Hold AU Small Finance Bank with a 750 rupee goal: Sharekhan

 Hold AU Small Finance Bank with a 750 rupee goal: Sharekhan

In its research report dated October 30, 2023, Sharekhan suggested a Hold rating on AU Small Finance Bank with a target price of Rs 750.

The research report on AU Small Finance Bank by Sharekhan

The bank has declared its intention to combine with Fincare SFB, citing strategic reasons related to product and geographic diversity. The bank has always been rooted in secured lending and organic book creation, which has produced great asset quality that better growth across economic cycles and allowed it to maintain higher multiples than rivals. The news that the bank is expanding its product line in an inorganic way—which is not complementary—has surprised the market, given that 54% of Fincare's current book comprises of MFI loans (unsecured). In addition, the bank has consistently avoided entering the MFI market in the past due to caution. The MFI book would account for around 8–10% of the overall book on the consolidated basis. Because of the intrinsic nature of the portfolio to be acquired, we believe that even though the acquired portfolio wouldn't be very large and the business is going to be EPS/RoA accretive in upcycle, it may lead to a larger valuation de evaluation as the bank is unable to maintain superior asset quality/growth across cycles as it previously did. The company is trading at 3.6x and 3.1x, respectively, its estimated ABV for FY2024E and FY2025E.

Prospects

We maintain our Hold rating on AUSFB at Rs. 750 with the updated PT. Despite a downturn in business momentum, margin pressures, and higher-than-expected credit cost (headed by higher slippages), the bank recorded a solid beat in PPoP (~21%) and PAT (~8%), mostly driven by increased fee revenue. This resulted in a ROA of ~1.7%.