Buy Equitas Small Finance Bank; target of Rs 42: Emkay Global Financial

Emkay Global Financial's report on Equitas Small Finance Bank

Equitas SFB reported a higher PAT of Rs1bn, driven by lower opex and contained provisions. Covid-19 provisioning remains moderate at Rs1.7bn (1% of loans), but management believes that it is sufficient given better-than-expected collection efficiency. Overall loan growth improved to 23% yoy, while CASA surprised positively with ratio now at 25% vs. 20% in Q1. Overall collection efficiency comparable with peers stood at 87%, mainly dragged by VF. For MFI, it is reasonable at 91% in Oct’20. The bank expects 1.5% restructuring and LLP at 2%, including 1% BAU/ageing related. The recent IPO and resultant promoter stake reduction to 82% eased regulatory constraints on branch opening/CEO compensation, but the bank has to reduce it further to 40% by Sep’21, 30% by Sep’26 and to 26% by Sep’28, calling for continued dilution. The reverse merger of holdco and inorganic acquisition will be the options at disposal of the bank. We like Equitas for its healthy asset diversification, better management pedigree, reasonable liability profile, capital position and reasonable valuations.

Outlook

We assume coverage on Equitas SFB with a Buy rating (TP Rs42) and continue our coverage on holdco with a Buy rating and a revised TP of Rs86 (assuming a 25% holdco discount).

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