We met the top management of Equitas Holdings (Equitas), which reinforced our confidence that it is on course to build a sustainable and scalable small finance bank franchise. The focus is on customer acquisition, reaping the benefits of a diversified product offering as well as ramping-up deposit base. However, during the transition phase, RoEs shall be depressed given its strategy to significantly bring down proportion of micro finance (MFI) business to about 30 % by FY18 and further to 15 % by FY20. Moreover, credit cost pertaining to stressed MFI book of R75- 80 crore might be up-fronted over the next 1-3 quarters. But, the scale-up of the non-MFI book will support >35% AUM growth over the FY18-20 period.
Furthermore, asset quality trend in non-MFI book will stabilise as well. As the management does not intend expanding the branch network significantly, operating leverage will kick-in and strengthening liability franchise (CASA mobilization) will bring down cost of funds. We believe that the visible benefit of successful execution from FY19 onwards will bolster confidence, leading to valuation re-rating. We maintain a ‘BUY’ rating with a TP of `220. Equitas is one of our top sector picks.
In a bid to reduce the volatility in business model associated with MFI business, management continues with its stance to prune down MFI portfolio to about 30 % by FY18 and 15 % by FY20. However, the focus is on acquiring customers and broadening the non-MFI product bouquet through: a) launch of new products such as LCV, dealer financing, and business loans for the formal segment); and b) rolling out existing products from more branches post the soft launch. Consequently, strong underlying momentum in vehicle/ business loans, LAP, and scale up of new product segments will support an AUM growth in excess of 35 % over FY18-20E.
The ongoing transition phase will be strenuous during the near-term, but the company’s conservative strategy and adequate capital will rein-in execution risks.