Hold Equitas Small Finance Bank; target of Rs 69: Geojit Financial Services

Geojit Financial Services research report on Equitas Small Finance Bank

Equitas Small Finance Bank (ESFBL) is the second-largest SFB in India in terms of total advances as of FY24. ESFBL, located across 18 states and UTs, serves through 987 banking outlets. Net Advances grew muted (18%YoY), driven by a 28% YoY increase in the Small Business Loan, 53% YoY increase in used car vehicle finance and 23%YoY increase in housing finance segments. Deposit growth advanced by 29.2% YoY, with CASA accounts growing by 17% YoY. The CASA ratio stood at 30.6%, a sequential decrease of 68bps. The bank is shifting its focus towards increasing disbursements in small business loans, vehicle finance, and affordable housing segments. This shift is evident as the microfinance segment experienced a 33% YoY decline in disbursements. Net Interest Income grew by 7.9% YoY in Q2FY25, impacted by falling yields on disbursements and rising costs of funds. Additionally, NIM contracted by 28 bps sequentially to 7.69%. Management has noted rising stress in the microfinance sector due to borrower overleveraging and an increase in the number of lenders. Despite increasing its PCR to 67.7%, the company continues to face asset quality challenges and high operating expenses, which are impacting its margins. GNPA and NNPA have deteriorated to 2.95% and 0.97%, respectively, from 2.12% and 0.91% in Q2 FY24. Other income grew 10%YoY, driven by an increase in treasury income and asset fee income. But a significant increase in provisions led PAT to degrow 94% YoY to Rs.12.9cr.

Outlook

Given the ongoing stress in the microfinance segment, we are downgrading our rating from Accumulate to Hold with a target price of Rs. 69 based on 1.2x FY26E BVPS.