JM Financial

Equitas SFB (Buy)

Target: ₹51

CMP: ₹39.10

We initiate coverage on Equitas Small Finance Bank (Equitas) with a Buy rating and a target price of ₹51. Since its transition into a mass market focused SFB, Equitas has successfully been able to diversify its loan portfolio and significantly reduce dependence on the microfinance business. Thus, owing to its diversified asset base, it is relatively safe from acute asset quality shocks in a particular asset class.

Equitas’ liability engine, after losing traction post initial success, is now revving up with continued retail deposit accretion (65 per cent of deposit mix). With most investments to set up liability branches, adopt technology and hire personnel completed in the past few years and no near-term branch capex plans, we believe that Equitas has substantial operating leverage to support a 34 per cent EPS CAGR over FY20-23 with ROA recovering to 2.1 per cent by FY22.

Equitas has maintained its asset quality along with sustainable business growth and we expect the asset quality to improve in medium term as the loan mix and macros become more favourable. Although its performance in H1-FY21 has been muted due to elevated Covid-19 related provisions and lower disbursements, we expect rebound in performance given that the businesses of its borrowers and collection efficiency are nearing normalisation.

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