Buy AU Small Finance Bank; target of Rs 720: Motilal Oswal

Motilal Oswal's research report on AU Small Finance Bank

We attended AUBANK’s analyst meet, wherein the management provided the outlook of the merged entity as the bank aspires to increase the size of its balance sheet to ~INR2t over the next three years. The merger with Fincare SFB will enable AUBANK to achieve sustainable growth, while stronger return ratios for Fincare will boost profitability, particularly as operating leverage improves. After the merger, the bank is expected to expand into new geographical areas and product segments, with robust growth in high-yielding Wheels, MFI, Gold and SBL segments. Moreover, since Fincare is a rural-focused SFB with 85% of its advances qualifying under the priority sector, the merger will enable AUBANK to not only meet its PSL target but also generate PSLC income in the long run. We believe that the bank’s execution capability will play an important role in maintaining robust growth and asset quality while delivering healthy RoA.

Outlook

We are optimistic about smooth execution, given the management’s execution prowess and track record over the past couple of decades. We reiterate BUY on the stock with a TP of INR720 (2.7x FY26E BV).