IGI Logo

Reorganises itself into 10 SBUs to ensure sustainability and scalability; insights into two

AU Small Finance Bank (AU) has always remained ahead in pre-empting future business trends and building capabilities to serve the evolving needs of customers. We derive this view from AU’s past initiatives such as: i) reducing exposure to MHCV segment during FY13-FY14; ii) strategic shift towards used vehicle financing in FY19-FY20 considering slowdown in new vehicle sales; iii) during 9MFY22, it calibrated growth in wheels segment as reflected in higher sourcing in customers with >700 CIBIL score at 56% vs 45% on AUM basis; and iv) focus on building a digital platform during FY20-FY21 given the current wave of digitisation. Recognising the massive structural growth opportunity across segments, AU has reorganised itself into 10 strategic business units (SBUs) to ensure sustainability and scalability. With this backdrop, AU hosted a second event to discuss key strategic priorities for two of the SBUs: i) wheels and ii) housing loans.

We believe the SBU structure will help AU have a differentiated approach in each of its businesses and customer journeys, and carve a niche for itself. Considering an adequate provision buffer of 2.8% of loans against stress pool of 5.7% (GNPL at 2.6% + standard restructured loans at 3.1%), focus on tapping upcoming growth opportunities (9MFY22 AUM growth at 11%) and healthy profitability (9MFY22 RoE at 16%), we upgrade the stock to BUY (earlier: Hold) with an unchanged target price of Rs1,370. It is currently trading at 4.2x / 3.6x FY23E / FY24E P/BV, respectively, and we value it at 4.2x FY24E BVPS.

* Wheels (~37% of AUM). AU’s core customer segment consists of self-employed individuals / small transport operators who are often underbanked or unbanked and mostly lack formal income documentation and credit track record. Its Wheels portfolio is well diversified across: i) geography: presence in 12 states and emerging states like MH, Goa, MP, GJ growing at 19-37% CAGR and budding states like PB, Delhi, CH, HP growing at 25-60% CAGR; ii) categories: PV 44%, CV 26% (~90% is SCV/LCV), commercial PV 17%, tractor 9%, and CE 4%; iii) OEMs: Maruti 31%, Mahindra 27%, Tata 8%, Hyundai 7% and rest spread across others. Further, focus on in-house (including dealer) sourcing at 79%, >80% of portfolio towards NTC and >700 CIBIL score customers, and strong collection mechanism, has helped AU maintain best-in-class asset quality across cycles.

* Home loans (~5% of AUM). AU re-entered the housing finance business in FY19, post divesting AU Housing Finance in FY16 (incorporated in FY12). It adopted a tried and tested approach of in-house sourcing (85%), limited non-housing exposure (only ~11%), focus on portfolio quality (NPA at 0.65%) while scaling up home loans in its SFB avatar.

To Read Complete Report & Disclaimer Click Here

To More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer