Equitas Holdings (Equitas) reported a strong set of results for 1QFY2017. Its AUM
grew by 48% yoy which led to a PAT growth of 64% yoy to Rs61cr, both beating
our expectations. The Management remains confident of sustenance of business growth in
the years to come and expects to start the small finance bank (SFB) by 2QFY2017 end.
AUM growth remained strong, on track to start SFB: The company’s AUM for the
quarter grew by 48.4% yoy/7.1% qoq to Rs6,559cr. The MFI, (Vehicle Finance +
MSE), and the Home Finance segments grew by 48%, 50%, and 32% yoy
respectively. We believe the company will be able to achieve similar growth in the
quarters to come. With the start of the SFB operations, Equitas will also offer
Agriculture Gold Loans and Business Loans which will enable it to meet the
priority sector lending norm. The AUM mix remained stable.
Rise in NPAs due to migration to 120 days NPA recognition norm from 150 days:
The 27bp sequential rise in GNPAs to 1.61% during the quarter is largely due to
the company’s migration to 4-months NPA recognition norm from 5 months
earlier. Given that the company intends to start its banking operations by
2QFY2017 end, it will then have to move to the 3-months NPA recognition norm,
which could lead to further escalation in NPAs in 2QFY2017. However, from an
operational point of view, the asset quality has not deteriorated, as on a like to
like basis, the rise in GNPAs for 1QFY2017 would have been of 5-10bp only.
Margins to moderate down: The reported NIM for the quarter has improved to
12% vs 11.92% in 1QFY2016 and vs 11.40% for the entire FY2016 period.
However, post the initiation of SFB operations, the maintenance of SLR and CRR
will impact NIM to some extent. While the new bank will have access to lower cost
funds it will take time to get sizeable access to the low cost CASA.
Outlook and valuation: We continue to believe that Equitas is strongly positioned
to grow on the back of its balanced portfolio. Conversion to a SFB will have its
own challenges. However, the market segment which the upcoming bank intends
to cater to has vast untapped business potential and exploiting it effectively will
drive the company’s growth for multiple years. Despite costs having to be incurred
in order to meet regulatory requirements (SLR + SRR), we believe the company
will be able to deliver a ROA of 2.5% and ROE of 11.5% by FY2018. At the
current market price the stock is trading at 2.3x its FY2018E BV of Rs75.6. We
maintain BUY on the stock with a target price of Rs235.

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