scorecardresearchEquitas Small Finance Bank surges 115% in one year; is there more upside

Equitas Small Finance Bank surges 115% in one year; is there more upside left?

Updated: 27 Jun 2023, 11:56 AM IST

Equitas Small Finance Bank is engaged in the retail banking business with a focus on microfinance, commercial vehicle finance, home finance, loan against-property finance, corporate finance, and providing financing solutions for individuals and micro- and small enterprises (MSEs).

The stock, which went public on November 02, 2020, is trading 160% higher than its issue price of Rs. 33.0 apiece.

The stock, which went public on November 02, 2020, is trading 160% higher than its issue price of Rs. 33.0 apiece.

Shares of Equitas Small Finance Bank, one of the largest small finance banks in India, rewarded their shareholders with a return of 115% in the last one-year. During this period, the shares have grown from 39.45 apiece to 84.80.

According to projections from analysts at Motilal Oswal, the stock still has ample room to appreciate further. In their latest research note, the brokerage firm has continued its 'buy' rating on the stock and revised its target price upward to 105 apiece. Notably, this target price represents a new record high for the stock and indicates a potential upside of 25% from its last trading price.

The brokerage noted that the bank has been consistently reporting a gradual improvement in its operating performance over the past few quarters and has made significant progress in reducing the concentration of MFI loans, resulting in a more balanced loan portfolio.

Stock price chart of Equitas Small Finance Bank.

“The bank expects MFI loans to contribute approximately 15-20% of total assets under management (AUM) while foreseeing an increase in the share of vehicle loans. Additionally, the bank intends to grow the unsecured personal loan and credit card segments with a focus on the prime segment while maintaining overall stability in the loan portfolio,” said the brokerage.

The bank has also progressed well in building a granular liability franchise, reporting a 30% CAGR in total deposits over the past four years, led by CASA deposits (47% CAGR). During the same period, the CASA mix improved from 25% to 42%, while the mix of retail term deposits also improved to 61% in FY23 from 31% in FY18, the brokerage noted.

However, the brokerage anticipates the CASA mix to decline to 37% in FY24 on the back of a sharp rise in interest rates and a widening differential between SA and term deposit rates.

Regarding NIMs, the bank reported a healthy net interest margin of 9.0% in FY23. Motilal noted that in all four quarters of FY23, margins remained broadly stable at 9–9.1%, aided by a controlled cost of funds at 6.4% in FY23 vs. 6.6% in FY22.

Furthermore, the brokerage highlights the bank's strong improvements in asset quality. It said the bank has witnessed a notable enhancement in collection efficiency, with the X bucket collection efficiency reaching 99.6% for MFI, 99.6% for Small Business Loans (SBLs), and 99% for vehicle finance.

As a result, the bank has experienced moderated slippages, along with robust recoveries and upgrades, leading to improved asset quality ratios. As of FY23, the bank's gross non-performing assets (GNPA) and net non-performing assets (NNPA) stood at 2.8% and 1.2%, respectively, it added. 

The bank expects the incremental ECL provision to be negligible; however, the guidelines are still to be finalized. Thus, the brokerage estimated the GNPA ratio to decline to 1.8% by FY25E from 2.8% currently, while it said the credit cost is likely to remain in the range of 1.2-1.3% vs. 1.4% in FY23.

Meanwhile, the RBI's approval for a fresh three-year term for Vasudevan P N - CEO - Equitas Small Finance Bank, is awaited, the overhang of management succession has gone, and the focus will now shift back to the fundamental performance of the bank, the brokerage highlighted. 

18 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.


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First Published: 27 Jun 2023, 11:56 AM IST