Bandhan Bank is India\u2019s largest microfinance-centric bank with a strong track record. Having received its banking licence in 2015, Bandhan is transforming from a geographically concentrated single-product company to a more diversified entity, tapping into new profit pools. We forecast earnings at 34% CAGR in FY18-FY23e on strong lending growth and continued superior profitability driven by: (i) sustaining market share gains from existing\/new geographies in both lending and low-cost deposits, (ii) diversifying revenue streams with product suite expansion, (iii) maintaining competitive edge on industry-leading operating efficiency, and (iv) better risk-profile on geographical\/product diversification. Bandhan trades at a premium to peers (29.6X FY19e\/FY20e EPS and 5.3X FY19e\/FY20e BVPS), which we see being sustained for three key reasons: (i) a play on underpenetration with an edge against competition, (ii) among the best operating metrics (average FY19-20e RoAs: c.4%, RoEs: 21.1%, and RORWAs: 5.7%) and (iii) strong capital base providing enough cushion against any asset quality issues. Initiate at Buy with a 12-m price target of `650 (29% upside). Key risks include (i) asset quality deterioration, (ii) key man risks, (iii) strategy execution and (iv) no extension of timeline for dilution of promoters\u2019 stake. Where are we disputing consensus? We believe there are four key debates on Bandhan\u2019s investment thesis: (i) the scope for further penetration in MFI business given a large number of microfinance (MFI) players and limited potential for further market share gains for Bandhan, (ii) low confidence on asset quality due to the past two NPL crises over the last eight years, (iii) how real and sustainable is the cost efficiency and (iv) execution risks in the banking franchise and how the profitability will shape up. Penetration and market share There are 178 MFI (incl. Small Finance Banks) players in India with a combined AUM of $14.6 bn as of FY17. However, the penetration continues to remain low compared to the top seven MFI markets in the world, with only 19% of households covered by MFIs. Bandhan has been a market leader with an approximate market share of 12% (overall MFI incl SHG loans) as of March 2018. Asset quality risks The microfinance industry has witnessed twin crises in the past decade i.e. (i) Andhra Pradesh crisis in FY11 and (ii) demonetisation coupled with political factors in select geographies . However, Bandhan has been largely unaffected with average credit costs of c.50bps of loans since FY10. We believe while the risks exist, they have gone down v\/s those in FY11 due to: (i) stringent regulations in place, and (ii) availability of information utilities such as credit bureaus. Sustained cost efficiency Bandhan has maintained a low-cost business model even when it operated as a NBFC-MFI. Further, despite being in a significant network-expansion mode in its general banking business post 2015, its cost-to-income ratios have remained under control. We believe cost-to-income ratio may not drop materially on changing loan mix and lower yields but better operating leverage on improving productivity would keep it one of the best in industry. Profitability in banking The initial phase of execution in its banking business has panned out reasonably well at Bandhan. We believe Bandhan would be able to retain its superior profitability (~4% ROA) over the next few years supported by improving cost-to-assets ratio on improving operating leverage.