Purchase AU Small Finance Bank with a 780 rupee goal: Motilal Oswal

 Purchase AU Small Finance Bank with a 780 rupee goal: Motilal Oswal

In its research report dated October 30, 2023, Motilal Oswal expressed optimism about AU Small Finance Bank's recommended buy recommendation on the company, with a target price of Rs 780.

The AU Small Finance Bank study report by Motilal Oswal

Due in part to greater other income, which increased by 72% YoY, AUBANK reported net profits growth of 17% YoY (in line). So, PPoP increased 30% YoY (up 19% QoQ, beating by 9%). From QoQ, margins fell by 22bp to 5.5%. Provisions increased to INR 1.1 billion. While deposits expanded rapidly at 30% YoY (9.3% QoQ), advances climbed 24% YoY (2% QoQ). CASA mix was 33.9%, while CASA deposits increased 4% YoY. QoQ, absolute GNPAs/NNPAs rose by 11%/10.8%. As a result, the headline GNPA/NNPA ratios dropped to 1.91%/0.6%, a 15bp/5bp QoQ decline.  During the first round of SFB consolidation, AUBANK declared its intention to combine with Fincare SFB. With the combined company accounting for around 7.5% of loans, AUBANK will be able to access the rural-dominated MFI portfolio and diversify its loan book thanks to this EPS, BV, and RoA-accretive transaction. The combination would also provide some respite from the current pressure on margins and compliance with sub-segmental PSL objectives, and the bank will gain from an enhanced geographic footprint with a strong foothold in Southern India.

Prospects

Because of lower margins and greater provisions, we have marginally lowered our FY24E/25E projections by 2.8% and 2.0%, respectively, due to increased other income and managed opex. For the company, we maintain our Buy recommendation with a target price of INR 780 (3.6x FY25E ABV).