Add Equitas Small Finance Bank Ltd for the Target Rs 65 by Emkay Global Financial Services Ltd
Equitas SFB reported 2Q PAT of ~Rs2.2bn/ROA of 1.3%, around 12% above estimates driven by higher other income (~11% above estimates) and lower provisions (~30% below estimates). Loan growth remained strong at 28% yoy, led by MFI (+87% yoy) and non-MFI (+24% yoy), with FY27 guidance of >25%. Deposits grew 19% yoy, while $110mn of FCNR(B) mobilization took the total book to ~$138mn. NIM declined by 55bps qoq to 6.7% due to surplus liquidity and higher funding costs; Management expects excess liquidity to be largely deployed in 3QFY27, supporting NIM recovery to 6.87-6.89% by 4QFY27. While GNPA improved to 2.3%, slippages remained elevated at 5.1% of loans, and 1– 90 DPD increased qoq across MFI (1.5%), non-MFI (8.3%), and the overall portfolio (7.4%). Exposure to drought-affected regions in MH and KTK is limited to 2.9% of advances, while exposure to borrowers with 3+ lenders declined to Rs820mn. Management raised FY27 ROA guidance to ~1.35% from 1.2–1.25%. Meanwhile, MD & CEO P N Vasudevan’s resignation, citing personal and social initiatives, may help address the perceived conflict-of-interest overhang linked to his daughter’s co-promoter role at an NBFC; however, the succession remains an overhang, with Management expecting to identify a successor within a month. We expect the bank to deliver ROA of 1.2–1.4% over FY27–29E. We maintain ADD on the stock, while cutting our TP by ~13% to Rs65 from Rs75, valuing the bank at 0.9x Sep-28E ABV
Strong growth continues, with margins set to improve
Equitas reported strong growth, with AUM and gross advances rising 30% and 29% yoy, respectively, led by broad-based loan growth and 24% yoy in non-MFI loans. Management raised FY27 credit growth guidance to ~25% from ~20% and ROA guidance to ~1.35% from 1.20-1.25%. NIM declined by 55bps qoq to 6.69% in 2QFY27 due to excess liquidity and higher interest costs; deployment of surplus liquidity is expected to lift NIM by 18–20bps to ~6.87-6.89% by 4QFY27, despite a further 8–10bps rise in cost of funds in 3QFY27. Management targets ~7% NIM over the next 1–2 years.
Asset Quality mixed; elevated slippages and delinquencies a concern
Asset quality was mixed, with GNPA improving by 13bps qoq to 2.3%, while slippages remained elevated at 5.1% of loans. Early delinquencies rose across MFI (~1.5%), nonMFI (8.3%), and overall advances (7.4%), despite healthy collection efficiency of ~99.6%. Drought-affected regions account for 2.9% of advances, with no material collection stress, while exposure to MFI borrowers with 3+ lenders declined to Rs820mn, with 50% provisioning.
We maintain ADD on Equitas We expect the bank to deliver 1.2-1.4% ROA over FY27-29E, up from 0.2% in FY26E. We maintain ADD on the stock, while cutting our TP by ~13% to Rs65 from Rs75, valuing the bank at 0.9x Sep-28E ABV.
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