Aye Finance IPO: Tapping the Underserved MSME Lending Opportunity – Subscribe or Avoid?

At a Glance

Company and its Business Operations

Aye Finance Limited is a technology-driven non-Banking financial company (NBFC) focused on providing credit to underserved micro and small enterprises (MSEs) across India. Incorporated in 2014, the company offers working capital, business expansion, and asset purchase loans through a data-driven underwriting platform and digital distribution model. It primarily serves informal and thin-file borrowers lacking access to traditional banking channels. Aye Finance operates pan-India through a phygital model combining branch presence and digital origination. The company has built proprietary credit algorithms, strong risk analytics, and scalable lending infrastructure. Over time, it has expanded its borrower base, improved asset quality, and strengthened technology capabilities to support sustainable growth.

Industry Outlook

India’s MSME credit gap remains structurally large, creating strong long-term growth opportunities for specialised NBFC lenders. The domestic MSME financing market is estimated at over Rs 25–30 lakh crore, with formal credit penetration still moderate, driving strong double-digit sector growth. Globally, SME financing continues expanding with increasing digital lending adoption. Technology-enabled NBFCs are gaining share due to faster underwriting, customised loan products, and deeper penetration in informal segments. Government initiatives supporting financial inclusion, digital payments, and formalisation further strengthen credit demand. Rising entrepreneurship, GST data availability, and data-based underwriting are expected to accelerate lending growth, positioning specialised MSME lenders like Aye Finance for sustained expansion.

Objects of the Issue and Utilisation of IPO Proceeds:

• Augment capital base to support future lending – Rs 710 crore
• Offer for Sale by existing shareholders – Rs 300 crore (no proceeds to company) 

SWOT Analysis

Strengths

• Strong niche positioning in underserved MSME segment
• Technology-driven underwriting and scalable lending platform
• Diversified borrower base with improving asset quality

Weaknesses

• Exposure to informal borrower segment with higher credit risk
• Dependence on external borrowings for funding growth
• Limited seasoning compared with large NBFC peers

Opportunities

• Large MSME credit gap in India
• Increasing digital adoption and data-based lending
• Cross-selling and geographic expansion potential

Threats

• Rising credit costs during economic slowdown
• Regulatory tightening in NBFC sector
• Competition from banks, fintech lenders, and large NBFCs

Financial Performance
(Amount in Rs Crore)

 Peer Comparison (Indicative NBFC / MSME Lending Peers)

Outlook & Relative Valuation

Aye Finance operates in the structurally underpenetrated MSME lending segment, supported by long-term drivers such as financial inclusion, formalisation, and increasing credit demand from micro enterprises. The company has scaled its AUM to about ₹60,276 million with a diversified base of over 5.8 lakh customers and improving operating leverage supported by technology-led underwriting and a gradual shift toward secured lending. However, profitability and asset quality remain moderate, with average ROE around 7.6%, ROA nearly 2%, and Gross NPA at about 4.85% and net NPA at 1.78%, indicating relatively higher credit risk within the segment.

From a relative valuation perspective, the IPO is priced at around 1.35x Price-to-Book on a post IPO basis at the upper price band of ₹129, positioning it below peers such as SBFC Finance (2.97x) and Five-Star Business Finance (2.05x). This valuation gap reflects lower capital efficiency, as Aye’s RoNW (7.6%) trails Five-Star (18.6%) and remains broadly comparable to SBFC. Despite the lower P/B, the implied earnings multiple remains elevated relative to stronger peers, limiting valuation comfort. Near-term rerating may remain dependent on improvement in profitability, credit cost normalisation, and asset quality stability. Overall, the structural growth opportunity remains intact, but the risk-reward profile appears moderately balanced.

Recommendation

Avoid. Avoid for listing gains, we maintain a wait-and-watch stance. While Aye Finance offers long-term exposure to the expanding MSME credit market with scalable growth potential, moderate profitability, elevated NPAs, and recent earnings pressure constrain near-term upside visibility. Investors may track post-listing performance for improvement in asset quality, ROE trajectory, and earnings stability before considering exposure. Suitable primarily for long-term investors comfortable with NBFC credit-cycle risks rather than short-term opportunities.