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MOSL: EQUITAS HOLDINGS (Buy)-Modest quarter-growth trajectory to moderate slightly

EQUITAS HOLDINGS: Modest quarter; growth trajectory to moderate slightly

(EQUITAS IN, Mkt Cap USD0.5b, CMP INR104, TP INR140, 35% Upside, Buy)

 

• Lower other income, higher provisions lead to PAT miss: EQUITAS reported PAT of INR619m (+75% YoY), missing our estimate by 15% due to lower other income and higher provisions. Other income declined 6% YoY to INR578m on account of lower fees, as the bank did not sell any PSLC certificates in the quarter.
• PPoP increased 65% YoY, led by 35% YoY growth in NII (INR3.4b; in-line). Lending spreads/NIM shrank ~20bp/25bp QoQ to 10.5%/8.6%, as the cost of funds increased 10bp QoQ. Total opex increased 15% YoY to INR2.8b, mainly led by higher staff expense (+21% YoY). Cost-income ratio, thus, remained elevated at 68.6% (+10bp QoQ). Cost-to-asset ratio declined ~55bp QoQ to 6.7%.
• Balance sheet de-risking continues: Total AUM grew 38%/4% YoY/QoQ to INR123.5b, with the share of MFI AUM at 25.3% v/s 27.2% in 1QFY19. On an absolute basis, MFI AUM was up 28% YoY to INR31.2b. Non-MFI AUM increased 42%/5% YoY/QoQ to INR92.3b, led by 52%/28% YoY growth in small business loans/vehicle finance. Vehicle finance portfolio now constitutes 24.6% of total AUM. Disbursements grew by a tepid 5.4% YoY, as rejection rates in certain geographies increased and the bank defocused on unsecured business loans.
• Deposit accretion remains healthy: Deposits increased 52%/8% YoY/QoQ to INR86.7b, led by 12% QoQ growth in TD. CASA deposits declined 2% QoQ to INR22.3b, resulting in a CASA ratio of 25.8% (v/s 28.3% in 4QFY19), as ~INR1.8b of CASA deposits moved to retail TD. This resulted in a 10bp QoQ increase in the cost of funds to 7.9%
• GNPA/NNPA increased 13%/12% QoQ to ~INR3.3b/INR1.8b. Fresh slippages stood at INR0.8b, driving ~25bp QoQ rise in the GNPA/NNPA ratios to 2.8%/1.7%. Management is running down the unsecured loan portfolio, and thus, guided for an uptick in the GNPA ratio in that segment. The bank made higher provisions, resulting in ~70bp QoQ improvement in PCR to 44.1%.
• Other highlights: (1) Capitalization levels stood strong at 21.5% (-95bp QoQ). (2) Deposits as % of total borrowings stand at a healthy 63.3%. (3) Listing update: Management is awaiting the SEBI's approval, which may take 5-6 months; it has also approached the RBI to seek an extension in the listing timeline.
• Valuation and view: EQUITAS is progressing well on its goal of balance sheet de-risking and reporting healthy growth in secured products. The recalibration in the growth strategy away from unsecured loans is likely to provide benefits over the medium-to-long term, but could exert pressure on near-term growth. We cut our PAT estimate by 8% for FY20/21 to factor in lower fee income and higher provisions. We reiterate our Buy rating on the stock with a target price of INR140, based on 1.7x Mar'21E ABV of INR85 per share. The listing of SFB and the ongoing approval process from the SEBI remain could pose near-term overhang, in our view.