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Suryoday Small Finance Bank is among the leading SFBs in India in terms of net interest margins, return on assets, yields and deposit growth and had the lowest cost-to-income ratio among SFBs in India in Fiscal 2020. Company has over a decade experience in serving customers in the unbanked and underbanked segments in India and promoting financial inclusion. Over the years, it has diversified loan portfolio to include non-micro banking loans thereby reducing dependence on micro banking business.

Positives:

(a) Customer centric approach with a focus on financial inclusion (b) Diversified asset portfolio with a focus on retail operations (c) Fast evolving granular deposit franchise (d) Leveraging emerging technologies to enhance digital footprint (e) Strong credit processes and robust risk management framework (f) Track record of strong financial performance and cost-efficient operations. (g) Multiple distribution channels.

Investment concerns:

(a) The continuing impacts of COVID-19 are highly unpredictable and could be significant, and may have an adverse effect on the company’s business, operations and future financial performance. (b) Business is currently significantly dependent on advances to inclusive finance (JLG) customers and any adverse developments in the microfinance sector could adversely affect the business. (c) Banking business is vulnerable to interest rate risk, and any inability to manage interest rate risk could adversely affect the financials of the company.

Outlook & Valuation:

Suryoday SFB has posted strong growth in NII of 72.1% CAGR between FY18-20 though 9MFY2021 numbers were adversely impacted due to the Ciovid-19 pandemic. While reported GNPA and NNPA stood at 0.8% and 0.3% at the end of Q3FY21, proforma GNPA and NNPA stood at 9.3% and 5.4% respectively. However CAR of 41.1% at the end of 9MFY2021 provides comfort. At the higher end of the price band the stock would be trading at P/BV of 2.25x fully diluted post issue book value of `136 per share. While we believe that valuations are reasonable asset quality will be an issue in the near to medium term and hence have a NEUTRAL rating on the issue.

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