Buy AU Small Finance Bank; target of Rs 780: Motilal Oswal

Motilal Oswal's research report on AU Small Finance Bank

We attended AUBANK’s analyst meet wherein the management highlighted its rationale for merger with Fincare SFB and the outlook for the merged entity as bank aspires to reach a balance sheet of INR2t over next three years. The merger will improve the bank’s geographical diversification and improve AU’s branch presence across the country. New business verticals like MFI and Gold Loans will improve its lending yields and open new avenues for growth. Moreover, since Fincare is a rural-focused SFB with 85% of its advances qualifying under the priority sector (56% of MFI and 30% of overall book being SMF eligible), the merger will enable AUBANK to not only meet its PSL target, but also generate PSLC income in the long run.

Outlook

While its execution prowess to consummate the merger will be vital, we believe that the merger will enable AUBANK to further strengthen its position and deliver all-round growth. We reiterate BUY on the stock with a TP of INR780 (3.6x FY25E BV of standalone bank).

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