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Why you need to invest in this flexible workspace company’s IPO

The concept of flexible or coworking spaces has gained considerable importance in the last five years or so, although the concept has been around for some time.

Whether it’s start-ups looking to work flexibly with physical space, companies looking for plug-and-play working solutions, retailers looking for suitable locations, or even freelancers considering flexible office space for a limited period of time, there are companies that meet such needs.

A leading player in the flexible workspace segment, Awfis Space Solutions is the first company to conduct an initial public offering (IPO). The issue is open for subscription until May 27. The company is looking to raise close to Rs 600 crore (OFS: Rs 470.9 crore; new issue: Rs 128 crore) at the upper end of the price band (Rs 364-383 lakh). It offers coworking spaces on rent and primarily provides related services, apart from executing construction and furnishing projects.

At ₹383, Awfis Space’s IPO would trade at 3.28 times NAV (Net Asset Value) as of 9MFY24 on a post-offer diluted equity basis. There are no listed peers in this space. Given the company’s growth trajectory over the last three years, the issue seems to be fairly priced.

Revenue grew at a compound annual rate of 57 percent to Rs 545.3 million during FY2021-FY2023. EBITDA grew 39.3 percent to Rs 176.1 million during the same period in FY2023. In 9MFY2024, revenue was Rs 616.5 million while EBITDA was Rs 195.5 million. The company is loss-making at the net level, although losses have come down significantly in the last two years.

Return on capital employed (cash EBIT divided by capital employed) increased from just over 10 percent in FY21 to 49.9 percent in 9MFY24.

A diversified customer base, an increase in fee-based areas, higher utilization, a focus on a managed aggregation business model that reduces capital expenditure requirements, the flexibility to serve both large and small customers, and a debt-free balance sheet are positive aspects for the company.

Investors can subscribe to Awfis Space Solutions’ issue with a long-term perspective and not just because of an IPO. The most important factor to monitor would be the development towards net profit in the coming years.

Asset-light model

Awfis Space Solutions has a presence in 16 cities (including seven tier two cities) including Bengaluru, Mumbai, Chennai, Delhi, Pune, Kolkata and Hyderabad. The company has over 105,000 seats and operates as many as 169 centres. It has a base of 2,295 clients, one-third of whom operate in multiple centres, indicating a high level of client satisfaction.

In India, 74 percent of the workplace supply is distributed among non-institutional landlords, hence there is a need for players like Awfis to provide these landlords with workplace solutions for customers with diverse requirements.

From ready-to-move-in offices, flexible rental contracts, appropriate infrastructure and maintenance services, to simple access to conference rooms, day passes or virtual offices, to individually customized workspaces, the company offers a wide range of solutions.

There are two models of flexible workspaces that companies offer their customers.

In the straight lease model, office space owners lease office space to operators such as Awfis. The terms include the operator paying a fixed monthly rent, maintenance fees for common areas and a security deposit. There are minimum commitment periods and escalation clauses. The capital expenditure for fit-out (making vacant office space ready for occupancy) is borne entirely by the operator.

However, Awfis focuses more on the managed aggregation model, where landlords bear most of the capital expenditure on equipment and the operator only has to bear a small part of the burden. Awfis works with the space owner on a profit or revenue sharing model and only provides a minimum guarantee from the 5th to the 13th month of operation until the contract expires.

As a result, the capital cost per seat is around Rs 50,000 crore, which is less than the Rs 80,000-200,000 crore that the company would otherwise have to raise. The minimum guarantee is only 45.88 percent of the average micro market rent, and in 41.1 percent of the centers, there are no minimum guarantee obligations.

About 66 percent of Awfis’ seats are based on the managed aggregation model, while the others will be based on the straight lease model from December 2023 (46 percent in March 2021).

This asset-light model has helped improve return on investment and reduce financial risk due to low utilization, apart from reducing the payback period.

Diversified customer base, healthy key figures

Awfis has a well-diversified customer base. As of December 2023, 68.6 percent of its customer base consisted of large companies or multinational corporations, 19.8 percent of SMEs and 10.9 percent of start-ups. A small portion also comes from freelancers.

Looking at the industries, IT is the largest sector with a share of 46.3 percent. Professional services, consumer and durable goods, healthcare and pharmaceuticals, and financial services each account for 8 to 11.8 percent.

Capacity utilization increased from 50 percent in March 2021 to 75 percent in December 2023.

Also, in the largest seating group (more than 100 seats), the weighted average tenure has increased from 27 months to 44 months. As an indication that customers want more large office space from Awfis, the company has observed that the share of the group with more than 100 seats has increased from 49.7 percent in March 2021 to 57.7 percent in March 2023.

The number of seats increased by 50.2 percent annually between FY21 and FY23, while the metered area grew by 54.8 percent over the same period.

Dependence on top customers has almost halved between FY21 and 9MFY24. Monthly churn rates have also fallen significantly.

With improving key metrics, a robust customer base and the resulting customer loyalty, Awfis Space Solutions is in a comfortable position.

According to a CBRE report, the flexible office space market size in India is expected to be Rs 47,400-59,200 crore by FY2026. And 60 percent of it is controlled by the top 10 operators. The demand for seats in flexible workspaces is expected to grow at a CAGR of 25-29 percent between 2019 and 2025 to reach 3.35-3.45 lakh seats. So, the long-term prospects for a leading player like Awfis seem solid.

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Published on May 25, 2024

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