Despite falling 5 percent just in September so far, and over 6 percent in 1 week, domestic brokerage house Axis Securities has chosen AU Small Finance Bank (AUSFB) as its top 'pick of the week'.
The brokerage has a BUY rating on the stock with a near-term target price of ₹705, implying an upside of 16 percent. Axis is bullish on the stock on the back of encouraging growth prospects, healthy asset quality, strong deposit franchise, and well-capitalized to fuel growth post the recent capital raise.
AU Small Finance Bank is retail focused small finance bank that transitioned from an NBFC in April 2017 and offers a diversified suite of products spread across Vehicle Finance, SME, Home Loans, Business Banking, etc. The bank primarily caters to low and middle-income individuals and businesses that have limited or no access to formal banking and finance channels. The bank operates its business through 953 touchpoints pan-India.
The stock lost over 5 percent in September after giving positive returns in the last 2 months. However, it has risen 15 percent in 2022 YTD and 8 percent in the last 1 year.
In the June quarter, AU Small Finance Bank’s net profit rose 32 percent year on year (YoY) to ₹268 crore on the back of an improvement in its net interest income. The Jaipur-based lender had posted a net profit of ₹203 crore during the same period last year (Q1FY22). Sequentially, its net profit fell by 23 percent from ₹346 crore in Q4FY22.
The lender's net interest income (NII) was up 35 percent in Q1FY23 to ₹976 crore from ₹924 crore in Q1FY22. Sequentially, the NII grew by four percent from ₹937 crore. However, its net interest margin (NIM) declined to 5.9 percent in Q1FY23 from 6.0 percent a year ago and 6.3 percent in Q4FY22.
The biggest boost to the bottom line has come from a massive improvement in the asset quality with gross steeply falling to 1.96 percent year-on-year from 4.31 percent and the net NPA plunging to 0.56 percent of net advances from 2.26 percent in the pandemic hit June 2021, its managing director & chief executive Sanjay Agarwal said.
Investment Rationale
Growth runway remains large: As per the brokerage, AUSFB reported a healthy advances growth of 37 percent YoY and 5 percent QoQ in Q1FY23 driven by a robust disbursement growth. The brokerage expects the growth momentum to continue with the bank delivering a strong advances growth of 25 percent CAGR over the medium term, driven by the Vehicle Finance, Home Loans, SBL, Credit Cards and Business Banking portfolio.
Asset Quality headwinds well managed: AUSFB has emerged successful in navigating COVID-related asset quality headwinds and has been able to maintain strong asset quality, said the brokerage. The restructured book has been exhibiting strong collection trends and slippages from the pool well below the anticipated levels, it added. Going forward, Axis expects asset quality to remain healthy thereby keeping credit costs muted.
Superior RoA/RoE profile: The brokerage stated that AUSFB is well placed to maintain its NIMs in an increasing interest rate environment and it expects NIMs to be maintained at 5.8 percent (+/-10bps) over FY23-25E. Though higher Opex owing to investments in building the franchise and towards technology will keep cost ratios elevated, it will help AUSFB build a strong platform for sustainable growth over the long term, opined the brokerage. Despite higher cost ratios, stable NIMs and benign credit costs are likely to help AUSFB deliver strong RoA/RoE of 1.6-1.9 percent/14-17 percent over FY23-25E, it estimated.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
