NEW DELHI: AU Small Finance Bank is all set to hit the market with an initial public offering ( IPO ) on Wednesday. On offer are 53.42 million shares in the price band of Rs 355-358 apiece. The issue will close on Friday.The Jaipur-based company, which has got RBI licence to engage in small finance banking, has already commenced operations. With a network of 300 branches spread across Gujarat, Maharashtra, Rajasthan, Delhi, Punjab, Haryana, Himachal Pradesh, Madhya Pradesh, Goa and Chhattisgarh, the lender used to serve across 10 states as a non-banking finance company ( NBFC ) – AU Financiers – before foraying into the small finance bank space.Here’s what brokerages said on the IPO:AU Small Finance Bank (AU SFB) is a small finance bank that recently transitioned from a retail-focused NBFC and primarily serves low and middle income individuals and businesses. Started in 1996, the company’s business primarily was focused on vehicle finance. The company later ventured into MSME and SME loans. AU SFB commenced business as a small finance bank on April 19, 2017. The transition to SFB has offered AU SFB significant growth potential and will help deliver improved performance and return ratios. At the upper band of the price band at Rs 358, the post-money valuation of AU SFB is at 5.3 times P/ABV FY17 of Rs 68, which we believe, leaves little scope for any upside in the near term. Hence we recommend investors to subscribe to the issue only with a long-term investment horizon.AU SFB’s gross AUM has grown at a CAGR of 30 per cent over FY13-17 on account of sectoral tail winds such as a financial inclusion drive and low credit penetration in certain areas of the country. These growth drivers are likely to persist over the longer term. As a result, AU SFB should continue its record high growth rate on its loan book.Further, AU SFB has successfully diversified its loan book composition that has helped it reduce concentration risk and improve asset quality. Out of the total loan book, 98.99 per cent is backed by revenue-generating assets. Also, LTVs of 80-85 per cent on showroom prices for vehicles loans and 40 per cent for MSME/SME loans are indicative of high-quality loan underwriting and risk management practices at AU SFB.Its initiation into housing finance and unsecured lending in FY18 should aid further diversification of the loan book. Given that the management has strong operational experience in housing finance and has an excellent track record of scaling up the same, we are confident that its initiation of housing finance will only add to profitable growth for AU SFB besides achieving diversification and risk management objectives. AU SFB has also displayed strong focus on optimising costs to keep profitability levels high. At the upper end of the price band of Rs 358, issue is priced at 5.1 times FY17 book value. Based on the management’s successful track-record of scaling up the business over the years, generating high returns (better RoAE than peers), focus on optimising costs, well-established framework for controlling asset quality and well-thought-out future expansion strategy, we recommend subscribe rating to long-term investors.In its earlier avatar as an NBFC, AU grew its gross loan assets and earnings at a robust CAGR of 34 per cent and 65 per cent, respectively, over FY14-17. The brisk AUM growth was complemented by its business diversity, both in terms of products and geographies. Profitability grew by leaps and bounds, notwithstanding persistent investments on the back of moderation in funding cost and firm control on product pricing.Post SFB launch, growth and profitability would be restricted; but the longer-run prospects seem bright. Its conversion into SFB will augment earnings diversity and stability. The IPO of 53.4 million shares is a 100 per cent offer for sale; with the promoters divesting 9 million shares after which they would bring down their holding to 33 per cent.At the upper end of the price band of Rs 355-358, the stock is being valued at 5.3 times FY17 P/ABV. In our view, this valuation, more than being palatable, offers a material upside post listing. We recommend a subscribe rating.While the trailing valuation of 5.1 times FY17 P/BV may look expensive after taking a first look, this is a unique model with no exact peers. An important distinguishing factor is that Au SFB is a small finance bank and can raise deposits to keep the cost of funds low, unlike its peers. Therefore, the SFB model should do better compared to the NBFC model in the long run.At the upper end of the price band, the company is valued at a P/BV of 5.1 times on FY17, which is relatively higher than the peer group NBFCs. However, given the consistent track record of AU delivering high growth, better RoAs with contained asset quality issues vs peers, AU commands a premium valuation. At the offered valuation, we recommend a subscribe rating on the issue with a long-term view.Given the strong presence in niche customer segments, AU SFB’s profitability will be remain superior to most conventional banks, said the brokerage. “Despite the migration to SFB, we estimate that AU will report trough RoEs of 17 per cent in FY18 this will recover to 20 per cent by FY20. This is significantly better than its listed peers which are currently reporting single digit RoEs. As such, valuations at 3.2 times book on FY20 are reasonable, and investors can expect strong upside over the next few years,” it said.Its evolution from a DSA of HDFC Bank to a significant retail lending NBFC and outstanding performance track record suggest AU SFB has the potential to emerge as one of the most successful SFBs in three to five years. “We expect AU SFB to attract higher valuation premium compared to its peers led by sustainability of high growth in diversified business amid lower assets quality risk. At the upper end of the price band at Rs 358, AU SFB’s market capitalisation would stand at Rs 102 billion, which gives it a price-to-book multiple of 5.1 times on March 2017 book value and P/E of 31.2 times on FY17 profit. We recommend subscribe rating to the issue, as it provides a favourable investment opportunity for long-term investors.At the upper end of the price band at Rs 358, the issue is offered at 5.1 times its FY2017 BV. However, AU has reported a strong 48 per cent PAT CAGR over FY2013-17. “We believe it has the potential to deliver 30 per cent PAT CAGR over FY2017-19. Based on our quick estimates on FY2019 BV, the issue is offered at 3.5 times. While the issue is offered at premium valuations, we believe the valuation is justified given the historical track record and strong growth potential that SFB offers. We recommend subscribe rating on the issue,” the brokerage said.