IPO Size: Rs. 599 cr 

• Rs. 471 cr offer for sale (OFS) by promoter investor Peak Partners (23% to halve to 12%) and financial investor ChrysCapital (23% to drop to 15%)
• Rs. 128 cr fresh issue, for Rs. 42 cr for capex and Rs. 54 cr for working capital

Price band: Rs. 364-383 per share

• 75% for institutions and only 10% for retail, as company is loss making

M cap: Rs. 2,659 cr, implying 22.5% dilution

IPO Date: Wed 22^nd May to Mon 27^th May 2024, Listing Thu 30^th May 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Co-Working Company

Awfis Space Solutions operates 79,946 seats, across 138 centers, comprising 4.1 million sq. ft. chargeable area. Additionally, it has 25,312 seats across 31 centers (1.23 million sq. ft.) under fit- out and has also signed letters of intent (LOI) for 13 centers, comprising 10,859 seats and 0.55 million sq. ft. chargeable area.

Asset Light Business Model

Company operates on both Straight Lease (SL) and Managed Aggregation (MA) models, with the latter accounting for 66% of total seats. MA model entails lower-risk on Awfis, as also, lower capex, making operations asset-light. Company’s

capex per seat is thus ~Rs. 50,000, against Rs. 80,000 to Rs. 2,00,000 per seat for top operators in India. Combination of MA model (with initial moratorium and half the minimum guarantee vis-à-vis market rentals) with high occupancy (75% blended in 9MFY24, 83% for seats with 1+ year vintage) lead to high RoCE of 50%.  

Revenue: Mix of Rental and Project Income

Company clocked revenue of Rs. 545 cr in FY23, which increased to Rs. 616 cr during 9MFY24, of which, 24% was earned from construction and fit-out projects. Net of sub-contracting cost (20% of topline), net income from projects was at Rs. 23 cr for 9MFY24, which is different from rent income. This income stream is non-liner with number of seats and may be lumpy (Rs. 15 cr in FY23).

Understanding Profitability

Company operates on 30% EBITDA margin, leading to 9mFY24 EBITDA of Rs. 196 cr. Pursuant to accounting standard IndAS 116, depreciation on right-of-use assets and interest on lease liabilities are notional expenses. Cash EBIT (i.e. EBITDA less actual lease payment) can be taken as a proxy to net profit, which stood at Rs. 67 cr in 9MFY24, up from FY23’s Rs 36 cr. Thus, reported loss after tax of Rs. 19 cr for 9MFY24 is notional / mere accounting loss, while actual profit is Rs. 67 cr. On Rs. 645 cr capital deployed by the company till date, annual profit is at Rs. 90 cr (annualizing Rs. 67 cr from above), leading to 14% RoE.

While business is cash flow positive (Rs. 195 cr cash from operations in 9MFY24), on an accounting basis, it may never be able to post super profits.  

In-line Valuation

In Nov-Dec 2022, Awfis undertook private placement at Rs. 144 per share, when FY23 cash EBIT was at Rs. 36 cr. In the past 18 months, cash EBIT has grown 2.6x and so has the asking price in the IPO.

M cap of Rs. 2,659 cr at the upper end, discounts annual profit of Rs. 90 cr by a PE multiple of 29x. There are no direct listed peers, but REITs like Embassy, Mindspace, Nexus, engaged in leasing commercial properties, are ruling at PE multiples of 32-35x. Thus, IPO of Awfis is fully valued.

Long Term Overhang Remains

Awfis is a new-age company, with 82% ownership held by the financial investors. Post lock in-expiry after listing, share is bound to have selling pressure, as seen even now, when 80% of IPO is an offer for sale and investors holding 47% stake are part-exiting. Moreover, OFS size has been increased by 24% from DRHP filing in Dec 2023.