Emkay Global Financial's report on AU Small Finance Bank
According to media reports, AU Small Finance Bank (AU SFB) plans to raise ~Rs6.15bnRs6.32bn (US$0.08bn-US$0.09bn) at an indicative price band of Rs1,230-Rs1,265 vs. CMP of Rs1,231 (SEBI floor price: Rs1,181 per equity share). The issue will open on March 9 and close on March 10 by 8.30 am IST (with an option to close earlier). Despite lumpy stake sale in Aavas Financiers, AU SFB’s Tier 1/CRAR ratio, ex-9M profit, dropped to 16.3%/18.8% in Q3 while including profits stood at 20%/23.5%, mainly due to a sharp rise in RWA. AU SFB’s CAR is based on credit risk as the bank still enjoys the leeway to not maintain capital on operational/market risk. After the capital raise, Tier-1 ratio will increase by 244bps/251bps (based on Q3FY21 RWA). Though the capital ratios remain well above the regulatory requirement of 7.5%/15% even including operational/market risk-weighted assets, we believe the capital raise is primarily to fund future growth and also a preparatory measure to apply for Universal Banking license once it completes 5 years of operations as SFB in April 2022.
We expect the bank to report healthy pre-money RoE of 23%/19%/20% over FY21/FY22/FY23, which post-money without factoring in the benefits of capital raised, should stand at 22%/17%/18%. At the higher QIP band of Rs1,265, the stock is valued at 5.3x FY23 ABV pre-money and 4.9x FY23 ABV post-money. Currently, we have a Hold rating on the stock, given rich valuations. Asset-quality movement too remains a key monitorable given its relatively vulnerable portfolio.
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