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Return of growth and contained slippages from restructured pool key for profitability uptick

Our view

While earnings came in ahead of expectations, we construed Equitas SFB’s Q3 FY22 performance as a tad disappointing due to a) microfinance led growth (portfolio grew 8% qoq and share in AUM increased to 24%), b) disbursements being down 22% qoq in Secured Business Loans (flagship product), c) significant flows into overdue and NPL buckets (adjusted for write‐offs), and d) reduction of PCR and absence of additional/contingency provisions underpinning lower credit cost. Outstanding restructured loans were at Rs17.6bn (9% of advances), on which bank holds Rs2bn provisions. With collections, not being that encouraging on restructured portfolio in Q3 FY22, it had a PAR 30 of 37% as of December. The sole positive in the quarter was significant improvement in NIM (pre‐pandemic level), aided by lower interest reversals and decline in CoF (sustained granular CASA growth).

Though there was not much impact of the current omicron wave, bank’s January disbursements have been significantly lower than December due to Pongal holidays. Notwithstanding this, bank expects to execute higher business than Q3 FY22 in the current quarter. Management sees advances growth returning to pre‐pandemic level from FY23; key drivers being demand coming back strongly in SBL, improving vehicle utilization driving new/use vehicle demand, and sustained robust traction in affordable home loans. Bank expects to hold CASA share in deposits around the current 50% mark, and thus is confident about maintaining NIMs. While guidance is of credit cost normalization from here, we see risks to the trajectory from further flow forward in restructured pool, not‐so‐comfortable PCR and absence of any contingency buffer.

Our EPS/BV estimates change on tweaking of growth and credit cost assumptions and due to factoring of capital raise (via QIP  ‐  size likely Rs5.5‐6bn) to meet SEBI’s minimum public shareholding criteria. Post the capital raise in Feb, the Bank is hopeful about completing the reverse merger process by December. Valuation is attractive at 1.3x FY24 P/ABV for a likely return of growth and delivery of 2%+/15%+ RoA/RoE in FY24. Maintain BUY with 12m PT of Rs77.     

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