Down over 11 percent since August 2022, brokerage house Axis Securities has picked Equitas Small Finance Bank as its top pick of the week. This is on the back of buoyant business growth, improving cost ratios, healthy RoA (return on asset) delivery potential and reasonable valuations.
The brokerage has a ‘buy’ recommendation on the stock with a target price of ₹97, indicating an upside of over 11 percent from its current market price of ₹87, as of September 11.
Equitas SFB (EQSFB) is a leading diversified SFB that offers a wide-ranging suite of products, primarily catering to low and middle-income individuals as well as businesses that have limited or no access to formal banking and finance channels. The bank operates through a network of 927 branches, with a majority of the branches in Tamil Nadu (TN).
Stock Price Trend
The stock has jumped around 83 percent in the last 1 year and over 44 percent in 2023 YTD. However, it has lost around 7 percent in September so far, extending losses for the second straight month. It has shed over 11 percent together in August and September (so far). The stock has given positive returns in just 5 of the 9 months so far in this current calendar year.
It rose the most in May 2023, surging 25.3 percent, and has shed the most in September (so far) and January, down 7 percent each.
It is currently 14 percent away from its record high of ₹101.16, hit on July 27, 2023. Meanwhile, it has soared over 87 percent from its 52-week low of ₹46.50, hit on September 28, 2022.
The private sector lender reported a 97.1 percent jump in its net profit for the April-June 2023 quarter at ₹191.20 crore versus ₹97 crore during the corresponding quarter last year.
Meanwhile, its total income during the quarter under review grew almost 33 percent to ₹1,425.32 crore from ₹1,073.61 crore in the same period last year.
The Gross Non-Performing Assets (GNPA) improved by 135bps YoY to 2.60 percent in Q1FY24, while Net Non-Performing Assets (NNPA) improved by 95bps YoY to 1.12 percent. The bank strengthened its Provision Coverage Ratio (PCR) by making additional provisions of ₹13.99 crore during the quarter, improving PCR to 57.79 percent from 56.90 percent in Q4FY23 and 48.46 percent in Q1FY23.
Commenting on the bank's performance, Managing Director and CEO PN Vasudevan, said, "The bank has now consistently delivered to a 2 percent plus RoA and 15 percent RoE (Return on Equity) over the past three quarters back by a strong credit growth, continued traction in retail deposits and a favorable credit cycle in urban and rural geographies."
"We firmly believe over the past 7 years the bank has created a strong franchise which is stable, scalable and sustainable and now aspires to convert to a universal bank," he said.
Business growth expected to remain buoyant: In Q1FY24, Equitas SFB reported a robust and broad-based advances growth of 36 percent YoY and 6 percent QoQ. Furthermore, the management remains optimistic about the growth momentum sustaining throughout FY24. Continued growth in core segments of CVs (commercial vehicles), small business loans, and Affordable Housing Finance along with plans to roll out new products over the next 12-15 months (credit cards (CC), new car loans and personal loans (PL)) will keep credit growth buoyant over the medium term. The brokerage expects the lender to deliver a healthy credit growth of 28 percent CAGR over FY23-25E. This will be driven by large unmet demand in the core customer segment, healthy rural demand, and new products gaining scale.
Similarly, despite the stiff competition for deposits, the bank has been able to maintain healthy deposit growth, especially in TDs, thanks to its unwavering focus on building a retail-led deposit franchise, it added. It sees the lender registering a healthy deposit growth of 30 percent CAGR over FY23-25E.
Asset quality improvement to continue: The management expects better recoveries to drive asset quality improvement in FY24, as slippages are at normalised (pre-COVID) levels. The restructured book in Q1FY24 stood at 0.7 percent of advances and the bank holds a provision cover of 97 percent against this pool. With visibility on incremental stress formation being low, the management remains confident of containing credit costs at 1.25 percent in FY24E. As a prudent measure, the bank looks to strengthen the PCR to 70 percent over the next 2 years, stated Axis.
Eyeing to deliver 2 percent RoA: Given that 83 percent of the lender's portfolio is fixed rate and limited repricing opportunities available, the sharp increase in the cost of funds (CoF) puts its margins under pressure. Moreover, on account of the bank looking to build a retail-led deposit franchise along with older deposits getting re-priced, its CoF is expected to continue its upward trajectory and settle at 7.25 percent in FY24E, stated the brokerage. This will also keep the bank’s margins under pressure, it added.
Against this backdrop, margins are expected to stabilise at 8.5 percent vs. the earlier guidance of 9 percent in FY24E. As the lender looks to build a scalable and sustainable franchise, it continues to invest in rolling out new products, tech and brand building, keeping cost ratios elevated in the near term, said Axis. On a positive note, improving productivity would bring down the C-I Ratio to 55-60 percent on a steady-state basis over the medium term. Thus, the brokerage expects the bank to deliver a RoA of 1.9 percent vs. the management’s expectations of 2 percent.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.