Stock Fundamentals

Why Equitas Holdings is a good bet for long-term investors

Radhika Merwin | Updated on July 12, 2020

Healthy deposit accretion, strong capital ratios make it a good bet for long-term investors

The stock of Equitas Holdings, the holding company of Equitas Small Finance Bank, has been under pressure since September last year owing to the regulatory overhang over the listing of its banking subsidiary.

The pandemic-led lockdown has also weighed heavily on the stock — from peak levels in late February, the stock has halved in price.

But the recent business updates put out by the company for the June quarter, reveal some positive trends.

After meagre disbursements in April, there has been a significant uptick in June (₹465 crore), with the company focussing on helping existing customers to restart their business activity. There has also been a decline in the moratorium book as of June from April levels.

In the company’s MFI (micro finance institution) business (24 per cent of advances in FY20), 56 per cent of centres opted for moratorium in June as against 100 per cent in April; 42 per cent of small business loans (41 per cent of advances) were under moratorium as of June, down from 87 per cent in April; in vehicle loans (24 per cent of advances), 65-70 per cent were under moratorium as of June, down from 89.5 per cent in April.

Healthy growth in deposits, too, lend comfort. Post the YES Bank crisis in March, there were concerns about a spillover effect of the event on other private banks.

But Equitas has reported healthy growth (q-o-q) in deposits in the June quarter. Total deposits grew 11 per cent q-o-q, led by a robust 17 per cent growth in retail term deposits.

While all these are sanguine trends, as Equitas continues to have sizeable loans under moratorium, asset quality will need a close watch in the coming quarters (once the moratorium is lifted).

Also, business growth can remain modest in the near term as the management’s focus will be on improving collections and managing risk.

That said, the sharp fall in stock price, diversified loan book, healthy deposit accretion and strong capital ratios make Equitas Holdings a good bet for the long term, for those with a higher risk appetite. Investors with a three- to four-year horizon can start accumulating the stock in dips.

The regulatory overhang on the listing of the banking subsidiary could add some pressure on the stock price in the near term.

But given that the event (creating pricing discount for the holding company) has been long factored into the stock, the downside could be limited.

At the current price, Equitas Holdings is trading at 0.6 times the FY20 book, which is cheap even after considering the holding company discount. Ujjivan Small Finance Bank (banking subsidiary of Ujjivan Financial Services) that got listed last year is trading at over two times the FY20 book.

Covid update

In the first phase of the moratorium, the company encouraged customers to opt for moratorium to conserve cash as businesses were hit hard by the Covid lockdown. In the second phase of the moratorium, the company has adopted an ‘opt-in’ system, where customers have to inform if they want extension of the moratorium. This, along with improvement in business activity, has led to a decline in the moratorium book across segments as of June.

In the micro finance segment, the overall collection efficiency for June stood at 44 per cent.

In the vehicle segment, while moratorium has declined, it remains high at 65-70 per cent. The company has stated that 76 per cent of high-risk advances have been inspected (vehicle inspection to assess risk); 98 per cent are in good condition. In small business the loans, moratorium rate is higher (at 49 per cent) for smaller-ticket loans (less than ₹5 lakh) than for larger-ticket loans (over ₹10 lakh) at 24 per cent.

The company has made provision of ₹99.6 crore — 10 per cent provision on accounts which were overdue but not NPA as of February 29 (as against RBI requirement of 5 per cent each over two quarters starting March quarter).

The asset quality picture and the incremental provision requirement will need a close watch in the coming quarters. However, the company’s healthy capital position and healthy deposit base offer comfort. As of March 2020, the company’s tier-1 capital ratio stood at 22.4 per cent and total capital adequacy at 23.6 per cent.

Sound fundamentals

Equitas has been de-risking its loan book over the past few years. Micro finance, which was 53 per cent of overall loan book in FY16, is down to 24 per cent as of FY20. A well-diversified loan book helps mitigate risk. Overall in FY20, advances grew 31 per cent.

The cost-to-income ratio declined to 66 per cent in FY20 from 70 per cent in FY19. The company’s GNPA ratio stood at 2.7 per cent in FY20.

Published on July 12, 2020

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