Buy AU Small Finance Bank; target of Rs 1050: Motilal Oswal

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Motilal Oswal's research report on AU Small Finance Bank

AUBANK reported strong earnings, led by an improvement in core operating performance and prudent utilization of AAVAS stake sale proceeds towards provisions on elevated slippages. n Disbursements picked up in retail, while healthy retail deposit traction enabled improvements in incremental cost of funds (30bp QoQ). n On the asset quality front, pro forma GNPA/NNPA ratio increased to ~3.3%/1.3% as slippages increased to INR7.1b (largely from Wheels and SME). However, adequate provisions (55%) towards elevated slippages and controlled restructuring gives us comfort on asset quality. Going forward, the management indicated normalization in slippage trends. We increase our FY22E/FY23E earnings estimate by 10%/8%, factoring in stronger growth and improvement in core operating performance. Maintain Buy

Outlook

We estimate AUBANK to deliver FY23E RoA/RoE of 2.2%/21.2%. We value the stock at INR1,050 per share (4.2x Sep’22E BV) and maintain Buy.

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