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Growth is back and stress well provided for ‐ Upgrade to ADD with 12 PT of Rs950 

AU SFB posted a strong growth and core PPOP performance, while the Covid stress manifestation was in‐line with expectations. On growth, the key positives were a robust 34% yoy growth in overall disbursements and 8‐9% qoq expansion in Wheels and SBL MSME portfolios. Management expects business activity to further pick‐up in Q4 FY21 and times to come. The core PPOP (ex. treasury, PSLC, stake sale and bad debts recovery) jumped 30% qoq (was higher 8% v/s our estimate) on solid AUM growth delivery, expansion in spread (benefits of improving liability franchise) and controlled cost growth despite sustained franchise investments.

The overall stress recognition, in the form of proforma slippages of Rs7.1bn (2.3% of AUM) and assessed restructuring of Rs4.7bn (1.5% of AUM), was well‐contained considering the product mix and targeted customer segments. The bank holds significant provisions on this Covid stress – 55% on proforma slippages and ~30% on expected restructuring incl. the contingency buffer. These provisions were augmented in Q3 by utilizing the Aavas stake sale gains. Management expects much lower slippages and normalized credit cost from Q4 FY21, encouraged by reversion of customer activation (full and part payments against billing) and collection efficiency (including collection of overdues) to pre‐Covid levels from December.

We expect 23‐25% AUM growth for AU SFB over FY21‐23 and a 2%+ RoA and 18%+ RoE delivery. Upgrade the stock to ADD from Reduce rating due to much better visibility on growth and credit cost post the Q3 results. Notably, the stock did underperform the market as envisaged when we tactically downgraded in Q1 FY21 result update (CMP was Rs792 then). We now anchor valuation to FY23 ABV which stands at 3.4x, palatable for a high‐quality franchise on RoE expansion path. We upgrade 12m target to Rs950.

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