Equitas Holdings is one of the fastest growing microfinance institutions in India
having a wide portfolio of product. Backed by strong Management and recently
procured license for setting up a small finance bank (SFB), it is all set for its next
leg of growth. Post its conversion into a SFB, Equitas intends to continue to focus
on high yielding assets like microfinance and used vehicle financing. We believe
the company is ahead of other MFIs and upcoming SFBs in its learning curve as it
has already been financing used vehicle, MSE and home loans. Hence it is in a
position to scale up faster than its peers.
Transition to SFB likely to be smooth: Once Equitas migrates to a SFB model it will
have to adhere to all the regulations applicable to commercial banks including
maintenance of CRR and SLR, which could possibly levy pressure on its yields.
However, once an SFB, it will have access to low cost funds, ie below the current
~11.5% rate via deposits, which in our view can insulate against any major fall in
profitability. Although initial transitional expenses with regards to technology and
manpower would be high, but we see operating leverage playing out in the next
few years which should result in strong growth for the company post the
absorption of initial one-time costs. Further, meeting the 75% Priority Sector
Lending (PSL) target will not be a challenge for Equitas as its entire portfolio
qualifies for PSL and hence the migration from NBFC to SFB should be smooth.
Underleveraged balance sheet leaves enough scope for growth: Equitas’ AUM
has grown at a CAGR of 65% over FY2012-16 to Rs6,131cr. AUM of used vehicle
financing and MSE has scaled up to Rs1,510cr and Rs1,087cr in its 5th & 3rd years
of operations, respectively. There is a huge untapped potential as microfinance is
targeted to the lower income segment which often lacks access to formal
financing sources. With a portfolio of only ~Rs53,200cr, and streamlining of
regulatory aspects, the microfinance industry is positioned for healthy growth
going ahead. We believe there would be enough scalability for Equitas without
further dilutions given its relatively low leverage of ~4.4x.
Reducing dependence on microfinance: Equitas has successfully diversified its
business over the past few years as the share of microfinance in terms of its total
AUM has declined to 54% in FY2016 from 100% in FY2011, while that of vehicle
finance and MSE has risen to 42% from nil over the same period. Despite
aggressive growth, it has been able to maintain strong asset quality with GNPA at
0.2% for microfinance and 1.3% at the consolidated level. Conversion to SFB will
put pressure on the yield however access to low cost funds will help to some
extent. However, we expect ~100 bps decline in NIM over the next two years.
Outlook Valuation: Equitas is rightly placed and adequately capitalized to encash
on the opportunity arising out of growing credit need from the underserved
segment and has the potential to deliver a high double-digit earnings growth for
multiple years. At the current market price the stock is trading at 2.3x its FY2018E
BV of Rs75.6. Despite regulatory compliance we expect it to deliver a ROE of
11.5% and ROA of 2.5% in FY2018. We recommend BUY on the stock with a
target price of Rs235.

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