IGI Logo

Moving coverage from hold co to bank; Estimate FY25E RoA at 2.2%

* EQUITASB has been focusing on building a diversified loan book with small business loans (SBL), vehicle finance, MFI and housing finance being the key business segments. Loan growth has witnessed a gradual recovery at 27% vs 15% last year and we estimate 26% CAGR in loan book over FY23-25E.

* The bank has progressed well in building a granular liability franchise with total deposits up 45% CAGR over the past five years while CASA/retail term deposits grew 55%/54% CAGR. During 9MFY23 the bank has reported 23% growth in total deposits while CASA growth has also been healthy at 10% (CASA mix of 46%).

* The bank has demonstrated a strong improvement in asset quality with X bucket collection efficiency improving to Pre-Covid levels and GNPA/NNPA moderating to 3.6%/1.8% as on 3QFY23. The bank expects slippages to moderate and has guided to improve its PCR to 60% by FY25 vs ~51% at present. We thus estimate credit cost to moderate to 1.3% by FY25 vs management guidance of 1%.

* The reverse merger with the hold co has driven ~21% increase in BV. We believe the merger would also solely shift the focus on the fundamental performance of the bank. We thus transition our coverage from Equitas Holding to Equitas Small Finance Bank.

* We estimate EQUITASB to deliver FY25E RoA/RoE of 2.2%/16.9% and value it at INR77 (1.4x Sep’24E ABV). We thus transition our coverage with Buy rating.

SBL remains a key focused segment; Estimate 26% loan CAGR over FY23-25E

EQUITASB has been focusing on building a diversified loan book with small business loans (SBL), vehicle finance, MFI and housing finance to be the key focused segments. Over the past five years, AUM has grown by a healthy ~26% CAGR led by SBL which grew at 33%. Vehicle finance grew by 23% YoY while MFI loans grew by 13% over the similar period. Housing finance grew at robust 59% albeit on a lower base. The bank believes that SBL segment offers huge opportunity which will continue to grow at a healthy pace while vehicle/MFI loans are witnessing a gradual recovery which will continue to drive the loan growth. We thus estimate loans to grow at 26% CAGR over FY23-25E.

Business mix well diversified; MFI mix to remain steady at ~15-20%

The bank has progressed well in reducing the concentration of MFI loans which moderated to 18.5% of AUM in 3QFY23 vs 53.6% in FY16. The mix of vehicle loans has remained broadly stale at ~25% while the mix of SBL loans has increased to 37% vs 18% over the similar period. The mix of housing loans too has increased and now constitutes ~10% of the AUM. Disbursements in the MFI and vehicle loans have started to witness a pick up and thus the bank expects business mix to remain broadly stable with MFI contributing ~15-20% of the AUM. We believe that the bank has been successful in building a diversified franchise which will enable it to report a healthy loan growth.

Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

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