This Small Cap Banking Stock Likely To Jump 70%, Brokerage Suggests Buy For Target Price Of Rs 155

Stock Outlook & Returns

Suryoday Small Finance Bank's stock current market price is Rs 91.30 apiece, currently the stocks are trading Rs 14.25 apiece above the 52-week low level and Rs 133.35 apiece below the 52-week high level, respectively.

The 52-week low of the stock is Rs 77 apiece, while the 52 week high is Rs 224.60 apiece. TTM EPS is negative Rs 3.54. PB ratio is 0.61.

The stock in the last 1 week moved up by 0.38% and 2.27% in the past 1 month, respectively. Over the past 3 months, the shares have fallen 34.17% and 51.46% over the 1 year, respectively.

While disbursements grew modest 3% QoQ, they were still higher than precovid level >Rs10bn

Disbursements during Q1FY23 sustained momentum at >Rs10bn vs Rs9.8bn in Q4FY22 and management expects to clock Rs4-5bn monthly disbursements Q2FY23 onwards. Incremental disbursements would be mainly driven by new customer acquisition in MFI business. Further, it plans to increase the share of secured loans to 50-55% by FY25 from current level of 34%. Total AUM grew 1% QoQ and growth was mainly driven by FIG (up 22% QoQ), SBL (9% QoQ) and HL (5% QoQ). Microfinance loans (66% of total AUM) remained flat sequentially at Rs33.8bn and CV portfolio fell 2% QoQ.

Elevated credit cost marred earnings in Q1FY23

NII retraced to Rs1.8bn (up 21% QoQ) driven by lower interest reversals unlike Q4FY22 and the same resulted in >250bps QoQ improvement in asset yields to 19.1%. Reduction in cost of funds by 10bps QoQ and asset yield expansion led to 130bps QoQ margin expansion to 9.1% vs 7.8% in Q4FY22. While total operating expense fell 6% QoQ, non-staff cost grew 20% QoQ. Overall PPoP grew 64% QoQ to Rs0.79bn. However, higher provision at Rs693mn (credit cost of 5.4% annualised) resulted in earnings of Rs78mn. RoA stood at 40bps during Q1FY23.

Stress pool moderated but remains elevated at 16%

Suryoday's asset quality performance was weak. While GNPL and standard restructured book moderated to 10% / 6% vs 11.8% / 10% in Q4FY22, it remained elevated at 16%. NNPL stood at 5% vs 6% in Q4FY22. PCR remained flat at 53% QoQ. Total standard restructured book stood at Rs3bn, of which ~Rs0.5bn is in 1-90 DPD bucket (1% of AUM) and the rest is current book, as on June'22. Higher urban MFI exposure (67% of total AUM) and ~34% AUM in Maharashtra (worst impacted state during covid) are primary reasons for high PAR portfolio. Its collection efficiency (one EMI adjusted) marginally improved to 89% during Q1FY23 vs 87% in Q4FY22 vs 84% in Dec'21 but still significantly lower than the industry average of ~95%+.

Lower coverage and visible vulnerability in restructured portfolio pose risk of higher credit cost in near term

The brokerage said, "We expect credit cost to remain elevated in near term given low PCR at 53%, likely higher write-offs and provision towards restructured book. A) Lower PCR on existing GNPL at ~<53% (we believe LGDs will be much higher) and B) elevated PAR 0 portfolio at 13% as on June'22 would keep credit cost elevated in near term."

According to the brokerage firm, the key risks are a) Stress unfolding higher than expected and b) deceleration in AUM growth in coming quarters.

Credit cost remains elevated, trend likely to reverse in H2FY23E, Buy for Target Price Rs 155

Suryoday SFB's Q1FY23 financial performance is a continuation of its earlier articulated strategy of cleaning covid-related stress during H1FY23 and by H2FY23 achieve business normalcy. While credit cost remained elevated at 5.4% (annualised), the same was lowest in the last 5 quarters. Business seasonality and process migration, as per revised MFI regulation, resulted in 4% QoQ decline in microfinance disbursements, while gross disbursements grew (muted) 3% QoQ. Overall AUM grew 1% QoQ to Rs51.3bn as on June'22. Total stress (GNPL + standard restructured book) declined to 16% in Q1FY23 from 22.2% in Q4FY22. Total write-offs stood at Rs1.3bn during Q1FY23 and cumulative at Rs3.4bn during FY21-22.

Near-term asset quality concerns persist, given the elevated stress pool at 16%, but revival in AUM growth in FY23E with adequate capital at 36% and gradual moderation in credit cost in H2FY23E will help Suryoday Small Finance Bank revive RoA of >1% by FY23E. "We believe current valuation (0.5x FY24E PBV) captures most negatives, hence, maintain BUY with an unchanged Target Price of Rs155, valuing the stock at 1x (vs 1.25x earlier) on Sep-23E BVPS," the brokerage said.