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Hold AU Small Finance Bank Ltd For Target Rs.1,000 - Emkay Global

Plans to mobilize growth capital; asset quality remains key monitorable

* According to media reports, AU Small Finance Bank (AU SFB) plans to raise ~Rs6.15bnRs6.32bn (US$0.08bn-US$0.09bn) at an indicative price band of Rs1,230-Rs1,265 vs. CMP of Rs1,231 (SEBI floor price: Rs1,181 per equity share). The issue will open on March 9 and close on March 10 by 8.30 am IST (with an option to close earlier).

* Despite lumpy stake sale in Aavas Financiers, AU SFB’s Tier 1/CRAR ratio, ex-9M profit, dropped to 16.3%/18.8% in Q3 while including profits stood at 20%/23.5%, mainly due to a sharp rise in RWA. AU SFB’s CAR is based on credit risk as the bank still enjoys the leeway to not maintain capital on operational/market risk. After the capital raise, Tier-1 ratio will increase by 244bps/251bps (based on Q3FY21 RWA).

* Though the capital ratios remain well above the regulatory requirement of 7.5%/15% even including operational/market risk-weighted assets, we believe the capital raise is primarily to fund future growth and also a preparatory measure to apply for Universal Banking license once it completes 5 years of operations as SFB in April 2022.

* The bank remains well-complied with promoter stake norm which stands at 28.5% and post capital raise should further reduce by ~0.5%. Unlike other SFBs, the bank does not have any holdco structure, and thus the journey toward a Universal Bank should be relatively smooth.

* In Q3, the bank had reported higher-than-expected pro forma GNPA at 3.3% vs. reported GNPA of 1%, mainly due to higher NPAs, majorly in the relatively vulnerable wheels/SBL portfolio. The bank has restructured 0.8% of loans till now, and expects the overall pool at 1.5% by Q4. However, it holds a healthy contingent provision buffer ex-RSA of Rs4bn (1.2% of AUM) and pro forma PCR of 62%, including specific provisions.

* We expect the bank to report healthy pre-money RoE of 23%/19%/20% over FY21/FY22/FY23, which post-money without factoring in the benefits of capital raised, should stand at 22%/17%/18%. At the higher QIP band of Rs1,265, the stock is valued at 5.3x FY23 ABV pre-money and 4.9x FY23 ABV post-money. Currently, we have a Hold rating on the stock, given rich valuations. Asset-quality movement too remains a key monitorable given its relatively vulnerable portfolio.

Note: Separately, WTD and Executive Director, Mr. Uttam Tibrewal, intends to sell 1mn shares (0.33% of pre-money o/s of bank shares/19% of his own holding) out of his current holding of 5.4mn shares, representing a 1.76% stake in the bank, due to personal commitment, after QIP.

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