MOSL: EQUITAS HOLDINGS (Buy)-Operating performance improves-balance sheet de-risking continues

Equitas Holdings: Operating performance improves; balance sheet de-risking continues

(EQUITAS IN, Mkt Cap USD0.5b, CMP INR108, TP INR160, 49% Upside, Buy)

• Operating expenses stabilizing: Equitas reported PPoP growth of 142%/42% YoY/QoQ to INR1.1b (higher than our estimates) driven by controlled opex as cost to assets declined to a multi-quarter low of 6.45% (35bp QoQ decline). Total income grew 31%/8% YoY/QoQ to INR3.4b (largely in line with our estimates) led by NII growth of 22% YoY to INR2.8b and other income of INR0.7b. Provisions at INR0.3b were 9% above our estimate (credit cost for 2QFY19 came in at 1.36%) as the calculated PCR rose to 41% from ~39% in 1QFY19. We expect the bank to report INR1.1b PAT for 2HFY19 (PAT estimate for FY19E: INR1.9b).
• During the quarter, recognition criteria for NPAs were changed to daily basis instead of month-end, as a result of which provisions were higher by INR91.1m and PAT was impacted to the tune of INR79.9m.
• Balance sheet de-risking continues: In keeping with the goal of reducing microfinance share of AUMs, microfinance AUMs stood at 27% of total v/s 36% in 2QFY18; however, on absolute basis MFI AUM registered 11% QoQ growth (2% YoY) to INR27b, while total non-MF AUM registered a robust 55%/12% YoY/QoQ growth to INR72.8b led by 69%/21% YoY growth in small business loans and vehicle finance, respectively. Small business loans and vehicle finance loans constitute 38%/25% of the total AUM’s of INR99.8b.