Three brokerages have given reduce/sell calls on AU Small Finance Bank even after the lender reporting an all-time high quarterly profit of ₹425 crore in the March quarter (Q4FY23), led by lower-than-expected credit costs.
The highest-ever quarterly profit also failed to cheer the Street as most experts believe the stock valuations are too high and that the risk-reward is better in other stocks. Since announcing its quarterly results on Tuesday (April 25, 2023), the stock has lost 3.5 percent.
Meanwhile, the lender's net profit for the full financial year 2022-23 rose 26 percent YoY to ₹1,428 crore.
Its asset quality also improved, with gross NPA at 1.66 percent in March 2023, compared to 1.98 percent in March 2022, and net NPA at 0.42 percent of net advances in March 2023, compared to 0.50 percent in the year-ago period.
HDFC Securities, in an earnings review note, has assigned a 'reduce' recommendation for the stock with a target price of ₹580, indicating a downside of 12 percent.
The brokerage noted that the bank continues to invest in franchise-building activities and new businesses, which are likely to drag medium-term profitability before we begin seeing operating leverage benefits accrue in FY25 (as per management guidance). The brokerage said that it will watch out for improvement in efficiency ratios and gradual reflation in margins (subject to a turn in the rate cycle). It has also tweaked its FY24E/FY25E estimates by -6 percent each, factoring in moderation in margins and higher opex.
Similarly, brokerage house Nuvama also has a ‘reduce’ call on the stock with a target price of ₹560, indicating a downside of 15 percent.
"We find valuations expensive for the bank’s medium-term RoA profile. In all, we find better value in other banks," it said.
The brokerage stated that AU reported in-line Q4FY23 results driven by NII growth of 5 percent QoQ, core fee growth of 17 percent QoQ and opex growth of 9 percent QoQ. However, despite strong deposit growth and premium deposit rates, the cost of funds rose only 30 bps QoQ, leading to a lower-than-expected NIM contraction of 10 bps QoQ, it added. Cost of funds also rose slower than expected due to high securitisation, higher current accounts and greater government-led bulk savings that were cheaper than retail savings, the brokerage pointed out.
Nuvama also highlighted that AU is expensive because its RoA is equal to/lower than peers including ICICI Bank, HDFC Bank and IndusInd Bank, which trade cheaper. While AU’s loan growth is higher, it has weaker deposit profile and higher opex yield an RoA that is equal to/lower than peers, it said.
Dalal & Broacha, meanwhile, has a ‘sell’ call on the stock with a target price of ₹569, indicating a downside of 14 percent.
"Valuations look expensive at 3.4x/2.9x FY24e/FY25e ABV. The profitability outlook looks slightly bleak given margin contraction and higher opex cost that will be incurred. In our view, there are other large-cap banks like HDFC Bank, and ICICI Bank are trading at cheaper valuations. We recommend switching from AU Small Finance Bank to HDFC Bank," it suggested.
