Bandhan Bank share price gained 4.7 percent on March 16, extending rally for second consecutive session after Japanese brokerage firm Nomura upgraded the stock to “buy” from “neutral” following favourable risk/reward ration.
The stock closed at Rs 294.50 on the BSE after gaining 6 percent in the previous session.
The research firm also increased its price target on the stock to Rs 375 (2.5x FY24 book) from Rs 330, implying a 33 percent upside from the close of March 15.
The stock fell 22 percent between February 15 and March 7 following a sharp market correction due to Russia's invasion of Ukraine and a spike in commodity prices.
"Recent corrections have turned risk/reward favourable for Bandhan, and we see multiple reasons to turn positive," Nomura said in a March 15 report.
The brokerage listed four reasons for the positive mood. "1) Microfinance is at a cusp of a cyclical recovery, with stress books peaking and credit cost drags behind; 2) sharp recovery in growth-disbursement 40 percent above pre-COVID; 3) near normalising collection trends (97-98 percent ex-NPAs and arrears) and 4) reduced competitive intensity," it said.
Micro factors at play
Despite a weakening macro environment, Nomura said micro factors remain intact for microfinance institutions (MFIs) and sees upside risks to earnings estimates (around 10 percent ahead on consensus PAT for FY23/24).
Stress book remains elevated at around 30 percent but the brokerage said it didn’t expect any material provision requirement.
"With asset quality drags declining and growth recovering sharply, we think both PPOP and EPS recovery will surprise positively; we build in a 37 percent earnings per share (EPS) CAGR over FY21-24 with return on equities (ROEs) normalizing to 25-26 percent over FY23 & FY24,"it said.
Nomura found risk/reward turning favourable for Bandhan with valuation at 1.8x FY24 book.
Re-rating on cards
After the recent upgrade, the brokerage said it does not rule out further re-rating to 3x book if positive surprise on recovery is stronger-than-expected, where its bull case fair value comes to Rs 450, implying 60 percent potential upside from March 15 close.
Its “neutral” view on Bandhan Bank after Q3FY22 was largely due to valuations still more than 2x book providing lower upside given the elevated stress pool.
In the quarter ended December 2021, the Kolkata-based private sector lender had reported a profit of Rs 859 crore driven by a significant fall in provisions and higher other income against a loss of Rs 3,008 crore in the previous quarter and a profit of Rs 633 crore in the year-ago period.
Provisions declined 86 percent to Rs 806 crore in Q3FY22 on a sequential basis and the year-on-year decline was 25 percent.
"We have seen all round recovery during the quarter with improved collection and increase in disbursement," said Chandra Shekhar Ghosh, Managing Director and CEO in January 2021.
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