Avanse plays in a highly competitive market and locks horns with juggernauts like State Bank of India (SBI), Bank of Baroda, ICICI Bank, as well as NBFCs like HDFC Credila, Auxilo, and InCred, among others
As per its DRHP, Avanse is the second-largest education loan-focused NBFC in India, following HDFC Credila. Its total AUM stood at INR 13,303 Cr as of March 2024
Avanse’s FY24 PAT more than doubled YoY to INR 342.4 Cr and operating revenue jumped 74.5% YoY to almost INR 1,727 Cr
With the new-age tech IPO season in its full bloom, after a lull of almost two years, Avanse Financial Services has emerged as the latest entity to have filed for a draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (SEBI).
Backed by marquee names such as Kedaara Capital, Warburg Pincus, Mubadala Investment Company and Avendus, the education loan-focussed non-banking financial company (NBFC), Avanse, is aiming to raise INR 3,500 Cr through its public listing. Its IPO would comprise a fresh issue worth INR 1,000 Cr and an offer for sale (OFS) component of shares worth INR 2,500 Cr.
With its IPO, Avanse will contribute to over INR 1 Lakh Cr of IPOs expected to happen in the country this fiscal. The draft document for its IPO, filed in June this year, is under SEBI’s review, along with the DRHPs of other new-age companies like non-banking lender Northern Arc and fintech startup Mobikwik.
After the mainboard public listing of TBO Tek, Go Digit, Awfis, and ixigo, listings of several other new-age tech startups are also in the pipeline, including Ola Electric and FirstCry. Meanwhile, taking the confidential route, Swiggy has filed its IPO papers with SEBI.
With such major brand names in the pipeline for this year’s IPO, let us delve deeper into Avanse’s business model, competition, and books to gather some understanding about the prospects of its impending public market debut.
Though the market is bullish on the new-age tech companies and has largely shown a positive response to the recent listings, a few trends have emerged — the market’s affinity for certain differentiating factors in the IPO-bound companies, decent valuations that match with the other market leaders, and strong fundamentals of companies planning to walk down the IPO aisle.
Avanse In The Education Loan Market
In the Indian education loan market, Avanse offers full-stack education financing options — from education loans for students to growth capital for education institutions through education infrastructure loans.
As an education-focussed NBFC operating in India, Avanse plays in a highly competitive market and locks horns with juggernauts like State Bank of India (SBI), Bank of Baroda, ICICI Bank, as well as NBFCs like HDFC Credila, Auxilo, and InCred, among others.
Although banks continue to dominate the realm of education financing, NBFCs have started securing a notable portion of the education loan market, particularly in the overseas student loans segment, as the demand for student loans is on the rise.
As per a CRISIL report, 88% of the NBFC portfolio comprised overseas education loans as of December 31, 2023. When compared with banks, the NBFCs comprised 37% of the total overseas education loans market in India during the same time.
As one of the leading NBFCs in the student credits market, Avanse wants to cash in on this very opportunity, as it is expected to grow sharply over the years on the back of an expanding student pool in the country, limited prestigious university seats locally, and a rising preference among students for global exposure, the report suggests.
Now, why NBFCs are excelling in the overseas market compared to banks?
Well, the answer to this lies in the risk-taking appetite of NBFCs when it comes to offering unsecured loans.
Unlike NBFCs, Indian banks have a higher share of small-ticket education loans in their education loan portfolio as the central bank (RBI) does not mandate security or guarantee for loans up to INR 4 Lakh.
Also, banks have slightly lower interest rates compared to NBFCs, making them an easier choice, especially when no collateral is needed.
In contrast, NBFCs focus more on higher-ticket sizes, above INR 10 Lakh, allowing them to corner a majority share of the overseas education loan space.
Speaking with Inc42, Nilanjan Chattoraj, head of credit and product, education loans at InCred Finance, explained that when the education loan model started in India in the early 2000s, the only providers of those credits, the banks, asked for property collateral or a mortgage to give higher ticket loans.
HDFC Credila, over the last 15 years or so, ushered in the biggest change in this game with high ticket-size unsecured loans, particularly enabling the students opting for higher education in foreign countries who might not be able to show property collateral given various socio-economic backgrounds, he said.
“With that being the starting point, one of the reasons that NBFCs started getting popular in the education loan space is the product fitment brought by these specialised players, which the public sector banks were not able to do,” Chattoraj added.
“Besides, the student lending product is inherently a completely different model compared to other financing products, such as a consumer loan or a home loan or a business loan… so understanding which colleges and courses are to be funded and which are to be avoided to minimise the risks of NPAs in the future is extremely important and banks being a multi-product company, it’s difficult for them. And that is exactly how NBFCs have become a popular choice in this market,” he said.
A Close Look At Avanse’s Fundamentals
According to the company’s DRHP, Avanse is the second-largest education loan-focused NBFC in India by assets under management (AUM), as of March 2023 and March 2024, following HDFC Credila. Avanse’s total AUM stood at INR 13,303 Cr as of March 2024.
However, compared to its closest competitors, Avanse has the largest average ticket size for international student loans at around INR 33 Lakh.
According to the CRISIL report, while HDFC Credila and Auxilo – the two closest competitors to Avanse in the NBFC education credits space – primarily focus on education loans, the latter (Avanse) is a multi-products educational loan NBFC. Notably, overseas student loans form 78.28% of its lending book, and the remaining comprises education institution loans and domestic education loans.
As of March 31, 2024, its overseas student loans had a total AUM of around INR 10,414 Cr while for domestic it stood at INR 361 Cr.
According to the founder and CEO of Wright Research, Sonam Srivastava, the education loans segment is booming, plus Avanse’s profitability factory is good and continues to increase. Given these factors, the company is expected to receive strong interest from the market.
“Demand for educational loans, especially for foreign schools, has grown and people’s discretionary spending is increasing. Besides, people are expecting interest rate cuts by September. If this happens, it would bring a lot more attention to banks and NBFC. So, good days are incoming for NBFCs,” Srivastava said, adding that Avanse’s tech capabilities and usage of data analytics is the bow that ties everything together for the NBFC.
Meanwhile, it is important to note that Avanse is a profitable entity. In FY24, its PAT more than doubled to INR 342.4 Cr from INR 157.7 Cr in the previous fiscal year.
A testament to the growing market opportunity and its significant share in it, the company also has a steady revenue stream. Avanse’s operating revenue jumped 74.5% year-on-year (YoY) to almost INR 1,727 Cr in FY24.
Its interest income, which primarily comprises interest on loans to its customers and interest on its investments and deposits held with banks, surged 61.6% YoY to INR 1,443.7 Cr in the same fiscal.
If compared with the leading NBFC in this market, HDFC Credila’s PAT stood at INR 528.8 Cr in FY24 growing from INR 276 Cr a year ago.
The gross non-performing asset (GNPA) ratio of Avanse stood at 0.43% as of FY24. The GNPA ratio highlights the asset quality of the lending companies.
However, it is also important to note that the Indian education loan market has faced significant difficulties in recent years amid a widespread crisis in the edtech sector.
Meanwhile, GNPAs in the overall education industry are also expected to remain high due to this very reason. Also, as per sectoral experts, education loans with ticket sizes less than INR 4 Lakh have been witnessed to have higher NPAs.
What’s Ahead For Avanse?
Since its inception in 2013, Avanse has experienced significant highs and lows. It was initially established as a joint venture between the International Finance Corporation (IFC) and housing finance firm DHFL. Amid the DHFL crisis, the company sold its stake in Avanse Financial to Warburg Pincus Group.
Currently, Olive Vine Investment, an affiliate of Warburg Pincus, is the largest shareholder in Avanse with a 58.38% stake. As part of the OFS, promoter group Olive Vine Investment will offload shares worth INR 1,758 Cr.
IFC, which holds an 11.36% stake, will sell shares worth INR 342 Cr and Kedaara Capital, with a 13.82% shareholding in the company, will offload shares worth INR 400 Cr.
With an already strong foothold in the education loans sector, Avanse aims to use the primary capital of INR 1,000 Cr from its IPO to augment its capital base to meet our company’s future capital requirements arising on the back of business growth and growth of assets.
Overall, Avanse is well-positioned to capitalise on the rapidly expanding Indian education finance market, leveraging its strong product portfolio, extensive distribution network, and the support of its marquee investors as it prepares to walk down the IPO aisle.
