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Published on 13/09/2021 10:56:12 AM | Source: ICICI Securities

Buy Equitas Small Finance Bank Ltd For Target Rs.92 - ICICI Securities

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Core performance steady; asset quality deteriorated

Equitas SFB’s (Equitas) Q1FY22 performance was mixed with steady core operating performance, as reflected in strong traction liabilities in terms of granularisation & scale. NII growth at 14% was supported by NIM expansion, improving other income, but sub-par asset quality performance. Elevated slippages at 8% taking GNPL ratio to 4.8% vs 3.7% in Q4FY21 and total restructured book at 13.3bn (~7.5% of loans) with likely incremental restructuring of Rs5-8bn over the next couple of quarters reflect higher stress.

However, upgradation of ~Rs1bn through collections vs full year FY21 up-gradation of Rs0.4bn and sharp uptick in July’21 collections suggest net stress addition would be at manageable level. It expects total credit cost in FY22e to remain around 2.5%. We model similar credit cost and estimate RoA to remain robust at 1.6% in FY22e. Maintain BUY with unchanged TP of Rs92.

 

* Core performance steady. Disbursements during Q1FY22 were down >50% QoQ, but the same picked up sharply in July’21. Disbursements in July’21, across key products like vehicle, MSE and SBL remained higher at Rs8.25bn vs Rs7.8bn in Q4FY21. NIMs too expanded 30bps QoQ on the back of improving cost of funds. Liabilities continued to display strong traction with retail TD share improving to 61% and CASA ratio reaching 40%, one of the highest within SFB space. Further, liabilities customer acquisition remained strong as reflected in incremental 0.5mn customer addition in Q1FY22 and ~0.2mn addition in July’21.

 

* Asset quality deteriorated; July’21 collections showing encouraging trend. Equitas’ asset quality performance with GNPLs at 4.8% vs 3.7% in Q4FY21, slippages at 8% and incremental restructuring of ~5% (total restructured pool stands at 7.5%) is sub-par but on expected lines considering predominately self-employed and new-to-credit customer profile. While collections fell sharply in May’21 to 67% from 91% in March’21, the same improved in June’21 to 70% and as per the management, July’21 is also showing encouraging trend.

MFI collections improved to as high as 98% in July’21 from 67% in June’21. Taking cognisance of improving collections, no ECLGS disbursements, up-gradation trend, we believe net stress build up will be at manageable level. Currently, PCR stands at 51%, provision on restructuring stands at ~10%. It expects full year credit cost at 2.5%.

 

* Higher opex and credit cost impacted earnings. Despite disbursement falling by 50% QoQ, total operating cost grew by 6% QoQ reflecting lower cost flexibility. Further, ~Rs1.1bn provisions towards incremental restructuring resulted in annualised credit cost at 3.4% and the same resulted in lower PAT at Rs119mn in Q1FY22 vs Rs1,129mn in Q4FY21.

 

* NIMs improved led by lower cost of funds. Margin improved by sharp 30bps QoQ to 7.87% vs 7.57% in Q4FY21 largely due to lower interest reversal sequentially and 23bps reduction in cost of funds. Notably, SA cost, after rising for five consecutive quarters, declined 14bps QoQ to 6.36% vs 6.5% in Q4FY21. Strong traction in CASA, normalisation of slippages and hence, lower interest reversal and increasing retail TD would provide support to improving NIM trajectory.

 

* Credit growth muted but disbursement trend in July’21 is encouraging. Total advances fell 0.5% QoQ, except MSE (up 2%), housing (6%) & corporate book (17%), rest all segments shrunk 2-5% QoQ during Q1FY22. Disbursements fell >50% QoQ in Q1FY22 but July’21 disbursements trend across verticals is encouraging with it surpassing March’21 levels.

 

* Key risks. a) Stress unfolding higher than expected and b) further deceleration in AUM growth from Q1FY22 level.

 

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