Motilal Oswal, a leading domestic brokerage firm, has recently upgraded its rating on Equitas Small Finance Bank to "buy" with a target price of ₹77 apiece. The brokerage highlights that the bank has been focusing on building a diversified loan book with small business loans (SBL), vehicle finance, MFI, and housing finance as the key focused segments.
According to Motilal, the SBL segment offers a great opportunity for the bank and is expected to continue at a healthy pace. Vehicle and MFI loans are also witnessing a gradual recovery, which will drive loan growth estimated at 26% CAGR over FY23–25E.
The bank has made progress in building a granular liability franchise, with total deposits growing at 45% CAGR over the past five years, led by CASA deposits growing at 55%, with the CASA mix improving to 46.2% as compared to 17.4% in FY17.
The term deposits grew at 38% CAGR over the past five years, while retail term deposits have also grown robustly at 54% YoY and constitute 66% of total term deposits.
Additionally, the bank has indicated that the majority of its bulk deposits are non-callable, providing further comfort. The bank has demonstrated resilience and was among the few to post healthy growth in CASA deposits in 3QFY23.
The bank indicated that it would refrain from raising its SA rate and will play the competition via TD rates, said the brokerage.
The bank's asset quality has also improved, with X bucket collection efficiency improving for MFI, SBL loans, and vehicle finance. The bank expects slippages to be moderate and has guided an improvement in its PCR to 60% by FY25, compared to 51% at current levels, it added.
Meanwhile, the approved amalgamation with holding company Equitas Holdings has resulted in the reduction of outstanding shares of the bank to 1.11 billion, which led to an increase in net worth of ₹3.25 billion and a 21% rise in its book value.
The brokerage believes that this will eliminate the overhang around the merger and shift the focus to the bank's fundamental performance.
On the fundamental side, the bank has been reporting a gradual improvement in operating performance over the past few quarters with steady AUM growth, led by healthy traction across segments, while moderation in credit costs has aided earnings.
During the October-December quarter of FY23, the bank posted its highest-ever quarterly net profit of ₹170 crore, a growth of 57% YoY and 46.55% QoQ. The bank recorded its highest-ever disbursement during the third quarter of FY23 at Rs. 4,797 crore, an increase of 68% YoY. The bank’s flagship product, SBL, clocked a YoY disbursement growth of 73%.
The gross non-performing assets of the bank during the quarter fell to 3.46%, a drop of 93 basis points from 4.39% in the third quarter of FY22, while the net NPA ratio came in at 1.73%, down 65 bps YoY.
The stock, which went public on November 02, 2020, is trading 93.3% higher than its issue price of Rs. 33.0 apiece. The stock touched a 52-week low of Rs. 37.4 apiece in June last year. As of Friday's closing price of Rs. 63.80, it has increased by 70.58% from its one-year low.
14 analysts polled by MintGenie on average have a 'strong buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.