Angel Broking initiated coverage of Equitas Holdings with ‘Buy’ rating with a target price of Rs 235. Equitas Holdings is a microfinance institutions in India having a wide portfolio of product. Backed by strong management and recently procured license for setting up a small finance bank (SFB), it is all set for its next leg of growth. Post its conversion into a SFB, Equitas intends to continue to focus on high yielding assets like microfinance and used vehicle financing. The brokerage house believes the company is ahead of other MFIs and upcoming SFBs in its learning curve as it has already been financing used vehicle, MSE and home loans. Hence it is in a position to scale up faster than its peers.
Since listing in April 2016, the share price of the company surged 28.43 per cent to Rs 173.70 till June 17, whereas the BSE Sensex gained nearly 3 per cent during the same period. Shares of Equitas Holdings were trading 0.26 per cent down at Rs 173.25 on Monday (at 12.28 pm).
Here are 5 key takeaways from the report:
1) Once Equitas migrates to a SFB model it will have to adhere to all the regulations applicable to commercial banks including maintenance of CRR and SLR, which could possibly levy pressure on its yields. However, once an SFB, it will have access to low cost funds, ie below the current around 11.5 per cent rate via deposits, which in our view can insulate against any major fall in profitability. Although initial transitional expenses with regards to technology and manpower would be high, but the brokerage house sees operating leverage playing out in the next few years which should result in strong growth for the company post the absorption of initial one-time costs.
2) Equitas’ AUM has grown at a CAGR of 65 per cent over FY2012-16 to Rs 6,131cr. AUM of used vehicle financing and MSE has scaled up to Rs 1,510 cr and Rs 1,087 cr in its 5th & 3rd years of operations, respectively. There is a huge untapped potential as microfinance is targeted to the lower income segment which often lacks access to formal financing sources. With a portfolio of only Rs 53,200cr, and streamlining of regulatory aspects, the microfinance industry is positioned for healthy growth going ahead. Angel Broking believes there would be enough scalability for Equitas without further dilutions given its relatively low leverage of 4.4x.
3) Equitas has successfully diversified its business over the past few years as the share of microfinance in terms of its total AUM has declined to 54 per cent in FY2016 from 100 per cent in FY2011, while that of vehicle finance and MSE has risen to 42 per cent from nil over the same period. Despite aggressive growth, it has been able to maintain strong asset quality with gross non-performing assets (GNPA) at 0.2 per cent for microfinance and 1.3 per cent at the consolidated level. Conversion to SFB will put pressure on the yield however access to low cost funds will help to some extent. However, Angel Broking expects around 100 basis points decline in net interest margins (NIM) over the next two years.
4) Microfinance business by virtue of its nature attracts high costs as the sourcing of clients and managing them needs high number of employees. Though the brokerage house has seen Cost/Income ratio of Equitas coming down from 71.8 per cent in FY2013 to 53 per cent in FY2016, there is still scope for it to come down, when it converts itself to a SFB.
5) Equitas is rightly placed and adequately capitalised to encash on the opportunity arising out of growing credit need from the underserved segment and has the potential to deliver a high double-digit earnings growth for multiple years. At the current market price the stock is trading at 2.3x its FY2018E BV of around 75.6. Despite regulatory compliance the brokerage house expects it to deliver a ROE of 11.5 per cent and ROA of 2.5 per cent in FY2018. Angel Broking has ‘Buy’ on the stock with a target price of Rs 235.