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Investing for future; strategically expanding footprints

At a time when AU Small Finance Bank’s most peers are either grappling with lower collections or sounding cautious in growing balance sheet, it remains committed in utilising its strong operational performance to invest for future. Addition of ~186 banking touch-points and ~2,000 headcounts since March’20 during the most challenging times reflect AU’s unwavering focus on strengthening asset franchise. It delivered robust ~42% AUM CAGR between FY18-20 - highest within listed SFB space and added infrastructure would ensure sustainability of high growth over near term. Taking cognisance of improving collection (pre-covid level in Dec’20) and clarity on asset quality, it kick started pursuing growth Q3FY21 onwards – disbursed Rs65bn, up 41% YoY and highest ever. With improving visibility on growth, capital infusion of Rs6.25bn and likely credit cost normalisation in FY22e (~40% coverage on proforma GNPL), we adjust our target multiple to ~5x FY23e (still ~35% lower than historical peak) and revise TP upwards to Rs1,320 (earlier Rs994). Maintain ADD.

* Strong asset franchise should help in reviving growth faster than peers. AU’s market share in vehicle financing at ~1% in new vehicle & ~6% in used vehicle vs <1% market share in total credit speaks for its competitive edge in financing selfemployed small-ticket loans diversified across sub-segments of vehicle financing. Notably, access to public deposit, post converting into SFB, helped it improve its cost of funds. The same has strengthened its position at dealers point and will help it corner self-employed customers from NBFCs. Competitive edge over NBFCs coupled with diversified product mix, niche in self-employed small-ticket financing and adequate tier-1 @ 20% (adjusted for Aavas stake sale in Dec’20) will ensure AU getting back to normalcy quicker than peers. Key risk – a) moderation in credit growth and b) stress unfolding higer than anticipated.

* Not shying away from investment. What we like the most about AU is its strategy to continue to leverage its strong asset franchise – taking cognisance of cost of fund advantage over NBFCs and improving collections, strengthening its distribution reach and beefing up manpower. It added ~186 banking touch-points and ~2,000 headcounts since March’20. Most banking touch-points have been opened at the existing locations to deepen its distribution reach and enter neighboring locations. Notably, AU clearly stands out when we look at spending trend of listed SFBs on business infrastructure since March’20 (refer chart 2).

* Improving liability franchise will further strengthen its market positioning. AU’s ability to think beyond traditional banking and build customer-friendly processes have helped it build strong retail liability franchise vs other SFBs. On the back of its improving liability franchise, its cost of fund continued to trend downwards, declining to 7.0% in Q3FY21 vs 7.5% in Q4FY20. Further, cost of incremental fund raised in Q3FY21 is significantly lower by ~110bps at 5.95%.

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