The concept of flexible or coworking spaces has gained considerable traction over the past five-odd years, though it has been around for a while.

Whether they be start-ups looking to work nimbly with physical spaces, or corporates seeking ‘plug and play’ work solutions, or retailers considering suitable locations, or even freelancers considering flexible office spaces for a limited period, there are companies catering to such requirements.

As a leading player in the flexible working space segment, Awfis Space Solutions is the first to come out with an initial public offering (IPO) of shares. The issue is open and is available for subscription till May 27. The company is looking to raise a tad less than ₹600 crore (OFS: Rs 470.9 crore; fresh issue: 128 crore) at the upper end of the price band (₹364-383). It offers coworking spaces on rent and offers allied services mainly, apart from executing construction and fit-out projects.

At ₹383, the Awfis Space IPO would trade at 3.28 times the NAV (net asset value) as of 9MFY24 on post-offer diluted equity base. There are no listed peers in the space. The issue seems reasonably priced, given the growth trajectory of the company over the last three-odd years.

Revenue from FY21 grew at a compounded annual rate of 57 per cent till FY23 to ₹545.3 crore. EBITDA rose at 39.3 per cent over the same period to ₹176.1 crore in FY23. In the 9MFY24, the revenues stood at ₹616.5 crore, while EBITDA was at ₹195.5 crore. The company is loss-making at the net level, though losses have reduced considerably over the past two years.

The return on capital employed (cash EBIT divided by capital employed) has risen from a little over 10 per cent in FY21 to 49.9 per cent in 9MFY24.

A diversified client base, surge in chargeable areas, rise in occupancy, key focus on managed aggregation business model that reduces capex cost requirements, the flexibility to cater to mega and tiny clients, and a net debt-free balance sheet are positives for the company.

Investors can subscribe to the Awfis Space Solutions issue with a long-term perspective, and not just for a listing pop. The key monitorable factor would the trajectory towards profitably at the net level in the coming years.

Asset-light model

Awfis Space Solutions is in 16 cities (including seven tier-2 cities), such as Bengaluru, Mumbai, Chennai, Delhi, Pune, Kolkata and Hyderabad, among others. It has over 1.05 lakh seats and operates as many as 169 centres. It has a base of 2,295 clients, a third of which operate in multiple centres, indicating a fair degree of customer satisfaction.

In India, 74 per cent of the workspace supply is fragmented with non-institutional landlords. Therefore, there is a need for players such as Awfis to offer workspace solutions to clients with varied requirements by taking these landlords onboard. 

From ready-to-move offices, flexible tenures, allied infrastructure and maintenance services, to just giving access to simple meeting rooms, day passes or virtual offices, to customised workspaces, the company offers a gamut of solutions.

There are two models in flexible workspaces that companies offer to clients.

In the straight lease model, owners of office spaces lease them to operators such as Awfis. The terms would include the operator paying a fixed monthly rental, common area maintenance charges and a security deposit There would be minimum lock-in periods and escalation clauses. The capital expenditure for the fit out (making empty office interiors ready for occupation) is entirely borne by the operator.

However, Awfis is more focused on the managed aggregation model where the landlords incur most of the capital expenditure on fit-out with the operator having to take only a small portion of the burden. Awfis works on a profit or revenue-sharing model with the space owner and provides a minimum guarantee only from the 5th to 13th month of operations, till the contract expires.

As a result, capex per seat works out to around ₹50,000, which is lower than the ₹80,000 to ₹2 lakh that would otherwise be incurred by the company. The minimum guarantee is only 45.88 per cent of the average micro-market rental and there are no minimum guarantee obligations in 41.1 per cent of the centres.

Around 66 per cent of the seats of Awfis are on managed aggregation model, while the others are on the straight lease model as of December 2023 (46 per cent in March 2021).

This asset-light model has helped improve its RoCE and reduced the financial risk due to low occupancy, apart from lowering the payback period.

Diversified client base, healthy metrics

Awfis has a well-diversified customer base. As of December 2023, 68.6 per cent of its base was made up of corporates or MNCs, 19.8 per cent from SMEs and 10.9 per cent from start-ups. A tiny portion also comes from freelancers.

In terms of industries, IT is the largest, accounting for 46.3 per cent of the pie. Professional services, consumer & durables, healthcare & pharma and financial services account for 8-11.8 per cent each.

Occupancy levels have increased from 50 per cent in March 2021 to 75 per cent as of December 2023.

Also, in the largest seat cohort (more than 100 seats), the weighted average tenure has risen from 27 months to 44 months. As an indication of clients wanting more large-sized office spaces from Awfis, the company has seen the 100-plus seats cohort increase contribution from 49.7 per cent as of March 2021 to 57.7 per cent as of March 2023.

The number of seats has risen at the rate of 50.2 per cent annually from FY21 to FY23 while the chargeable area grew at 54.8 per cent in the same period.

Dependence on top clients has nearly halved over FY21 to 9MFY24. Monthly churn rates have also reduced significantly.

The improvement in key metrics and the robust client base and stickiness created leave Awfis Space Solutions in a comfortable space.

The addressable flexible office space market size in India is set to be ₹47,400-59,200 crore by FY26, according to a CBRE report. And 60 per cent of it is controlled by the top 10 operators. The demand for seats in flexible workspaces is expected to grow at 25-29 per cent CAGR over 2019-2025 and touch 3.35-3.45 lakh seats. Thus, the long-term prospects for a leading player such as Awfis seem robust.