Buy Equitas Small Finance Bank; target of Rs 77: Motilal Oswal

Motilal Oswal's research report on Equitas Small Finance Bank

EQUITASB has been focusing on building a diversified loan book with small business loans (SBL), vehicle finance, MFI and housing finance being the key business segments. Loan growth has witnessed a gradual recovery at 27% vs 15% last year and we estimate 26% CAGR in loan book over FY23-25E. The bank has progressed well in building a granular liability franchise with total deposits up 45% CAGR over the past five years while CASA/retail term deposits grew 55%/54% CAGR. During 9MFY23 the bank has reported 23% growth in total deposits while CASA growth has also been healthy at 10% (CASA mix of 46%). The bank has demonstrated a strong improvement in asset quality with X bucket collection efficiency improving to Pre-Covid levels and GNPA/NNPA moderating to 3.6%/1.8% as on 3QFY23. The bank expects slippages to moderate and has guided to improve its PCR to 60% by FY25 vs ~51% at present. We thus estimate credit cost to moderate to 1.3% by FY25 vs management guidance of 1%. The reverse merger with the hold co has driven ~21% increase in BV. We believe the merger would also solely shift the focus on the fundamental performance of the bank. We thus transition our coverage from Equitas Holding to Equitas Small Finance Bank.

Outlook

We estimate EQUITASB to deliver FY25E RoA/RoE of 2.2%/16.9% and value it at INR77 (1.4x Sep’24E ABV). We thus transition our coverage with Buy rating.