentage) and ran a tighter ship than any company they had seen. So, they painted a larger picture for him: "You will be a ~10-billion company one day and your personal holding will be worth ~2.5 billion.”
It is amazing what can happen when you get things right in a country getting things right.