Awfis Space Solutions Ltd. (Avoid)

Highlights

Awfis Space Solutions Limited (ASSL) incorporate in 2014, is engage in the business of providing wide spectrum of flexible workspace solutions ranging from individual flexible desk needs to customized office spaces for start-ups, small and medium enterprises (SMEs) as well as for large corporates and multi-national corporations.

Over time, they have evolved from a co-working space to an integrated workspace solutions platform. While their core solution is co-working solutions which includes flex workspaces, customized office spaces and mobility solutions, they have built capabilities to design, build, maintain and manage a wide range of flexible workspace requirements such as Awfis Transform (their construction and fit-out services business segment) and Awfis Care (their facility management services business segment).

The company also provide allied services ranging from food and beverages, information technology support services and infrastructure services such as storage and customization to event hosting and meeting arrangements.

ASSL is the largest flexible workspace solutions company in India as on December 31, 2023,  based on total number of centers and they are ranked 1^st among the top 5 benchmarked  players in the flexible workspace segment with presence in 16 cities in India. As on 9MFY24 they have 169 total centers across 16 total cities in India, with 105,258 total seats and total  chargeable area1 of 5.33 mn sq. ft., of which 31 centers and 25,312 seats are under fit- out  with chargeable area 209 aggregating to 1.23 mn sq. ft.

In addition, they have entered into signed letters of intent (LOI) with space owners for 13 additional centers, with 10,859 seats aggregating to 0.55 mn sq. ft. as on December 31, 2023,  they have over 2,295 clients and have presence in 52 micro markets in India.

Out of the total proceeds of Rs. 5,989 mn, Rs. 420 mn would go towards funding capital  expenditure towards establishment of new centers, Rs. 543 mn would go towards funding  their working capital requirements and Rs. 4,709 mn would go towards existing selling  shareholders of the company.

Key Highlights

• Since early 2000s, India’s office real estate stock has grown more than 18x from  approximately 46 mn sq. ft. as of pre-2003 to approximately 832.00 mn sq. ft. as of  9MFY24. Flexible office space has long been a viable solution for freelancers, remote  workers and start-ups, and is rapidly gaining ground among large enterprises, corporates  and MNCs. Total market size of flexible workspace segment has more than tripled in last three to four years and projected market size in tier-1 and tier-2 cities is projected to be  approximately 105 mn sq. ft. by 2026.
• ASSL has adopted two differentiated models for sourcing and procuring workspaces,  namely the straight lease (SL) model and the managed aggregation (MA) model. One of  their key strategies for space procurement over time was to transition to an asset-light,  low risk MA model from a SL model.
• ASSL CAPEX per seat was approximately Rs. 50,000 in FY22 and FY23 and 9MFY24. The  average CAPEX per seat in 2023 of top operators in India typically ranged between Rs.  80,000 and Rs. 200,000. Due to the increasing share of MA centers in ASSL total 217  portfolios of centers, their average CAPEX per seat is lower than the average CAPEX incurred by top operators in India. This asset-light strategy has enabled them to rapidly  scale business and expand their footprint without being subjected to high capital  investment costs and fixed lease rental payment obligations, resulting in a high ROCE.
• As company scale their business, they intend to increase focus on improving their  operational efficiency. The company aim to achieve this by building a stronger vendor  base thereby providing cost efficiencies due to the scale of the business. Furthermore,  they plan to leverage their tech-enabled processes and tools to streamline operations  across all their departments and across vast network of centers.
• The company is focused on long-term sustainable growth and intend to continue to learn  from their data and experiences to innovate and execute using their technology and  mission-driven team. They believe that they have laid the foundation to capitalize on their significant market opportunity by continuing to reinvent the future of work.
• The key strategies of the company include (i) Continue to build an industry leading capital  efficient model. (ii) Expand in new and existing markets (iii) Enhance their product and  service offerings (iv) Improving operational efficiency.
• Sales of the company has grown by ~74 pct CAGR during the period FY21-23. During FY23,  company reported sales of Rs. 5,453 mn which increased by ~121 pct YoY, while EBITDA  increased by 95.66 pct YoY to Rs. 1,761 mn as EBITDA margin fell from 32.29 pct in FY22  to 31.12 pct in FY23. As of FY23 the company the company has not reported any profit. The loss for FY23 stood at Rs. 466 mn. During 9MFY24 the Sales/EBITDA/loss came at Rs.  6,165 mn/Rs. 1,955 mn/Rs. 189 mn.

Key Risk

•  The company has a history of net losses, negative earnings per share (EPS) and return on  net worth (RoNW). They need to generate and sustain increased revenues while managing  their expenses to achieve profitability, and their inability to achieve these goals may have  an adverse effect on the business, results of operations, cash flows and financial condition.
• The company is exposed to risks associated with the development and construction of the  spaces they occupy.
• A portion of ASSL new clients originate from brokers. In the event such companies continue  to gain market share compared to ASSL direct booking channels or ASSL competitors are  able to negotiate more favorable terms with such brokers, ASSL business, cash flows and  results of operations may be adversely affected.
• Its growth may be negatively impacted by macroeconomic factors.

Financial Performance

Valuation

Awfis Space Solutions Ltd offers workspace solutions and is a leading player in the rapidly  expanding Indian workspace solutions market. It leverages an integrated platform approach  to cater to diverse space sourcing and demand needs. Awfis has experienced negative cash  flow in the past and operates in a highly competitive environment. It has posted losses for the  reported period and hence the PE is negative. One can skip this IPO.

Also read: Evolving Landscape of Financial Advisory in India

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