This Small Cap Finance Stock Has 22% Upside In 12 Months, Buy Says ICICI Securities

The brokerage’s take on Fino Payments Bank

ICICI Securities has said in its research report that "Fino has built a unique business model with a perfect blend of physical and digital infrastructure. Unlike the conventional way of branch-led-business sourcing, it has strategically built a network via merchants - these merchants provide Fino's banking products and services to the end customers. It has developed an in-house app called "Fino Mitra" which facilitate & process banking transactions for customers at merchant point. Digital savvy customers can directly avail banking services from FinoPay, a digital solution that utilises the Unified Payments Interface ("UPI") for secure and fast personal banking and merchant payments, among other functions, and targets retail customers."

According to the brokerage "Fino's growth journey, as a payments bank, has been characterised by timely launch of new products, and scaling those aggressively to become one of the top 5 players in most categories. Total throughput CAGR of 70%+ and revenue CAGR of 45%+ between FY18-21 has been driven by the launch of MATM (currently enjoys ~51% market share) & AEPS in FY18, CMS (~110 partners) in FY19, subscription-based CASA products in FY20 (2.5mn+ CASA accounts) and gold loan distribution in FY21. Fino enjoys strong cost flexibility with ~70% variable cost, given it incurs minimal capital expenditure costs in connection with merchant on-boarding because setup capital expenditure costs are borne by the merchant. Further, it purely acts as loan distributor, and hence, we believe does not hold any credit risk."

Buy Fino Payments Bank Says ICICI Securities

According to the research report of the brokerage "Fino is likely to deliver 20% revenue CAGR over FY21-24E with PAT margin of 10% and RoE of ~20%. When we look at entities having similar financial outlooks, we observe these companies command a P/E ratio of 30-50x. Given, Fino's limited history of profitability and scale, we are assigning 32x (lower end of P/E band) and arrive at a TP of Rs475/share based on FY24E. While we assign P/E at the lower band, the market may tend to value higher considering - a) successful execution of strategies since inception as reflected in its diversified revenue stream & turning profitable within 12 quarters, b) likely revenue CAGR in excess of 20% if new products scale up faster than expectations, c) margin surprise driven by greater merchant stickiness (hence scope for commission rationalisation) and d) increase in MATM per transaction interchange fees by a regulator which is currently capped at Rs15 per transaction; regulator has recently hiked ATM interchange fees by Rs1-2 per transaction from Rs15."

ICICI Securities has also claimed that "Fino is uniquely positioned to capture growing opportunities in rural India, led by deep-rural products like MATM (~51% market share as on Aug'21) & AEPS, tailor-made CASA accounts for under-served population, and payment app called "FinoPay" targeting rural population. Further on the B2B2C side, it offers CMS service (110 partners) and distribution of gold/business loans. Diversified revenue stream, merchant-led asset-light distribution model and deep rural network with operational presence in over 90% districts are key features of its unique business model and also the primary reason behind Fino turning profitable within 12 quarters. Notably, unlike other players, Fino is rapidly building an organic customer base (~3.4mn) and merchant base (~0.8mn) without burning cash; annualised PAT margin stands at 4% with total annualised throughput of ~Rs1.7trn as on Sep'21."

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.