Operating expenses growth was high (cost-to-income of 69%) due to investments in technology and higher spend on marketing.
Key observations on 2QFY22 earnings performance: Outstanding restructured loans at Rs 18.2 billion (10.2% of loans) were lower than management guidance (cRs 21 billion). Sequentially GNPAs remained stable at 4.8%. The 31-90 days’ overdue loans decreased to 6.5% from 12.4% q-o-q. Additional provisions on restructured loans kept credit cost elevated. Operating expenses growth was high (cost-to-income of 69%) due to investments in technology and higher spend on marketing.
Management commentary: Bounce rates and collections efficiencies are trending towards pre-Covid-19 levels across segments. Management indicated that 3QFY22 should be a normalised quarter on both the operating front and in terms of asset quality performance. AUM growth should surpass 25% y-o-y, NIMs should range in 8-8.5% in the near term and credit costs should trend at c2.5% of loans for FY22. The near-term RoE target remains c15%. The deposit strategy is driven by a stronger customer acquisition run rate and the traction should continue. Operating costs should remain high in 2HFY22 given higher spend on technology and marketing.
We cut our FY22-24 EPS estimates on the back of higher credit cost estimates: For FY22, we lower our NIM and increase our operating costs assumptions. This results in a 2.9% cut to operating profits. For FY23-24e, we make minor changes to our operating profit estimates (+1.8%/-0.2% FY23/24e respectively). However, to factor in stress from the restructured book (10.2% of loans), we have increased our credit cost estimates for FY23-24e to an average of 211bp vs 186bp earlier. This results in EPS cuts of 6.2%/5.6%/9.2% for FY22/23/24e, respectively.
Valuation attractive; maintain Buy: We believe the potential stock catalysts are: i) the underlying business has strong growth and profitability outlook, even accounting for relatively elevated credit costs which its customer profile entails and ii) the holding company discount, currently at 26%, should drop as its amalgamation plan with the bank moves ahead (management expects merger to completed by 3QFY23). We value Equitas IN at 1.3x FY23e BV (unchanged) with TP of Rs 170 (unchanged). Maintain ‘buy’. Downside risks: 1) lower than expected loan growth and margins, 2) worse than expected asset quality, 3) loss of key management personnel.