AU Small Finance Bank bags 'buy' tag from Goldman Sachs, sees 20% potential upside

So far this year, shares of AU SFB dropped over 12 percent

A day after AU Small Finance Bank submitted its application to the Reserve Bank of India to transition from a small finance bank to a universal bank, analysts at Goldman Sachs have initiated a 'buy' rating on the counter and set the target price at Rs 831 per share. The target price implies a potential upside of over 20 percent from current levels.

Goldman Sachs said that AU SFB was ready for its next innings and further drivers are in place for the stock's re-rating going ahead. "The stock's de-rating is largely done, sector lending EPS growth beckons," they stated.

So far this year, shares of AU SFB dropped over 12 percent, underperforming benchmark Nifty 50's 16 percent surge during the same period. Earlier this year, AU SFB had hit a 52-week high of Rs 813 apiece on January 8.

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Despite the slump, analysts believe that the valuations' de-rating is an opportunity to improve earnings dynamics. Goldman Sachs forecasts EPS growth of 27 percent CAGR over FY24-27 on an improved RoA profile.

"We see improving deposit market share to sustain on its multi-pronged strategy. Better asset quality control and operating efficiency gains is likely, including merger synergies. AU SFB is relatively better placed in this cycle," the brokerage firm pointed out.

AU SFB's application for a universal bank license is in-line with the RBI's mandate of applicants having a minimum net worth of Rs 1,000 crore, scheduled status, and a satisfactory track record of at least five years.

In the recently concluded June quarter, AU SFB reported a 30 percent year-on-year increase in net profit to Rs 502 crore, while net interest income rose 54 percent YoY to Rs 1,920 crore.

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