Mumbai: Buyout group EQT has emerged as a top contender to acquire affordable housing finance company Aavas Financiers Ltd (formerly AU Housing Finance Ltd) as promoters, private equity firms Kedaara Capital and Partners Group, are looking to exit their eight-year-old joint investment, said people in the know.
EQT is competing with two other private equity peers, CVC Capital Partners and Bain Capital, ahead of binding offers that are expected early August as PE firms look to consolidate their position in the fast-growing sector.
Between Kedaara and Partners, the duo currently owns 26.47% of the company with the former owning slightly more than the latter. Their exit will trigger an open offer for the acquisition of an additional 26% from public shareholders and result in a change in control. The current market value of the company is Rs 13,812 crore. Based on that, a 51% stake sale would lead to a potential Rs 6,976 crore buyout, the largest in the space till date, overtaking the Warburg Pincus acquisition of Shriram Finance in May.
However, the company’s stock has run up 11 per cent in the last three months in anticipation of a sale. Bidders are unlikely to pay a premium to the current levels and if the bid ask is not matched, the sellers are also likely to explore an exit through the public market route via block trades, said the people cited above. Kedaara Capital and Partners Group liquidated 12.6% of their holdings in March through a block trade, the third since they entered the company. The first big liquidity event for the current promoters was the 2018 IPO that helped raise Rs 950 crore.
CVC, Kedaara and Bain, Partners Group didn’t respond to queries. EQT declined to comment.
Aavas was incorporated as a subsidiary of Au Financiers in 2011 and began operations the following year but was spun off after the parent applied for a small finance bank licence. Reserve Bank of India (RBI) regulations call for either a merger or a sale of business as part of the licence agreement. Founder Sanjay Aggarwal sold the company to the two funds who bid together but retained a single-digit stake, which he eventually sold to the two promoters. The management of the company owns 2% but are classified as public shareholders.
Starting in Rajasthan, the company has expanded across states. Its assets under management (AUM) increased at a compound annual growth rate (CAGR) of 28% during FY18-23 and stood at Rs 17,313 crore in FY24. As of March end, Avaas had 367 branches in 13 states, mostly in the north, west and central India. It closed FY24 with a profit after tax of Rs 491 crore on revenue of Rs 2,020 crore. Its net worth was Rs 3,773 crore. Last year, the company faced headwinds following the exit of CEO Sushil Kumar Agarwal, but it recovered after a few months of uncertainty.
“Aavas’ strong track record and franchise in the affordable housing market drives in current and historical multiples,” said Kushan Parekh, analyst at Morgan Stanley. “The slowdown in Q1FY25 loan disbursement is largely transient. It is also looking to counter lower incremental yields (owing to competition) by increasing the share of higher-yielding, lower-ticket loans (less than Rs 10 lakh) in its disbursements.”
The company’s cost of funding remained stable at 6.6% in FY23. Its financial flexibility stems from relationships with all the leading banks of the country, refinance from National Housing Bank as well as funding support from various multilateral agencies such as International Finance Corp., (IFC), British International Investment (BII, formerly known as Commonwealth Development Corp.) and the Asian Development Bank. However, as credit agency ICRA noted its portfolio vulnerability, given its target borrower profile, Aavas’ operations remain focussed on low-and-middle-income self-employed borrowers, who are relatively more vulnerable to economic cycles and have limited income buffers to absorb income shocks.
Industry analysts and the management are expecting strong disbursement growth of 24% and a stable repayment rate of 17.5%, leading to an estimated AUM growth of 22-23% over FY26-27.
“Aavas remains a steady growth story with strong asset quality. Margin pressure has been a pain point, affecting the entire housing finance sector. While competitive pressure remains high in the sector, Aavas will scale up in higher-yield segments, as there is scope to increase the risk appetite,” Nishchint Chawathe of Kotak Institutional Equities said last week. “High growth canvas, scalability of the model and low risk in secured lending are key positives that differentiate affordable HFCs (housing finance companies) versus multi-product banks and NBFCs (non-banking finance companies), commanding high multiples. In an environment of rising risk, housing finance is a better asset class to be in.”
Housing finance and NBFCs have always remained a draw for private equity groups. Other than Warburg Pincus, Blackstone, TPG, Westbridge, True North, GIC of Singapore have all doubled down in the space. With assets under management of Rs 19,900 crore as of December 2023, Blackstone-backed Aadhar Housing is the leading player in the affordable housing finance sector. Its CEO Rishi Anand said earlier this year that he expects the sector to become “a two-horse race between Aavas and Aadhar.” Both companies obtained licences in 2010 and began operations around the same time.
EQT and Bain have both made marquee financial services investments in recent times, the former in partnership with ChrysCapital. They recently acquired 90% of Housing Development Finance Corp.’s wholly owned education financial subsidiary HDFC Credila Financial Services Ltd (HDFC Credila) in June last year for Rs 9,060.5 crore. Bain bought Adani Capital a month later after buying into wealth manager 360 One.
