Buy AU Small Finance Bank Ltd For Target Rs.965 - HDFC Securities
We like AU Bank’s ability to sustain quality growth at a high pace which is mainly driven by its deep domain expertise in servicing low and middle income individuals and businesses. It is a unique retail NBFC with a clear focus on asset-franchise driven growth model which enables strong loan underwriting across a granular retail portfolio (dominated by vehicle finance and MSME). Also over the years, it has been rapidly expanding beyond Rajasthan, its home state. Its loan book from Rajasthan as on Q2FY21 stood at 42% v/s 47% in Q2FY18. Experienced management team along with faster expansion towards used vehicles segment (36% of total wheels AUM as on Sept ’20), to bring faster recovery for AU Bank compared to peers in post corona world.
AU Bank is one of the best placed SFBs mainly due to its relatively better deposit franchise, large proportion of secured loan book and strong execution track record. In less than three years, the bank has built a deposit base of ~ Rs.270 bn, which stands out among SFBs in terms of granularity and branch productivity. Also book under moratorium has come down from 11% in June to 5.5% at the end of August which indicates significant improvement. Strong fundamentals and adequate opportunity augur well for the bank’s long-term growth prospects.
Valuations and Recommendations:
There seems to be a shift in management focus towards asset quality and away from rigid growth. This augurs well for the next growth phase for AU Bank. This moderated approach will help reaching the earlier high return metrics faster by restricting fresh slippages
We expect AU Bank to deliver 17% CAGR growth in NII and 9% in Net Profit on the back of higher provisioning requirement between FY20- 22E. Despite challenging environment we have estimated Loan growth of 18% looking at its past trend. ROAA is expected at 1.5% in FY22E compared to current 1.6%. It is trading at 5.0x and 4.4x FY21E and FY22E ABV. We think that the bank will keep on getting premium valuation compared to other peers because of it superior track record and strong pedigree.
We feel that investors can Buy AU Bank on dips to Rs.795-805 band (4.15xFY22E ABV) and add more on dips to Rs.730-738 band (3.8xFY22E ABV) for the base case target of Rs.897 (4.65xFY22E ABV) and bull case target of Rs.965 (5.0xFY22E ABV) over next 2 quarters
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