Post 30% bump, easy money has been made in Equitas: Antique

Chennai-based microfinance institution (MFI) Equitas Holdings today had a stellar listing on the bourses, with shares rising over 30 percent.

But Digant Haria, AVP - Equity Research, Antique Stock Broking, believes the easy money has been made in the stock following the gains and that going forward, only long-term investors should get into it.

"The company will make for a fine small finance bank. It has exposure to secured lending, has technology [but it may be in the price]," he said.Below is the verbatim transcript of Digant Haria's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: Will you advise people to buy Equitas at Rs 145?A: I think at Rs 145, the easy money is definitely off the table. Now, the upside from here depends a lot on how the management executes and we at Antique think that this company has a very good chance of becoming a fine, small finance bank because it has an exposure to secured lending, which most of the other microfinance companies do not have and it has very good state of art technology running through its branches and through its head office. So, the possibility is there. So at this point in time, only the guys who are long-term willing to wait for two-years when it transitions into a small bank, it does make sense for those guys but yes, for the shorter ones, the easy money is off.Sonia: The only risk is that it has very high concentration from two of these states Tamil Nadu and Maharashtra and we know the kind of competition there is. In Tamil Nadu there are 19 other MFIs, in Maharashtra there are almost 30 other MFIs, wouldn’t that be a concern to you?A: Looking at the state of Tamil Nadu, you can think of it both ways. It could either be a strength or it could be a concentration risk.So historically, if you look at a lot of these non-banking financial companies (NBFCs) specially the Sriram and the Sundaram Group, even today for Sundaram group 42 percent of their business comes out of the state of Tamil Nadu. It has been 52 years of operations probably the most profitable NBFC. So Tamil Nadu, as a state, has a lot of good characteristics for lending. So it is a state where the credit culture is good, where the per capita income in terms of the households is quite high. So I would not like to think that being in Tamil Nadu is a huge risk.Everybody points to the Andhra Pradesh crisis, which happened in 2010 and thinks that if something like that was to happen in Tamil Nadu, a company like Equitas would face big problems. You have to understand that the regulatory structure in India has changed for good. There is Reserve Bank of India (RBI) intervention at every particular state. So you may think that last two-three years, microfinance had no crisis but there were few districts where crisis had happened but because of the timely intervention by RBI and the strong regulatory framework, these crisis did not spread and become a state level contagion.Sonia: You did mention that most of the easy money perhaps is made but for somebody who still believes in the microfinance story and the growth, if one wants to buy now, what kind of an upside do you foresee in the stock over the next six-twelve months?A: The next six-twelve months are the transitionary ones for the stock. So it will prepare for the bank, it will prepare in branches, it will invest in technology. So on the numbers front, you may not see real fireworks, for example SKS could report 100 percent profit growth. For Equitas, the numbers would not be so strong for the initial one-two years but they stand a very good chance at becoming a small bank because they have already been ahead in using the cross sale to grow, they have these SME portfolio, the commercial vehicle portfolio where they have been doing quite well. So the stock should -- we think that 2.5 times at Rs 160-165 is where the fair value of the stock is. So for someone who is looking at a 12 months outlook, that is where they can place their finger and stay invested.Latha: Do you think some of the shine will go away when Ujjivan comes? So do you think some of this money could migrate there or in spite of it you will hold on to Equitas?A: The appetite for the entire sector is quite strong. The reason is Indian banks have traditionally shied away from lending to these underprivileged people. We have seen very strong growth in microfinance for the last three years and there have been some concerns that there is overleveraged but if you look at point-to-point in 2010, the microfinance book in India was Rs 42,000 crore. Today we are sitting in 2016, the microfinance book is Rs 53,000 crore. So it did go down to as low as Rs 19,000 crore in 2012 but if you look at it point to point, we are just up from Rs 42,000 crore to Rs 53,000 crore.So, the sector as a whole still has some steam left and it will be the good players, players who do not indulge into bad practices to grow, those are the ones which will do well and Equitas triggers out right at the top there.Talking about Ujjivan, it is a standalone microfinance company. It does not have a secured lending product just like a commercial vehicle finance or an SME. So for it to migrate into a bank, obviously, is a little more difficult compared to an Equitas. So, I would think that Equitas should be a better preferred one over the two but Ujjivan should also show good interest amongst investors because there is a lot of unmet demand for Equitas.Latha: Are you also tracking banks for Antique, what have you made of this rally, would you recommend buying any of the banks?A: I do not track banks, I just look at the NBFCs.