EQUITAS HOLDINGS: Business growth healthy; Higher provisions lead to PBT miss
(EQUITAS IN, Mkt Cap USD0.4b, CMP INR91, TP INR125, 38% Upside, Buy)
– Reported PAT declined 2% YoY to INR476m (in-line), led by one-time DTA markdown due to change in the corporate tax rate and higher provisions, which increased 47% QoQ. PBT grew 10% YoY to INR829m (MOFSLE: INR1b). For 1HFY20, PPoP/PAT grew 38%/27% to INR2.5b/INR1.1b.
– PPoP at INR1.3b (+21% YoY) was driven by 29% YoY/4% QoQ growth in NII to INR3.5b (in-line). However, lending spreads/NIMs declined 27bp/5bp QoQ to 10.1%/8.8% as cost of funds increased 26bp sequentially. Other income stood at INR639m. Total opex increased INR2.9b, led by 28% YoY growth in staff expense. Cost-income ratio, thus, remained elevated at 69.1% (flat sequentially).
– Total AUM grew 33% YoY to INR132.7b, with the share of MFI AUM at ~24% v/s ~27% in 2QFY19. On an absolute basis, MFI AUM grew 18% YoY to INR31.9b. Non-MFI AUM was also robust, growing 39% YoY to INR100.8b, led by 45%/31% YoY growth in small business loans/vehicle finance. Vehicle finance portfolio now constitutes ~24% of total AUM as at 2QFY20.
– Deposits grew 44% YoY/10% QoQ to INR100.2b, led by 56% YoY/13% QoQ growth in TD. CASA deposits grew 14% YoY to INR22.5b, resulting in CASA ratio of 22.4% (v/s 24.5% in 2QFY20).
– Absolute GNPA/NNPA increased 13% each QoQ to ~INR3.8b/INR2.1b. Fresh slippages stood at INR1.1b while reductions were at INR0.7b, leading to 13bp/7bp QoQ rise in GNPA/NNPA ratio to 2.9%/1.6%. However, PCR declined ~30bp QoQ to 43.8%.
– Other highlights: (1) Capitalization levels stood strong at 21.6% (Tier 1 at 20.5%), (2) Deposits as a % of total Borrowings was a healthy 66.9%, and (3) the listing is expected to get completed by Mar’20.
– Valuation and view: The bank has delivered on its goal of de-risking its balance sheet and lowering the MFI proportion in its loan book, which has been offset by high growth in secured products. The recalibration in its growth strategy should yield positive results over the medium-to-long term. We have lowered our PAT estimates by ~17% for FY20 to reflect higher provisions. We reiterate BUY with a revised target price of INR125 based on 1.5x FY21E ABV. However, the listing of SFB remains a near term overhang.