MOSL: EQUITAS HOLDINGS (Buy)-Reassessing risk in the portfolio-Doing the right things-near-term pain for long-term gain

​Equitas Holdings: Reassessing risk in the portfolio; Doing the right things; near-term pain for long-term gain

(EQUITAS IN, Mkt Cap USD0.9b, CMP INR169, TP INR220, 30% Upside, Buy)

• Identifying potential risks early on, Equitas Holdings (EQUITAS) is moderating exposure to the micro finance (MFI) segment. The company targets to reduce the share of MFI in overall loans to ~30% (from 50% in 9MFY17). It has also narrowed timeline for meeting this target to 2018 from 2020 earlier. Moderation in MFI book would impact near-term growth, in our view.
  
• The impact of moderated exposure to MFI would be partially offset by high growth in its existing secured products like micro LAP (akin to MSE) and vehicle finance (VF). Also, EQUITAS expects strong growth in its newly launched products like housing, business, gold and agri loans in FY18. We now expect ~20% AUM growth in FY18 (30% earlier), despite the expected decline of 15-20% in the MFI portfolio.
  
• Despite moderation in asset growth, the roll out of liability branches (412 planned by 1QFY18) remains intact. A strong branch/business correspondent (BC) reach and a large captive MFI customer base will enable EQUITAS to recalibrate the liability side, lowering CoF and increasing cross-sell and fee income.
  
• We expect near-term recalibration of the growth strategy to yield positive results over medium-to-long term. However, likely moderation in FY18 growth is leading us to cut earnings estimates by 10-15% for FY18/19. Diversified business mix, strong growth visibility, sound risk management practices and pristine governance are the key factors driving our positive view.