Buy Equitas Small Finance Bank Ltd For Target Rs.90 - Emkay Global Financial Services
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Equitas SFB reported a strong PAT beat at Rs1.9bn (vs our estimate of Rs1.6bn), mainly on higher income from the ARC sale (Rs0.7bn) along with healthy margins (up 9bps QoQ), and partly offset by higher provisions on SRs (Rs0.4bn) as well as PCR build-up (Rs 0.9bn). Bank reported its highest-ever RoA at 2.3%, and guides for FY24 RoA of 2-2.25% led by healthy growth of 25-30% and contained credit costs at 1.2-1.25%. Nonetheless, we build-in slightly higher credit costs @1.5%, given the inherent business risk and further PCR build-up.
We upgrade earnings for FY24/25E by 15/9%, in view of the better growth/fee traction; we also introduce FY26 estimates. We expect Equitas to clock RoA/RoE of ~2%/14-17% over FY24-26E. We retain BUY, with revised TP of Rs90/sh (vs Rs72 earlier), valuing the stock at 1.5x FY25E ABV vs 1.5x Dec-24E ABV. Migration to a Universal Banking licence is likely to be a medium-term catalyst.
Strong credit growth, margin delivery
Equitas SFB posted strong credit growth at 35% YoY/12% QoQ, far exceeding its earlier guidance, led by traction in SBL, VF, MFI, and the corporate portfolio. Bank expects growth to be healthy at 25-30% for FY24, given the strong underlying demand as well as the bank turning pro-growth with the Covid-induced asset-quality disruption now largely behind. Deposits growth, too, remained strong at 34% YoY/9% QoQ, but CASA ratio slipped to 42%. However, the bank managed an uptick of 9bps QoQ in NIM to 9.1%. Bank expects NIM to remain healthy in FY24, albeit believes it should structurally moderate as the share of secured loans goes up. Bank has completed the reverse merger of its Holdco and now plans to apply for a universal banking licence; this could hasten the portfolio diversification and concurrently help it mobilize low-cost deposits.
Asset quality improves; PCR finally gets a boost
Gross slippages were lower at Rs1.9bn/3.9% of loans (vs 6% in Q3 and 7% in Q2). This, coupled with better recoveries/upgrades and sale of NPA to ARC, led to a sharp decline in GNPA ratio by 86bps QoQ to 2.8%. The restructured book too moderated, to Rs2.4bn/0.9% of loans from 3.1% in Q3; of this, Rs1.8bn is NPA and the bank carries healthy PCR of 88%. Bank has shored-up its long due PCR to 57% (vs 51% in Q3), as it has made additional provision of up to Rs0.9bn due to change in the provisioning policy; PCR should continue moving up over the next 3-4 quarters, amid looming ECL norms.
Outlook and Valuations
Post Founder cum MD & CEO’s (Mr Vasudevan) decision to stay back in the bank, the stock had seen a decent run-up. Also, the bank has completed the reverse merger of its holdco – a long-term overhang – and would now apply for a Universal Banking licence, which we believe will be positive for the bank and thus should be additional catalyst apart from steady improvement in return ratios. We retain BUY on the stock, with revised TP of Rs90/share (vs Rs72 previously), valuing the bank at 1.5x FY25E ABV vs 1.5x Dec24E ABV. Key risks: Higher-than-expected NPA formation, higher provisions in case of new ECL norms, elevated opex structure in the run-up to its migration to becoming a Universal Bank, and KMP attrition.
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