Maintain ‘Buy’ on Equitas, says Motilal Oswal, pegs TP at Rs 210

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Published: May 12, 2017 4:22:40 AM

In a quarter marred by uncertainty over the MFI portfolio, Equitas’ PAT fell 85% y-o-y/q-o-q to Rs 69m (~82% miss).

In a quarter marred by uncertainty over the MFI portfolio, Equitas’ PAT fell 85% y-o-y/q-o-q to Rs 69m (~82% miss). Flat AUM q-o-q, interest reversal on MFI loans (Rs 38m) and a decline in high-yielding loans led to net interest income miss of 7% (-4% q-o-q, but +30% y-o-y). NIM contracted 70bp/140bp q-o-q/y-o-y to 9.8%, and high-yielding MFI AUM (~50% of AUM as of Q3) declined 7% q-o-q. Continued investments in branches (284 in 4Q v/s 112 in Q3) led to opex increase of 85% y-o-y (+17% q-o-q) to Rs 1.95b (in-line).

The bank also onboarded 600+ (+23% q-o-q) branch banking employees in Q4FY17. GNPA in MFI portfolio, including RBI dispensation (Rs 620m), stands at Rs 100m. However, Equitas has proactively classified R580m worth of accounts as NPA, taking NPA in MFI portfolio to Rs 680m (2% of MFI AUM).

Total at PAR stress on AUM is Rs 1.9b (Rs 1.45b on books), with Equitas confident of recovering 50%, leading to total loss of ~Rs 1b. It already has Rs 540m of provisions (Rs 350m specific+Rs 190m floating) on this portfolio. Overall GNPA stood at 3.5%; however, excluding the proactive impaired account recognition, it stood at 2.5%. MFI PAR at >90 DPD was 2.7% v/s 8% for the industry.

Collection efficiency deteriorated to 95.4% v/s 98.4% in Q3 owing to a drop in collection efficiency in Maharashtra (77% v/s 93% in Q3 AUM growth was moderate at 17% y-o-y, as the bank chose to be cautious in MF lending (flat y-o-y).  UCV/micro LAP grew 28%/50% y-o-y. Garnered deposits of Rs 18.9b; CASA deposits were Rs 3.3b. Target is to reduce MFI share in overall loans to ~30% by FY18. This would be partially offset by high growth in secured products (e.g. micro LAP, VF) and new products (e.g. housing, business, gold, agri loans).

We expect near-term recalibration of the growth strategy to yield positive results over medium- to long-term. Fast paced liability branch set-up, a strong BC reach and a large captive MFI customer base will enable it to recalibrate the liability side, lowering CoF and growing cross-sell and fee income. Maintain ‘buy’ with TP of Rs 210.

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