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Slippages from restructured pool drag earnings

Equitas SFB reported an operating profit of INR 2.7bn (+63% YoY,-6% QoQ, in-line with JMFe). However, higher provisions on account of slippages from the restructured pool lead to a lower than expected PAT of INR 1bn (+7x YoY,-19% QoQ). Asset quality metrics continued to improve with GNPL/NNPL/restructuring at 4.1%/2.2%/5.8% (-15bps/-32bps/-190bps QoQ) and PCR increased to 48.5% (+570bps QoQ). Slippages were elevated at 6.5% (annualised) on account of 22% of the restructured book slipping into NPA during the quarter, while slippages (ex-restructured pool) were at 2.7% (annualised) and appear to be normalising. Disbursements were strong despite 1Q being a seasonally weak quarter in general which resulted into an AUM growth of +22% YoY/+5% QoQ driven by SBL, new CV and Micro Finance segments. The liabilities franchise has been shaping up well with deposits growing by +20% YoY/+7% QoQ and CASA remains stable at 52%. We see Equitas achieving ROAs of 1.8%/2.2% by FY23E/FY24E aided by a) acceleration in loan growth, b) moderating credit costs and c) cost moderation driven by operating leverage. Maintain BUY with a TP of INR 65, valuing Equitas at 1.7x FY24E adj. BVPS.

* Asset quality improves; slippages (ex-restructured book) normalise: In 1Q23, GNPL/NNPL improved to 4.1%/2.2% (-15bps/-32bps QoQ). PCR increased to 48.5% (+570bps QoQ) and is in-line with management’s target achieve 60% PCR in the long run on the back of strengthened provisioning norms. Total restructured loans (RSL) stood at INR 11.9bn (5.8% of loans vs. 7.7% in 4Q22) of which INR 2.7bn (22% of restructured book) has slipped into NPA, which in turn resulted into elevated slippages for the quarter (6.5% annualised vs. 9.2% in 4Q22). While slippages excluding restructured book normalised to 2.7% (annualised). Management highlighted that they expect incremental stress to be limited which should aid in moderation of credit costs. We expect credit costs to moderate to 1.9%/1.5% by FY23E/FY24E

* Loan growth remains healthy; in-line operational performance: Overall AUM growth stood at +22% YoY/+5% QoQ on the back of strong disbursements and this is despite 1Q being a seasonally weak quarter in general. Micro finance, small business loans (incl. home loans) and vehicle finance book grew at +28%/+25%/+21% YoY. Deposits growth stood at +20% YoY/+7% QoQ with CASA at 52% (flat QoQ). Operating profit stood at INR 2.7bn (+63% YoY, -6% QoQ) driven by strong NII growth of +26% YoY/+5% QoQ while opex remains elevated growing by +11% YoY/+7% QoQ despite reversal of employee provisions to the tune of INR 310mn during the quarter.

* Valuation and view: We see Equitas achieving ROAs of 1.8%/2.2% by FY23E/FY24E aided by a) acceleration in loan growth, b) moderating credit costs and c) cost moderation driven by operating leverage. Maintain BUY with a TP of INR 65, valuing Equitas at 1.7x FY24E adj. BVPS

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