Buy Equitas Small Finance Bank Ltd For Target Rs. 75 by Centrum Broking Ltd
Asset Quality Dragged by Concentrated State Exposure
Equitas (EQSFB) delivered a weaker-than-expected performance, largely due to the impact of revised provisioning norms (Rs145cr), an additional standard asset provision on the microfinance portfolio (Rs185cr), and elevated net slippages (Rs4.5bn vs. Rs2.95bn in 4QFY25). Consequently, PCR rose sharply across key segments – MFI (100% vs. 87%), SBL (39% vs. 26%), and HF (47% vs. 28%). FY26 has begun on a soft note, with MFI (9% of advances) and SBL (45% of advances) emerging as the main drags. That said, July’s moderation in slippages is encouraging, though sustainability remains to be seen. Past experience (March 2025) shows that one-month recoveries can fade quickly, warranting caution. On the positive side, the Bank has built substantial upfront provisioning buffers, which, while weighing on near-term earnings, could support profitability if asset quality holds. In terms of bright spots, the VF portfolio (25% of advances) has delivered strong growth and asset quality, with a strategic tilt toward used CV and PV at the expense of new CV. In microfinance, disbursements have cautiously resumed, balancing the longer-term objective of lowering the segment’s share in advances with the shorter-term focus on improving collections. At the current price of Rs56, the stock is trading below its mean minus one SD, reflecting the near-term headwinds already priced in. We roll forward to 1HFY28E and maintain our BUY rating with a revised target price of Rs75 (earlier Rs81), valuing the stock at 1.2x P/ABV (earlier 1.3x), representing a 20% discount to its historical mean multiple to reflect the softer performance amid a challenging environment.
Poor earnings amid higher credit cost
NII came in at Rs7.9bn (down 2%/5 YoY/QoQ) below our expectations of Rs8.4bn, while noninterest income jumped 40% YoY and 29% QoQ to Rs2.9bn, aided by higher treasury gains and PSLC income. Opex rose 14% YoY to Rs7.6bn, broadly in line with estimates, keeping the CTI ratio elevated at 70.8%. PPoP came in at Rs3.1bn, (down 7.5% / up 1% YoY/QoQ) vs. our expectations of Rs3.2bn.The bank booked credit costs of Rs6.1bn, including Rs3.3bn in onetime provisions—Rs1.85bn standard asset provision on MFI and Rs1.45bn incremental NPA provision leading to a net loss of Rs2.24bn versus a small profit expected.
Elevated Stress amid Geographic Concentration
EQSFB’s asset quality continues to be weighed down by high geographic concentration, with ~60% of advances from 2 states – TN (46%) and KTK (13%). Net slippages more than doubled YoY to Rs4.5bn (vs. Rs2.1bn), led by a ~3x surge in the MFI portfolio (Rs2.3bn vs. Rs0.78bn), indicating that the March recovery (4QFY25) was seasonal rather than structural. Non-MFI slippages also increased substantially. Write-offs spiked to Rs485cr from Rs137cr (+254% YoY), reflecting an aggressive clean-up in 1QFY26. While July data points to an early moderation in fresh stress accretion, the rise in GNPA stems from lower write-offs. A sustained decline in slippages will be key to confirming a true turnaround.
Outlook – Buffer in provision should aid lower credit cost going ahead
FY26 outlook is shaped by the one-time Q1 provisioning hit, which, while hurting near-term profitability, leaves the bank with a cleaner balance sheet. Asset quality should improve, with MFI stress normalizing by Q4FY26 and recovery already visible in July. Advances are seen growing 12–13%, led by 20% growth in secured loans and a pickup in MFI disbursements. Lower CoF and a fixed-rate loan book should aid NIMs. Management targets a 1% RoA exit in FY26, with further gains in FY27 aided by better asset quality and stable margins.
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