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Buy This Bank Stock With Upside Potential of 39%, Says Nirmal Bang

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Nirmal Bang brokerage is bullish on the stock of Equitas Small Finance Bank and has recommended a buy on the stock. Here are some reasons to buy the Equitas Small Finance Bank stock, says the brokerage firm.

 

Equitas Small Finance Bank Ltd. is a banking firm that was founded in 1993 having a market cap of Rs 7,802.92 Crore.

Equitas Bank: Well placed for long term opportunities

Equitas Bank: Well placed for long term opportunities

Equitas Bank has identified three important growth levers: (1) Small Business Loans, (2) Home Loans, and (3) Vehicle Finance. It has 8-10 years of experience in these categories and has established underwriting methods that provide it a significant advantage over other SFBs, which are primarily focused on MFI lending.

"The current valuation at 1.6x and 9.6x Sept'23 P/ABV and P/E is undemanding and does not factor in strong growth potential, improving liability franchise and possible transition to a universal bank. We value Equitas Bank at 2.25x Sept'23 P/ABV to arrive at our Target Price of Rs89. Key risks are events that could affect borrowers' cashflows," the brokerage has said.

Nirmal bang has issued a buy call on Equitas Small Finance Bank with a target price of Rs 89, with an upside potential of 39%.

Collection efficiency improves; asset quality to follow
 

Collection efficiency improves; asset quality to follow

Equitas Bank's collection efficiency (CE) increased to 105 percent in July of this year, up from 78 percent in May, when covid-induced constraints were eased. It's worth mentioning that when the initial covid wave hit, all of the bank's customers chose to put their accounts on hold. Following that, the bank's CE increased to 105 percent in December 20 and 109 percent in March 21. In fact, until April 21, Equitas Bank's CE was trending in line with AU SFB (similar rival), with Equitas Bank's performance dropping only in May 21. With the increase in economic activity, we believe the worst is likely past in terms of asset quality, and we factor in credit costs of 2% over FY22E-24E.

Key Investment Thesis

Key Investment Thesis

Scalable business model with a strong vintage:

Equitas Bank has identified three business lines as important growth levers: (1) Small Business Loans, (2) Home Loans, and (3) Vehicle Finance. It targets the bottom of the pyramid, where credit evaluation and underwriting are time-consuming, limiting bank competition.

Strong liability traction:

To source deposits, Equitas Bank focuses on the mass affluent group in metropolitan and semiurban areas. Through its own SELFE accounts (entirely digital acquisition) or fintech partnerships, it has bolstered its digital acquisition strategy. It offers industry-leading savings rates (7%) to attract deposits of more than Rs0.1 million, which has found traction, with CASA deposits climbing to Rs82 billion, a rise of 153 percent and 21% YoY/QoQ in the last year.

Asset quality to improve as covid restrictions have eased:

Equitas Bank's CE increased to 105 percent in July, up from 78 percent in May, as covid-induced restrictions were eased. From Rs4.3bn (2.4 percent of advances) in 4QFY21 to Rs13.3bn (7.4 percent of advances) in July'21, the restructured book climbed to Rs13.3bn (7.4 percent of advances).

Equitas Bank can clock 17%-18% RoE on a steady-state basis:

Because 90-95 percent of advances have a fixed rate of interest, interest yields are protected. However, when the bank's share of Micro Finance declines and it advances up the value chain in the client selection process, this may lessen slightly.

Valuation remains attractive for strong growth potential and healthy RoA:

Valuation remains attractive for strong growth potential and healthy RoA:

"Equitas Bank is currently trading at 1.6x and 9.6x Sept'23 P/ABV and P/E, respectively. We have seen strong momentum in CASA mop-up while disbursements reached all-time high in 2QFY22 (business update filing) as business activities have normalized. Equitas Bank has a strong CAR at 24.1% with Tier 1 capital of 22.6%, which should support growth over the next three years without a capital raise. We estimate AUM/NII/PAT CAGR of 22%/19%/32% over FY21-24E with RoA and RoE reaching 2.3% and 17.8%, respectively by FY24E.

We initiate with a Buy and a TP of Rs89, valuing it at 2.25x Sept'23 P/ABV. Key Risks - Severe third covid wave or events that could affect borrowers' cash flows. Dilution overhang reduces as the RBI has permitted Equitas Bank to apply for amalgamation with its Holdco - Equitas Holdings Ltd. Also, the RBI's discussion paper on harmonizing banking guidelines no more requires promoters to reduce their stake to 40% within 5 years. The interim dilution targets of ~5-15 years are proposed to be removed. However, the same has not yet been implemented", the brokerage has said.

Disclaimer

Disclaimer

Investing in stocks poses a risk of financial losses. Investors must therefore exercise due caution. The above stock is from Nimal Bang brokerage. Greynium Information Technologies, the author, and the brokerage houses are not liable for any losses caused as a result of decisions based on the article. Investors should take care because the markets are near record highs.

Story first published: Tuesday, October 12, 2021, 18:21 [IST]
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