Buy Equitas Small Finance Bank; target of Rs 75: Emkay Global Financial

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26 Aug, 2025 12:21

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Emkay Global Financial's report on Equitas Small Finance Bank

Equitas reported an in-line PAT of Rs1.2bn in Q4FY22, aided by healthy NIMs and lower opex as the bank reversed one-time excess employee provisions. Despite higher slippages, partly flowing from the restructured pool, the GNPA ratio was down 37bps qoq to 4.2% due to higher recoveries/w-offs. Specific PCR remains uncomfortably low at 43%, and the bank now intends to increase it to 60% gradually. Credit growth improved to 15% yoy/6% qoq but remained sub-par vs. peers as the bank remained relatively risk-averse given higher stress during Covid. With asset quality normalizing gradually, the bank plans to accelerate growth by focusing on secured credit. The bank believes that it should be able to contain margin pressure as it has a strong CASA profile, which should keep cost in check. The board has been rejigged with the elevation of Murali Vaidyanathan (head Liabilities & instrumental in CASA ramp-up) and Rohit Phadke (current head retail assets/ex-Chola) as Executive Directors. In other KMP changes, the designation of Narayanan Easwaran has been changed from CTO to CIO, and Vivek Dhavale from Dy CTO to CTO.

Outlook

Equitas did well on the liability front while gradually diversifying its asset base away from MFI. However, it needs to focus on portfolio quality and build counter-cyclical buffers. We expect the bank’s RoA/RoE to improve to 1.7%-2%/11-16% over FY23-25E from a low of 1.1%/7% in FY21, mainly led by better growth, operating leverage and lower LLP. Retain Buy with a TP of Rs75 based on 1.8x FY24E ABV (vs. Rs80 based on 2x Dec’23E ABV) due to high CoE and effectively lowering the TP of holdco to Rs164 from Rs175.

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