Buy Equitas Holdings; target of Rs 220: Edelweiss

Edelweiss' research report on Equitas Holdings

Equitas continued with it’s the strategy of pruning MFI proportion to <30% by FY18 (36% currently versus 51% a year ago). MFI NPAs rose further by INR300mn in absolute terms to 6.7% (higher optically due to run‐down in book)—no credit cost hit in this book due to adequate provisioning. PaR (more than 0‐day delinquency) stood at INR 1.76bn, of which INR 760mn are outstanding provisions. Due to excess provisioning, credit cost hit on the MFI book is likely to be curtailed in H2FY18.

Outlook

The ongoing transition phase is strenuous, but the company’s right strategy and adequate capital will rein‐in execution risks. Franchise investment, elevated cost and higher provisioning would lead to decline in earnings in FY18 but benefits will accrue FY19 onwards with significant funding cost advantages and lower cyclicality risk. At CMP, the stock trades at 2.0x FY19E P/ABV. We maintain ‘BUY/SO’ with TP of INR 220.