MOSL: Equitas Holdings (Buy)-Strong signs of profitability pick-up driven by lower opex and credit costs

Equitas Holdings: Strong signs of profitability pick-up driven by lower opex and credit costs

(EQUITAS IN, Mkt Cap USD0.8b, CMP INR155, TP INR185, 20% Upside, Buy)

• Operating expenses have started stabilizing: Equitas (EQUITAS) reported PPoP growth of 62%/42% QoQ/YoY (INR675m, off a low base), driven by strong cost control (cost-to-income ratio declined to a multi-quarter low of 77%). Total income increased 6.5%/20.3% QoQ/YoY (NII growth of 12% YoY, other income growth of 111% YoY, driven by higher share of liability fees). Provisions were controlled at INR139m, leading to PAT of INR348m.
• Balance sheet de-risking continues: In keeping with the goal of reducing the microfinance share of AUMs, microfinance AUMs decreased to 28% of total v/s 32% in 3QFY18 – MF AUMs declined 7.4%/30.5% QoQ/YoY to INR22.9b, while total non-MF AUM grew by a robust 13%/53% QoQ/YoY, led by 9%/73% QoQ/YoY growth in LAP. Unsecured AUMs decreased to 33% from 47% in FY17, with robust growth in secured lending products such as UCV (+4%/+17% QoQ/YoY) and LAP.
• Asset quality improved driven by MFI write-offs: Total GNPA declined 40% QoQ to INR2.1b, as the bank wrote-off INR1.42b of impaired MFI loans, leading to a decline in PCR to 47% (51% in 3Q), with GNPA/NNPA ratios at 2.72%/1.7% (NNPA at 1.44% incl. floating provisions of INR190m). GNPA in microfinance declined to 0.78% and asset quality improved across all segments (vehicle finance recorded highest GNPAs at 4.9%).
• Other highlights: (1) Deposits grew 28% QoQ, helped by strong CASA growth of 35.5% QoQ; CASA ratio at 34.6% (+200bp QoQ). (2) Capitalization remained strong, with a 27% Tier 1 ratio and a 29.6% CAR.