Awfis Space Solutions is the largest flexible workspace solutions company with presence in 52 micro markets across 16 cities in India. It had 169 centers, both operational and fitouts, with 105,258 total seats and a total chargeable area of 5.33 million square feet (msft) as on 31 December 2023. Of the total 169 centres, 31 centers with 25,312 seats are fit outs with chargeable area aggregating to 1.23 msft. In addition, the companyhassigned LoI with space owners for 13 additional centers having 10,859 seats, aggregating to 0.55 msft.

Promoted by Amit Ramani and Peak XV Partners Investments V, the company provides a 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 corporate and multi-national corporations. Its flexible workspace solutions range from a single seat to multiple seats. These can be contracted by clients for a period ranging from one hour to several years. There were over 2,295 clients at the end of December 2023.

Over time, the companyhas evolved from a co-working space to an integrated workspace solutions platform. While its core solution is co-working solutions including flex workspaces, customized office spaces and mobility solutions, there are capabilities to design, build, maintain and manage a wide range of flexible workspace requirements such as Awfis Transform (the construction and fit-out services business segment) and Awfis Care (the facility management services business segment). It 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 had the largest number of centers under the managed aggregation (MA) model among the organized flexible workspace players in India as of 31 December 2023. In the MA model, the developers or space owners typically incur capital expenditure on fit-outs, in part or full, with the remainder being borne by the operator (if any), depending on other terms of the MA model, often foregoing a fixed rental for a component of minimum guarantee on a case-to-case basis and may be a share of the revenue or profit on pre-negotiated terms.

The company is implementing an asset-light MA model over the years. Of the total assets, 66.43% of the total seats (or 107 of the centers, representing 69,918 seats) were under the MA model and the balance 33.57% of the seats (1.94 msft of the office space covering 62 total centers across 11 total cities and 9 states) under the long-term fixed cost lease (SL)model. In the SL model, the company is responsible for agreed lease payments, irrespective of whether it can secure client agreements for the space.

About 59% of the company’s space owner agreements under the MA model include a minimum guarantee (MG) obligation, payable anywhere from the fifth to the 13th month of operations, until the end of the term of the contract. MG at its MA centers was on an average 45.88% of the micro-market rental. Additionally, its space owner agreements under the MA model grant early termination rights to space owners on the occurrence of certain events, such as failure to meet specified performance tests based on the space owners’ financial and operational criteria.

About 67.82% of the company’s rental income from co-working spaces was derived from centers located in Bangalore, Mumbai, Pune, and Hyderabad as of end of December 2023.

The company has adopted a demand-based build approach. It typically only builds a small portion of the center with base amenities after it identifies a center. The rest of the center is built when it enters arrangements with clients for the utilization of the space at the center. The approach helps to mitigate risks by phasing the capital expenditure requirements and limiting the pre-operative burn during the occupancy build-up phase.

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. The success of the company is largely dependent on its ability to compete in areas such as seat rates, quality of centers, brand recognition, service level, and location of the property and the quality and scope of other amenities, including food and beverage and other facilities.It provides bespoke solutions to meet the varied needs of clients across a diverse spectrum of demographics.

The issue

The offer comprises a fresh Issue and an OFS component. TheOFS comprises sales of 12,295,699 equity shares by the promoters and other investors. The fresh issue comprises issuing equity shares, aggregating to Rs 128 crore.

The OFS comprises sales of 6615586 equity shares by Peak XV Partner Investments V, a promoter selling shareholder; 5594912 equity shares by Bisque, an investor selling shareholder; and 85201 equity shares by Link Investment Trust, an investor selling shareholder.

Post-issue Peak XV Partner Investments V, Bisque and Link Investment Trust will each hold 12.48%, 14.54% and 0.22% of expanded equity, respectively.

Peak XV, the promoter selling shareholder, is a financial investor in the company and does not possess adequate experience in the business activities undertaken by the company and has not actively participated in the business activities.

Objects of the issue

Of the total net proceeds from fresh issue, about Rs 42.03 crore is for funding capital expenditure towards establishment of new centers and Rs 54.37 crore for funding working capital requirements and for general corporate purposes.

Strength

Leadership in a large and growing flexible workspace marketplace through bespoke solutions to meet the diverse needs of clients.

Ability to source and offer quality workspaces from varied sources: organized or unorganized commercial real estate as well as unconventional assets such as malls.

An integrated platform approach offers well-suited solutions tailored to meet the needs of the diverse clientele spread across different demographics, seat cohorts and industry sectors.

Weakness

Reported net losses for FY2021, FY2022, FY2023 and 9mFY2024 and experienced negative cash flows in the previous fiscals.

About 33.57% of the seats are under the SL model. A fall in the occupancy of thesecentres will affect the profitability of the company as it needs to pay periodic fixed lease rentals.

Based on occupancy rates, about 52.39% of the clients are from the IT sector, 10.64% from consumer services and retailing, 9.56% financial services, 7.68% healthcare, 6.48% professional services, and balance others. A slowdown in IT and other key major client industries will affect the occupancy and profitability of the company.

Operating in anevolving flexible working space solutions market, the company continues to invest in additional solutions, products, and services to meet the increasingvaried customer needs and additional centersas well as marketing efforts. Thus,it is difficult to predict future profitability.

Clients with service agreement for a tenure of less than 12 months, 12-23 months, and 24 months and more accounted for 29.38%, 41.77% and 28.85% of the occupied seats, respectively. A portion of the clients have short-term client service agreements. Inability to enlist new clients can impact the occupancy, profitability, and growth of the company. Moreover, sub-optimal performance of new centers could adversely impact the profitability.

The flexible workspace industry in India is intensely competitive. The company competes in both the organized and unorganized sectors and with large multinational and Indian companies, as well as regional and local companies in each of the regions that it operates.

Exposed to risks associated with the development and construction of the spaces it occupies.

Certain group companies are involved in legal and regulatory proceedings. Any adverse outcome of such proceedings or initiation of similar actions or proceedings against group companies may result in negative publicity.

Valuation

Consolidated (re-stated) sales for FY2023 were up112% to Rs 545.28 crore. With a 190-bp expansion in the OPM, OP was up 128% to Rs 155.56 crore. OI declined 5% to Rs 20.51 crore. Thus, PBIDT was up 96% to Rs 176.06 crore. Hit by higher interest and depreciation, Pat was a loss of Rs 46.64 croreas compared to a loss of Rs 57.16 crore a year ago.

Consolidated sales in the ninemonths ended December 2023 were Rs 616.50 crore. OP was Rs 178.30 crore, with the OPM standing at 28.9%. Pat was a loss of Rs 18.94 crore. Total borrowings as end of Dec 31, 2023 were Rs 23.72 crore. On post issue expanded equity, the debt equity ratio stood at 0.1.

On post-issue expanded equity (at the upper price band), the EPS for FY2023 and 9mFY2024 were -6.7 and -3.6, respectively. The price/BV stood at 6.3 times. The company quotes at EV/sales and EV/EBITDA of 4.9 times and 15.2 times of the FY23 sales and EBITDA.

There is no listed player in the flexible working space front for apple-to-apple comparison, except Kontor Space, a very small Maharashtra-focused flexible working space player listed on the NSE SME platform.