June 2017


The Sector in play for this bull market is undoubtedly the NBFC space and AU’s IPO at mind blowing valuations is just an confirmation of the trend.

AU was valued at 1200 crores in Feb 2013 when Chrys bought Stake, it was valued at whopping 5,000 Crores in June 2016, just a year later in June 2017 at IPO its valued at 10,200 Crores.

The Grey Market Premium for AU is 100/Share i.e. it will list at a market cap of 13,000 Crores. We at Stallion  Asset Believe that AU is a Sell on listing gains as EPS will drop from 12 in FY2017 to 7-8 in FY2018 due to conversion from NBFC to Small Finance Bank. There is very limited upside for next 2 years after listing gains. Our Calculation Suggest an optimistic fair value of 350/Share.

Below are the 10 Must know Things about AU Small Finance before you Subscribe for the IPO

Factor #1 About the Management & Business – I had gone to Attend AU Small Finance Bank analyst meet a week ago and met Sanjay Agarwal personally to understand the business, let me tell you with some conviction that Sanjay is very passionate and the company works like a Start up. He understands the business really well and understands the credit culture for SME’s really well.

AU was launched in 1996 as a retail-focused NBFC based in Jaipur.  In December 2016 the company became the first asset-led NBFC to get a small finance banking license from RBI to kickstart their operations.

The Business is pretty Simple, they borrow at 9.6% and lend at 16.5%, there are two important cost 1) Credit Cost (NPA) and 2) Operation Cost.

AU was primarily in Vehicle Loans i.e Cars and  Commercial vehicles loans from 1996 and expanded in MSME in 2007.

#Factor2 – Loan Book –  50% of the Total Loan book is toward Vehicle Finance and the rest toward SME and MSME. The Growth in SME & MSME is faster than vehicle segment. When i asked Sanjay (the Founder) about expected growth he said he can’t give out the numbers in public due to SEBI Guidlines but we expect 40%+ Growth in SME/MSME Segment.

The Company has growth its AUM at 30% CAGR for the last 5 years and we believe this is sustainable going forward as well. We expect that the Vehicle finance would grow at 20% and SME Segment at 40%.

Factor 3 – Secure Lender –  The 3 rules of Credit are Character, Capacity and Collateral . Both Microfinance and SME finance grew at 40%+ for last 5 years but with SME finance the book is secured and MFI violates one of the most important rule of credit i.e. collateral. 99% of AU’s lending book is secured and AU SFB lends only for mostly productive assets.

Factor 4 – Complexity of  Business – AU has displayed good understanding of its client’s business, on why the customer needs money and how he will repay. Evaluation is very difficult because data is not available and AU uses its own 120 points checklist that has helped them get an edge over competitors.

Factor 5 – Low Leverage – AU is leveraged 5x whereas leaders in both SME and Vehicle space are leverage 7-8.5x. AU has a mix of Vehicle Loans and SME. We believe AU can leverage itself 50% more from current level and AU will not dilute its equity for next 2 years as it can Increase its leverage and ROE further.

Factor 6 – ROE – AU has the highest ROE among its peers of 21.7%, v/s 12% for Capital First and 11.6% for Shriram Transport even without taking on a lot of leverage, suggest better management effectiveness compared to peers.

Factor 7 – NPA – Au Small Finance has an NPA of 1.6% v/s 8.16 for Shiram Transport (Vehicle) and 0.95% for Capital First (SME). The most important things about AU is the credit discipline that they have maintained, Mr Sanjay says that he personally focuses a lot on Credit Quality. The Management seemed confident that net Credit cost will be 1% in the long term which is reasonable.


Factor 8- Financials & Valuations – The company has doubled its revenue in last 2 years and the Profits have Increased 234% in the same time to 326 crores. The networth has Increased Sharply from 1000 to 2000 crores in one year as it sold 90% of its housing finance business for 828 crores. The Selling of Housing Finance business was required as RBI had given them a conditional Small Finance Bank license and the most important condition was selling controlling stake of housing Finance business. AU Continues to Hold 10% stake in the housing finance business.

The IPO is priced to perfection leaving no room for sustainable upside. At IPO price, the Company is valued at 30x FY2017 PE and 5.11x P/B for 2017. The Issue is very expensive and we are very confident that Capital First will beat the returns of AU SFB for next 3 years after listing.

Factor 9 – SFB Conversion – This is the biggest risk to the company as they will now have to invest in low yielding government securities and spend money on opening branches. Currently the Company in FY2017 has opex of 350 crores and the company has guided that the opex will increase to 700-800 crores in FY2018. We believe that this will hit the EPS from 12 in FY2017 to 7 in FY2018, but it will get back to 11-12 in FY2019.

Factor 10 – Conclusion – If Grey Markets are Right and the company list at 100/Share premium, the stock would trade at 6.5x FY2018 P/B and 60x FY2018 PE. We believe it would be a Great Sell at 460 and Assign Fair value of the Stock at no more than 350/Share.

Stallion Asset is a SEBI Registered Equity Advisory Company and we have delivered 306% Returns in last 4 years. We provide independent equity Advisory services Plans Start 8,999

CDSL is coming with an IPO and the Grey market is very excited about it and pricing it at a premium of 100-105/ Share, this is a listing gain of a Whopping 65-70%. The Company did an EPS of 8.21/Share in 2017 is offered at 18 PE Multiple. We believe the company will grow at 10-15% for the Foreseeable future whereas maintain an ROE of 15% and we at Stallion Asset believe that the Fair Value is 200-220/Share.

Depositories have played a tremendous role in helping shareholders move away from physical share certificates to holding shares in the electronic form. The story of CDSL is pretty easy, it a duopoly business (2 player market), it’s a perfect proxy for playing the emergence of equity & mutual Fund as an asset class story.  Depositories are just like a bank. While a bank holds your cash and fixed deposits, depositories hold shares, debentures, bonds etc., for all shareholders in the electronic form.

8 Things You need to know about CDSL

Factor #1 – Forced Public Issue – According to existing rules, stock exchanges cannot hold more than 24% stake in depositories. BSE, which owns 50.05 percent in CDSL, is looking to divest 26 % stake.

Factor #2 – About the Business – Established in 1999 CDSL is the 2nd largest depository in the Country with Market Share of 43%. Below are the services offered by CDSL.

1) Depository Participants : CDSL offers dematerialization for a wide range of securities including equity shares, preference shares, mutual fund units, debt instruments, government securities.

2) Corporates: CDSL offers facilities to issuers to credit securities to a shareholder’s or applicant’s demat accounts to give effect to a range of non-cash corporate actions such as bonus issue, subdivision of holdings and conversion of securities in a merger, amalgamation or in an IPO.

3) New OpportunitiesCDSL has entered the new age depository as well where Mutual Funds, Insurance Policy, Commodity Receipt will all be securely stored digitally. They have also Invested in E-KYC which has huge potential where client data is pulled in via Unique Identification Authority of India (Aadhar).

Factor #3 – CDSL V/S NSDL Number of Accounts – The Total Beneficiary owner accounts are 27.88 Mln. accounts (CDSL & NSDL) combined as of FY17. The depository industry in India is worth  Rs2400 Mn as of FY16, with a CAGR of 12% from FY14 to FY16 . CDSL’s  volume of accounts has grown at 10% CAGR in last 4 years Vs 5 % of NSDL

Factor #4 – CDSL V/S NSDL Revenue Growth-The revenue of NSDL has grown at a CAGR of 12% Vs CDSL’s 11%.


Factor #5 – Incremental Market Share –  CDSL has gained in market share with respect to incremental demat accounts from 46% in Fiscal 2012 to 60% in Fiscal 2017 . CDSL added 1.51 Million Accounts compared to its peer NSDL who added just 1.01 Million. CDSL Has been Gaining Market Share consistently.

Factor #6 – No Pricing Power – Since the Pricing is controlled by SEBI there is no Pricing power in this company. Financial Inclusion is an important agency for the government and they wouldn’t allow these companies to make a lot of economic profit. Even though they can increase pricing by 100%, and revenue is highly inelastic, they cannot due to control by the Government.

Factor #6 – ROE– CDSL has an ROE of 15% whereas its Peer NSDL has an ROE of 10-15%. The ROE is expected to be sustain at current levels for the foreseeable future as operating cost is fixed and even if it’s a Duopoly business the pricing is controlled by SEBI. SEBI will never allow them to have an ROE above 20%.

Factor #7 – Financials – The Revenue has Grown over the Last 4 years at  10% CAGR to 146 Crores whereas Profit has grown 11% CAGR.

Factor #8 – Valuation & Conclusion – The Company is a high Quality Franchise and has longevity of 10-12% growth for next 1-2 decades. The company throws a lot of FreeCash Flow which doesn’t need to be reinvested as the business is self sustainable. We believe the company will trade at 25-30 PE Multiple due to longevity premium. The Pricing power is limited and SEBI will make sure that the ROE of more than 20% doesn’t happen.

If the Grey Market is Right and the Stock Indeed gets listed at 250, i.e. 30x FY2017 we will happily exit as expected returns are then probably equal to the growth rate of 10-12% which are satisfactory for an institutional Investor but not for Retail investors. We recommend a Subscribe for Listing Gains.

There is no doubt that financial Services and NBFC’s have been the leader of this Bull Market. IDFC is one of the newest bank and has recently completed its 1st Full year of Banking operations has done pretty well.

Let’s understand the larger trend that has emerged in the Private Banking space.

There have been different  strategy era’s in the private banking space in the  last 15 years which has resulted into wealth creation for Investors.

2003-2009 was about branch expansion and cross selling on services like credit card and auto loans which made the Emergence of HDFC Bank and ICICI Bank.

2009-2016 was about Kotak Bank, IndusInd Bank and Yes bank, where they emerged as the Fastest growing banks due to their focus on Niche Services and Digtal Foray.

2016 – 2020 the trend is clear i.e. its Digital Plus Rural. Till now banks have concentrated on 20% of population who has 60% of the countries net worth, however going forward the focus will be on the 80% population which doesn’t have access to credit facilities. With Digitalization, financial inclusion has become a possibility and the leaders in this pack could be IDFC Bank and RBL Bank.

10 Important Factors you need to know about IDFC Bank.

Factor #1 – About The Management Management – At Stallion Asset when we buy a Bank, We look at the Banker rather than bank only. Dr Rajiv lal is a veteran economist for last 30 years and has worked in various RBI Committees along with ex Governor Raghuram Raju, he has been a partner of popular private equity firm Warburg Pincus, head economist at Morgan Stanley clearly suggesting that he is a seasoned player who understands the game really well.

Factor #2 About the Bank – IDFC became a bank from an NBFC in October 2015, It offers wide variety of corporate and retail banking products and services to ~1.38 million customers. The Bank enjoys a presence of 74 Core Branches ; 47 ATM’s ; 8,600 points of presence covering 20 states, 150 districts, 19 major cities and almost 33,000 villages.

The bank is Divided into 3 Parts
1) Bharat Banking –  (Rural Side of the Bank) –This is the Microfinance unit of the company which started after it acquired Grama Vidiyal Micro Finance and has a unique outreach model to cater to local consumers. It has its branches built in difficult geographies and it has a unique outreach servicing model focused on financial inclusion. IDFC has acquired 12 Lakh customers in a small timeframe of 1 year.

2) Bharat Plus(Digital urban focused side of the Bank) It primarily caters to the needs of  mass affluent (Salaried class)  & affluent segment (self employed) business banking segment. The Bank has acquired 1.4 Lakh Customers since inception, out of which 20,000 are digitally acquired.

3) Wholesale – This is the legacy exposure of Infrastructure loans the Company had before it became a bank. The Percentage of Infrastructure loans have come down from 75% to 51% in FY2017 after 1.5 years of commencement of bank.

Factor #3 -Branch Light and Asset Light Business Model. –

IDFC bank is the bank of the future is focusing  more on technology and partnership and rely less on branches. Currently it has 74 Branches under its network likely to go up to 200 Branches by 2020 and corporate Business Correspondents will go up from 350 currently to 1000 by 2020. Further aggressive use of  micro ATM’s to 100,000 touch points from 8600 Currently & is expected to make en-roads in making banking simple and accessible, anytime and from anywhere along with Bank focus on serving the rural underserved communities & self employed. The average break-even of new branches is 4-6 months, the lowest in the industry.

Factor #4 – Impressive first Full Year of Operations –  There are only a few banks that become profitable in the first year of their operations since a lot of the cost are front loaded. Since IDFC Bank had a ready made loan book of Infrastructure loans, this helped it to be profitable in the first year Itself. The Bank recorded a net profit of Rs. 1,020 crore for FY17, delivering a 25% growth in net profit. Net interest income improved 20%, while the cost-to-income ratio was steady at 54%. Fee income has continued to increase at a healthy pace of 26%. The Balance Sheet grew y-o-y by 35% to 112160 Cr in Mar 2017.

Factor #5 -Growth Without Equity Dilution – Capital Adequacy Ratio stood strong at 18.9% with Tier I capital ratio at 18.5%. The bank does not plan to raise Tier I capital atleast for the next 2 years. The comfortable capital position provides healthy support for expanding loan book at a strong pace. The bank had a CASA of only 4% in FY2017 which the company has guided to Increase to 15%, which will decrease cost of funds.

Factor #6 – Selling out Legacy Loans – The bank sold its legacy infrastructure loans of Rs 2000 Cr net of provisions  in Q4FY17 to ARCs by way of security receipts. As a result of this sale, the Gross NPA levels reduced to Rs 1540 Cr (3%) in Q4FY17 from Rs 3590 Cr (7%) in Q3FY17. The net NPA levels stood at Rs 580 Cr (1.1%) in Q4FY17 as against Rs 1250 Cr (2.6%) in Q3FY17. Profitability wont be impacted in near future since management has provided adequate provisions for the stressed assets.

Factor #7 – Vision 2020 – The management has given aggressive guidance and is on the mission to transform the bank.

Factor#8 – Risks – The company is investing a lot of money in Microfinance segment and we at Stallion have been bearish on that part. We Believe that Loan Waiver is a New Normal and will continue happening for next two years until 2019 Elections Atleast.

The Company needs to show its best in digital platforms, a place where RBL is clearly winning in all fronts. Kotak has come out with 811, and has guided to acquire 1.5 crore customers.
IDFC doesn’t have the brand name yet, but with Mr Rajiv Lal at the forefront you can Expect the Unexpected. They have guided for atleast one acquisition which is very risky as valuations of banks ain’t cheap and the options available are South Indian Bank and Karnataka bank for them.

Factor #9 – Valuations- IDFC has a book value of 43/Share and Adjusted Book value of 41/Share i.e. it trades at 1.3x P/B . IDFC has a Market cap of 20,000 crore and did Earnings of 1020 crores i.e. trading at PE of 20 times. The valuations are reasonable but only if they can reach their 2020 target without screwing up in the acquisition, microfinance portfolio, they will get higher valuation. CASA growth is also very important which stands at 4% currently (Guided 15% in 2020) as cost of capital decreases with increase in CASA.

Factor #10 – Stallions View and Conclusion – At Stallion Asset We do understand that Rural plus Digital is wealth where wealth will be created. IDFC is reasonable at 1.3x Book especially after most legacy loan issues are now cleared but the story is not very clear as the bank is only 1 year old. We need to understand that there are many Small Finance banks (Rural Space) coming in as well as competition from payment banks (Digital Space). IDFC Bank are targeting 1 crore customers by 2020 which is a tall task but have an amazing management team. Most loans given out in microfinance division are subprime loans and are risky.

IDFC Bank is definitely not a 1 year story but a 5 year story and if it plays out, you can expect a 3-4-5x returns, and worse case you can lose 30% from these levels. We at Stallion like more clarity before investing especially because IDFC will be acquiring a bank, and expected volatility in microfinance division;things are not very clear now, probably we will have to pay a higher price for clarity, but we are comfortable to pay up a little more for certainty.

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Disclosure – Amit Jeswani and Family have no Positions in it. This is not a advise, please use this for education purpose only.

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