We are less worried about the long-term story and expect the bank to deliver well relative to new-age banking peers. That said, valuations at 3.8x/25x FY23F BV/EPS warrant caution in the near term as room for error is low.
AU’s strong asset growth was marred by weak asset quality, with a 100bps q/q increase in GNPAs. The extent of the increase in GNPAs was a negative surprise; while well provided for, we are concerned about the aggressive disbursals done in the past two quarters (36% of Mar’21 AUM), which remain unseasoned entering into the second wave of Covid. Further, we think AU will have to slow down its growth, given the uncertain environment, and will need to demonstrate stable asset quality before the current rich valuations can be justified.
We are less worried about the long-term story and expect the bank to deliver well relative to new-age banking peers. That said, valuations at 3.8x/25x FY23F BV/EPS warrant caution in the near term as room for error is low. We pencil in lower growth of 20%/ 25% and slightly elevated credit cost of 140/100bps for FY22/23F, resulting in 9%/ 6% cuts in our PAT forecasts. Accordingly, we downgrade the rating to ‘neutral’. We raise the TP to Rs 1,075 (target multiple unchanged at 4x FY23F book) as we factor in the recent capital raise. We prefer Equitas Holdings (EQUITAS IN, ‘buy’) within SFBs.
Asset quality surprises negatively: GNPA increased 60bp q/q to 4.3% (+`5billion), which was a negative surprise, given the strong collection trends AU was reporting. Of this, ~1.5% of GNPAs are now <90DPD but more than 60% of these are 60-90DPD and hence we don’t find it comforting given the current environment.
We could not get enough clarity whether previously impacted segments such as taxi aggregators, school bus operators, are now entirely recognised. That said, 50% PCR on this technical GNPA pool is adequate, in our view. What worries us more is the aggressive disbursements in 3Q/4Q (36% of AUM) which is clearly unseasoned and increase in GNPAs adjusting for this aggressive growth would have been higher (5.5% on 2 qtr lagged basis).
Credit cost may remain elevated in FY22F, given the second wave of the pandemic impacting the same segment; high probability of some part of initial stressed customers in DPD buckets rolling through and a large unseasoned book. Accordingly, we now build in 140/100bps credit cost for FY22/23F vs 100/85bps earlier.