Buy Equitas Small Finance Bank; target of Rs 100: Motilal Oswal

Motilal Oswal's research report on Equitas Small Finance Bank

Equitas Small Finance Bank (EQUITASB) has demonstrated a strong business growth trajectory with a 26% CAGR in its loan book and 38% CAGR in deposits from FY22-FY24. This growth has improved the bank's CD ratio from 102% in FY22 to 86% currently, and increased the retail deposit mix to 69%. The ongoing stress in the MFI segment has impacted profitability, but MFI business exposure has reduced to ~17% from 19% in FY22. The bank’s ability to recover from credit cycles suggests potential asset quality improvement from 2HFY25 onwards. EQUITASB’s stock price, which peaked at INR115 in January 2024, has corrected by 29%. We believe sustained loan growth estimated at 23% CAGR and improvement in RoA to 1.7% by FY26E will enable improvement in stock performance, particularly as confidence in asset quality improves. We have adjusted our earnings estimates for EQUITASB by incorporating higher credit costs, which would result in an 11%/12% reduction for FY25/26E. Despite this, we project a strong earnings recovery in FY26, with RoA/RoE improving to 1.7%/14.7%.

Outlook

We, thus, find the stock’s current valuation attractive at 1.3x FY26 BV, a 51% discount to AUBANK. We maintain our BUY rating with a revised TP of INR100 (based on 1.6x FY26E ABV).

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