Buy Utkarsh Small Finance Bank; target of Rs 70: ICICI Securities

ICICI Securities research report on Utkarsh Small Finance Bank

We initiate on Utkarsh SFB (Utkarsh) with BUY and a TP of INR 70, valuing at 2x FY25E BVPS. We see Utkarsh’s deep presence in under-penetrated states, enhanced product offering, proven track record of managing asset quality better than peers (write-offs during covid at 12% vs. 15-20% at other MFI players) and its rapidly evolving liability franchise (steady decline in cost of funds) ensuring sustainability of >18% RoE and >25% growth over FY24-26E. Utkarsh kickedoff its lending journey in the states of UP and Bihar – collectively, the region is perceived to be the toughest lending market in India. Hence, since inception, it has embarked on a calibrated growth journey emphasising on risk management and portfolio quality.

Outlook

We initiate coverage on Utkarsh with a BUY rating and a target price of INR 70, valuing it at 2.0x FY25E P/ABV. Our target multiple of 2.0x FY25E P/ABV is dictated by a) successful transition from NBFC to SFB model as compared to other SFB, and b) thoughtful strategy to build contingency provision to bring sustainability to P&L – we expect RoA trajectory of >2% in FY24-FY26E and >25% AuM growth over the same period.

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