Add Fedbank Financial Services Ltd For Target Rs.210 by InCred Equities
Slippage transitory; improving RoA
* 2QFY27 PAT at Rs1.3bn beat estimate by 16%. High-than-expected off-book AUM aided revenue growth along with lower-than-expected credit costs.
* Continued delinquency in gold loans due to the revised norms weighed on GS2/GS-3, up 90/30bp QoQ. Despite this, credit costs well-contained at 60bp.
* We believe the rising focus on LAP with credit cost comfort augurs well for profitability to improve in the medium term. Retain ADD rating with Rs210 TP.
PAT beat on higher co-lending income; well-contained credit costs
Fedbank Financial Services (Fedfina) reported 2QFY27 PAT of Rs1.3bn (+63% YoY/ +14% QoQ), above estimate, boosted by higher-than-expected co-lending income. Spread improved by 10bp QoQ to 8.8% due to higher off-book transactions during the quarter at Rs49bn (down 13% QoQ), excluding which NIM was flat. Despite rising early default or macroeconomic risks, credit costs eased by 20bp QoQ to 60bp.
MSME lending picks up pace; range-bound gold price movement
Loan against property or LAP disbursements improved 13% YoY/27% QoQ led by mediumticket LAP (75% of LAP disbursements.) and improving small-ticket LAP disbursements. There is heightened comfort in small-ticket LAP as most of the asset quality stress is guided to be behind. AUM grew by 37% YoY & 4% QoQ to Rs220bn. Gold loan AUM growth (77% YoY/7% QoQ) was aided by slower repayments (-3% QoQ) as tonnage remained sluggish at 2% QoQ. Total disbursements stood at Rs68bn (+28% YoY and -1% QoQ), largely comprising gold loans at Rs58bn, 87% of total vs. 90% QoQ.
Technical delinquency weighs down on gold loans
Asset quality continued to depict signs of stress due to revised gold lending norms. Gross stage-2 (GS-2) assets inched up by 90bp QoQ to 3.6% on account of elevated slippage in gold loans. Management highlighted that slippage was transitory as gross stage-3 (GS-3) assets increased by 30bp QoQ to 1.8%. While we remain watchful over the rise in asset quality stress, the gold portfolio LTV remains comfortable at 68%
Outlook and valuation – maintain ADD rating with a TP of Rs210
We feel that Fedfina is shaping well, aided by its deepening share in gold loans, while scaling its MSME lending. We expect its return ratios to improve over FY28F-29F to ~16- 17% led by strong AUM growth, improving operating efficiency, and stable asset quality. Retain ADD rating on the stock with an unchanged target price of Rs210, valuing it at 2x FY28F BVPS and 14x FY28F EPS. Downside risk: Sharp fall in gold prices or a steep decline in NIM.
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