Abans Holdings: A Little-Known IPO, A Whole Lot Of Electoral Bonds

Negative operating cash flow, falling revenues, and a nascent business don't typically leave much money with companies for discretionary spending.

But Abans Holdings—the maiden public offering for which opened on Monday—has navigated all those and made political contributions worth over 75% of its profit after tax in 2019 and 2021, according to the firm's draft red herring prospectus document.

"It is just like a normal business expenditure that you would do, like a marketing expenditure or any other expenditure," Abhishek Bansal, the firm's chief executive told BQ Prime.

But why did the company spend such a large portion of its profits to buy electoral bonds?

"I am just giving you an analogy. It's for you to interpret," he said. Bansal declined to go into additional detail on the matter. Abans spent Rs 34 crore and Rs 29 crore on buying electoral bonds in 2021 and 2019, respectively, when its net profit was Rs 45 crore and Rs 36 crore.

The question about electoral bonds was also raised in an analyst meeting hosted by the company on Dec. 9, according to an analyst who was in attendance. Bansal labeled the choice as a necessary business decision but did not share any additional details, the analyst added.

While the Abans Group has business interests across sectors like gold refining, commodities trading, warehousing, software development and real estate, Abans Holdings is the financial services arm of the company.

Abans Middle East DMCC—a derivatives trading firm in Dubai—contributes the largest chunk of the group's revenue. A trading solution subsidiary in the U.K. and an India-based non-banking financial company are the second and third largest contributors. 

The NBFC, called Abans Finance Pvt., provides working capital loans to small- and medium-sized enterprises. 

As of December 2021, "the top exposure [for AFPL] accounted for 38% of the total loan portfolio which is towards related party of Abans group and the same accounts for 32% of the tangible net worth," analysts from Care Edge wrote in a February 2022 report. Bansal said he could not recall the current level of exposure the NBFC has to Abans group's companies. 

The IPO is a combination of a fresh issue and an offer for sale. Bansal will sell up to 90 lakh shares and the fresh issue's size will be up to 38 lakh shares. The price band for the IPO has been set at Rs 256 to Rs 270 per equity share with the company hoping to raise between Rs 327 crore and Rs 345 crore. 

"We've hardly heard this name," Arafat Saiyed, analyst at Reliance Securities, told BQ Prime referring to the firm's limited presence in the broking business.

On the other hand, the firm's commodities business has also faced extra volatility in commodity prices over the past year and it's expected to continue, he added.

"The pandemic also shut down physical trading activity so the company had to shift to exchange traded commodities," Saiyed said, noting that this required a change in the company's operations as well.

On the broking side of things, "there is huge competition... with top key companies have majority of market share, while Abans is relatively unknown brand in the market", according to a Dec. 11 research report from Reliance Securities. 

The company has little to no interest in offering services to retail or high net worth client in India, Bansal said. Instead, Abans provides broking services to institutional investors it already has a relationship with, he said. 

The proceeds that the IPO gathers from the fresh issue will be used to bolster Abans' NBFC arm, according to the firm's DRHP. Abans will not receive any proceeds of the Bansal's OFS. 

"The IPO is priced at a price-to-equity ratio of 27 which we feel is an aggressive valuation," analysts at Cholamandalam Securities wrote in a Dec. 9 research report.

The brokerage assigned an 'avoid' rating to the IPO and noted that Abans may be exposed to "interest rate and maturity mismatches between assets and liabilities in the future which may cause liquidity issues". 

The Abans Group as a whole is diversified across sectors, but it currently seems to be focusing on developing its NBFC arm in India. It will remain focused on lending to companies adjacent or overlapping with Abans' business lines, Bansal said. 

For their part, analysts don't seem impressed. Cholamandalam Securities noted that the issue has been priced aggressively, even though the firm's business prospects remain challenging. "They can get some subscription for the IPO, but we don't find anything great on that front," Saiyed said.

Lack of clarity combined with the curious decision to divert a large chunk of its profits to political contributions further muddies the picture.

Bansal declined to comment on whether Abans plans to make any political contributions this year.