IPO: AWFIS Space Solutions

AWFIS Space Solutions, a flexible workspace solutions provider, will launch its IPO (initial public offering) on May 22, 2024. Below's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : AWFIS' three-year average ROE (return on equity) and ROCE (return on capital employed) are -36.7 and -4.9 per cent, respectively.
  
• Growth : Its revenue grew 74.8 per cent while net profit contracted 4.6 per cent per annum over the last three years.
  
• Valuation : The stock is valued at a P/B (price to book) of 7.1 times.
  
• Overview: Growth in the commercial office market, especially through start-ups and small and medium enterprises, will generate demand for flexible workspace requirements, benefiting the company. However, the industry is highly competitive, with the presence of organised peers like WeWork , Coworks etc., and other real estate players.

About AWFIS

AWFIS is the largest flexible workspace solutions company in India based on its total number of centres and total area. As of December 2023, it had 169 centres across 16 cities and a total chargeable area of 5.3 million sq. ft. The company provides a wide spectrum of workspace solutions ranging from individual desk needs to customisable office spaces for businesses. It operates under two main models:

• Straight lease model : This is a traditional lease model wherein property owners lease space to flexible workspace operators and the entire capex for its fit-out is borne by the operators.
  
• Managed aggregation (MA) model : Under this model, the property owners forgo rent in favour of a minimum guarantee. In some cases, they also receive a share in the revenue or profit generated from the space. If the owners receive a share in the profit, they may also incur partial capex for fit-outs.

Strengths of AWFIS

• Diversified supply: The company obtains the spaces from varied sources in the commercial real estate market. These range from organised to unorganised, institutional to non-institutional and many grades and classes of properties. This allows it access to a large pool of properties and flexibility of centre sizes.
  
• Higher share of MA model: The company operates 66.4 per cent of its spaces under the MA model, which has a lower rent expense. As of December 2023, the minimum guarantee it provided under this model was, on average, only 46 per cent of the micro market rentals (rents in similar properties nearby). This allows it to incur lower fixed costs, leading to operating leverage.

Weaknesses of AWFIS

• Client agreements: The client agreements that the company generally enters into are mostly for a period of more than two years. However, it does not have any say, if the clients decide to terminate the pact midway during economic down cycles or due to other requirements.
  
• Client concentration: In terms of demand diversity, the company majorly caters to IT (46.3 per cent of its occupied space) companies that require professional offices. The recent IT slowdown may impact the company's financials.

Risk report

Company and business

• Are AWFIS' earnings before tax more than Rs 50 crore in the last 12 months?
  No. The company has incurred losses of Rs -19 and Rs -47 crore for 9M FY24 and FY23, respectively.
• Will AWFIS be able to scale up its business?
  Yes. The corporate sector, especially start-ups and small and medium enterprises, is growing, driving demand for workspaces. Moreover, the WFH (work from home) trend is also receding, which will translate into growth for the company.
  
• Does AWFIS have a recognizable brand recall with client stickiness?
  No. Seasonal slowdowns can often prompt clients to withdraw their contracts. Note that even long-term agreements can be terminated within a month's notice or less. Such agreements (more than two-year long) accounted for 57 per cent of its total occupied seats, as of December 2023.
  
• Does the company have a credible moat?
  No. Although it is the largest company in the industry, it faces stiff competition from other real estate and similar flexible workspace solution providers.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post the IPO, the promoters will hold a stake of 30 per cent.
  
• Do the top three managers have more than 15 years of combined leadership at AWFIS?
  No. Key managerial personnel and senior management do not have more than 15 years of combined experience.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
  
• Is AWFIS free of promoter pledging of its shares?
  Yes. Promoters have not pledged any shares.

Financials

• Did the company generate a current and three-year average ROE of more than 15 per cent and a ROCE of more than 18 per cent?
  No. Its three-year average ROE and ROCE are -36.7 and -4.9 per cent, respectively. In FY23, its ROE and ROCE were -35.3 and 1.1 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. On the face of it, the company has been CFO (cash flow from operations) positive in the last three years. But after accounting for a key operational expense i.e., lease payments, the company has been CFO negative in two of the last three years.
  
• Is the company's net debt-to-equity ratio less than one?
  No. The company's net debt-to-equity ratio, as of December 2023, was 2.9 times.
  
• Is AWFIS free from reliance on huge working capital for day-to-day affairs?
  Yes. The company recorded higher payable days than receivable days in the last three years.
  
• Can the company run its business without relying on external funding in the next three years?
  Yes. The IPO proceeds should be enough for the company to not rely on external funding for the next three years.
  
• Is AWFIS free from meaningful contingent liabilities?
  Yes. The company reported no contingent liabilities as of December 2023.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of 0.2 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  It does not have a P/E value since it is loss-making.
  
• Is the stock's price-to-book value less than its peers' average level?
  It is valued at a P/B of 7.1 times. There are no listed peers.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

Also read: Another IPO frenzy begins