Awfis Space Solutions coming with IPO to raise Rs 605.61 crore

Awfis Space Solutions

• Awfis Space Solutions is coming out with a 100% book building; initial public offering (IPO) of 1,58,12,182 shares of Rs 10 each in a price band Rs 364-383 per equity share.   
• Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
• The issue will open for subscription on May 22, 2024 and will close on May 27, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 36.40 times of its face value on the lower side and 38.30 times on the higher side.
• Book running lead managers to the issue are ICICI Securities, Axis Capital, IIFL Securities and Emkay Global Financial Services. 
• Compliance Officer for the issue is Amit Kumar. 

Profile of the company

The company provides a 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. Its flexible workspace solutions cater to varied seat cohorts ranging from a single seat to multiple seats, which can be contracted by its clients for a period ranging from one hour to several years. Over time, it has evolved from a co-working space to an integrated workspace solutions platform. While its core solution is co-working solutions which includes flex workspaces, customized office spaces and mobility solutions, it has built capabilities to design, build, maintain and manage a wide range of flexible workspace requirements such as Awfis Transform (its construction and fit-out services business segment) and Awfis Care (its facility management services business segment). It also provides 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. 

The company’s understanding of the modern workforce has helped it identify and anticipate evolving preferences and requirements, thereby enabling it to provide bespoke solutions to meet the varied and diverse needs of its clients across a diverse spectrum of demographics that it caters to. It also expanded its business offerings and started providing in-house fit-out and facility management services at its centers. Gradually, it transformed into a workplace solutions platform providing a variety of business offerings to address its customer demand. In addition, it also transformed and upgraded several properties across its portfolio and expanded its portfolio to setting up flexible workspaces in alternate assets, such as malls.

Proceed is being used for:

• Funding capital expenditure towards establishment of new centers.
• Funding working capital requirements.
• General corporate purposes.

Industry overview

India is a leading office market globally, backed by, among other things, a strong abled and skilled demography, well established and evolving infrastructure and real estate sector, ample support infrastructure and a strong economy backed by political stability. India's commercial office stock stands at 832 million sq. ft. as of December 31, 2023, and is concentrated in the top 9 cities comprising of Bengaluru, Mumbai Metropolitan Region (MMR), Hyderabad, Gurgaon, Chennai, Pune, Noida, Kolkata, and Delhi, in order of size of market. The 832 million sq. ft. stock is considered as organized stock and is purely utilized as office space. India's office real estate landscape has changed significantly in the past two and a half decades. Since the early 2000s, office stock has grown more than 18 times from approximately 46 million sq. ft. as of pre 2003 to approximately 832 million sq. ft. as of December 31, 2023. Indian real estate has emerged as a favored investment asset class due to various intrinsic factors including growth of the economy, demand-supply fundamentals, investor-friendly policies, and increased transparency. Historically, the Indian office market grew at a CAGR of 6.8%. However, the Indian office market is expected to grow at a CAGR of 6.3% from 2023 to 2026. The office demand is expected to further enhance due to higher interest levels of domestic occupiers along with healthy demand from global markets. 

Flexible workspace is a fully furnished and serviced real estate offering provided by an operator to an end user with, among other things, potential flexibilities built in around design, tenure, area, and location. Once considered a niche offering, flexible workspace has become a prominent component of building owners’ and corporate occupiers’ real estate strategies. As such, it represents a structural shift in office leasing that has survived the COVID-19 pandemic and is thriving today. Flexible office space has long been a viable solution for freelancers, remote workers, and start-ups. Now it is rapidly gaining ground among large enterprises / corporates / MNCs because of its flexibility, speed, and capital deferral benefits not widely available through traditional leasing. Enterprise use of the flexible space model is important to drive the continued exponential growth of this sector. Space owners are finding increased demand for flex offerings. Traditional space owner-operator lease agreements are giving way to a range of models that change risk and reward dynamics for both parties. Space owners are even introducing flex offerings under their own brands. Investors' support for this new form of real estate income will ensure further growth of the sector.

Pros and strengths

Innovating in the flexible workspace industry with the adoption of MA model: The company has reimagined workspace sourcing strategy with its distinctive MA model, and it is a paradigm shift in the conventional coworking industry. MA model continues to be a key part of its supply strategy and it has increased the percentage of operational seats under the MA model from 46.37%, in Fiscal 2021 to 57.66% in Fiscal 2023. Further, as of December 31, 2023, 66.43% of its total seats are under the MA model, including seats that are under fit-out. It has the largest number of centers under the MA model among the organized flexible workspace players in India as of December 31, 2023. This increase is largely driven by its ability to identify suitable properties, manage space owner relationships, generate demand, manage its project delivery and operations, and its innovative design philosophy. The MA model enables it to pivot away from the traditional capital-intensive liabilities that are often associated with real estate. As a result, it has been able to scale its business and network more rapidly and swiftly adapt to market fluctuations while ensuring resilience amidst market uncertainties.  

Diverse space sourcing and demand strategies: The company’s diverse supply sourcing strategy targets all segments of the India commercial office market ranging from organized to unorganized, institutional to non- institutional and across various grades and classes of properties. This grants it access to a large pool of properties and flexibility of center sizes for building its centers and helps maintain a strong supply pipeline. Further, it has transformed and upgraded several properties across its portfolio and launched flexible workspaces in unconventional assets such as malls. As a result of these supply sourcing strategies, it can cater to a wide spectrum of requirements and uplift the overall quality of available workspaces. This also positions it in a unique place to help bridge the gap between the unorganized and organized sectors of the Indian commercial real estate market. It has also adopted a demand-based build approach wherein it typically only builds a small portion of the center with base amenities after it identify a center. The rest of the center is built out as and when it enters arrangements with clients for the utilization of the space at the center. This approach helps it mitigate risks by phasing its capital expenditure requirements and limiting its pre-operative burn during the occupancy build up phase.

Growth through an integrated platform approach: The company’s integrated platform strategy spans the major facets of modern workspace requirements, i.e., through backward integration with Awfis Transform by offering design and build services to clients and through forward integration with Awfis Care by providing facility management services on behalf of space owners. This integrated platform strategy provides a network effect, wherein each segment not only serves its primary clientele but also complements its other segments. As a result, its clients and space owners are introduced to its wider ecosystem, thereby enhancing retention and driving cross-selling opportunities. Its offering ecosystem caters to differentiated client needs to provide unmatched ease to the clients. The synergy among these offerings provides its clients and space owners a seamless experience. This network effect helps it offer a cohesive, one-stop solution to its clients and is a key differentiator from its peers.

Experienced and diverse senior management team: The company’s founder, Amit Ramani has over 20 years of experience in real estate and workspace solutions. Its senior management team is a professional team with a combined experience of 58 years in real estate, leasing, hospitality and sales and marketing businesses. Its Board of Directors and shareholders support and provide guidance to its management team. Its Board of Directors include six Directors with several years of experience. Its management team has demonstrated its ability to develop and execute focused strategies to grow its business, enabling it to strengthen its market position. The industry knowledge and leadership of its executive leadership team, combined with their extensive experience, provides it with a competitive advantage and are instrumental in enabling it to attract high-quality talent, drive implementation of its strategies and achieve its long-term objective of delivering sustainable growth across its business.   

Risks and concerns

Rely on customer relationships: The quality of services delivered to the company’s clients at its centers are critical to the success of its business. These depend significantly on the effectiveness of its quality control systems and standard operating procedures, which in turn, depend on the skills and experience of its personnel, the quality of its training program, and its ability to ensure that such personnel adhere to its policies and guidelines. It also relies on certain third parties to provide security services to its clients. Any decrease in the quality of services rendered by it or third parties including due to reasons beyond its control, or allegations of defects, even when false, at any of its centers could result in non-renewal and termination of Client Agreements by its clients, reduction in seat occupancy in centers, tarnish the image of its brands, result in negative reviews and feedback from its clients and may cause clients to choose the services of its competitors.

Face significant competitive pressures: The flexible workspace industry in India is intensely competitive and it competes in both the organized and unorganized sectors with large multinational and Indian companies, as well as regional and local companies in each of the regions that it operates. Some of its competitors may be larger than it or develop alliances to compete against it, have more financial and other resources, have access to better lease terms than it does or have greater brand recognition than its. Some of the major flexible workspace providers may have certain competitive advantages over it due to their global spread of operations, greater brand recognition and greater marketing and distribution networks. It cannot assure that new or existing competitors will not significantly lower rates or offer greater convenience, services or amenities or significantly expand or improve facilities in a market in which it operates. The growth of flexible workspaces is driven by factors such as enterprise focus on flexibility, cost optimization, workforce fluidity, reverse migration, workplace evolution, focus on wellness, facilities, and amenities, as well as growth of start-ups in Tier 1 and Tier 2 cities.

High working capital requirements: While the company has increased its focus on the asset-light managed aggregation model over the years, the company still has substantial capital expenditure and working capital requirements, including as a result of bearing a portion of the capital expenditure under the managed aggregation model. The actual amount and timing of its future capital expenditure or working capital requirements may differ from estimates due to, among other factors, unforeseen delays or cost overruns, unanticipated expenses, regulatory changes, economic conditions, design changes, weather related delays, technological changes, additional market developments and new opportunities in the industry. In the event its space owners terminate their leases with it, it may not be able to recover its capital expenditure incurred towards a center, in whole or in part, as a result of the loss of revenue from the center, and its business, results of operations, financial position and cash flows may be adversely impacted.

Rely on contract labor: In order to retain flexibility and control costs, it appoints independent contractors who in turn engage onsite contract labor for performance of certain of its operations. As of December 31, 2023, seven personnel are engaged on a contractual basis and the cost of such personnel was Rs 7.47 million for the nine months ended December 31, 2023. Although it does not engage these laborers directly, it may be held responsible for any wage payments to be made to such laborers in the event of default by such independent contractor. Any requirement to fund their wage requirements may have an adverse impact on its results of operations and financial condition. In addition, under the Contract Labor (Regulation and Abolition) Act, 1970, it may be required to absorb a number of such contract laborers as permanent employees. Thus, any such order from a regulatory body or court may have an adverse effect on its business, results of operations, cash flows and financial condition.

Outlook

Awfis Space Solutions is?the largest flexible workspace solutions company in India based on total number of centers.? It provides a 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. Its flexible workspace solutions cater to varied seat cohorts ranging from a single seat to multiple seats, which can be contracted by its clients for a period ranging from one hour to several years. The company is present in all Tier 1 cities and seven Tier 2 cities, covering 16 cities and 48 micro markets in India. Its wide supply network enables it to leverage on the workplace evolution towards liquid workforce and flexibility to work from a network of locations or work from anywhere or hybrid working. It started expanding its network to Tier 2 cities in Fiscal 2018, and this early expansion enabled it to strengthen its footprint and help a Fortune 500 company establish their presence and set up dedicated centers in Tier 2 cities such as Jaipur, Indore and Nagpur. On the concern side, the company may experience delays opening a new center as a result of delays by the space owners in completing their base building work or as a result of the space owners’ inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations.  

The company is coming out with an IPO of 1,58,12,182 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 364-383 per equity share. The aggregate size of the offer is around Rs 575.56 crore to Rs 605.61 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by 103.00% to Rs 5,657.87 million for Fiscal 2023 from Rs 2,787.16 million for Fiscal 2022. The restated loss was Rs 466.37 million for Fiscal 2023 from loss of Rs 571.56 million for Fiscal 2022. Meanwhile, the company intends to increase its focus on Awfis Transform, allied services and Awfis Care, thereby broadening the reach of these services to a wider range of clients. The company aims to enhance its workspace platform through several means, such as new design innovations including modern design and build practices, integration of technology and providing a wider variety of facility management services to its clients.