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Equitas Holdings Ltd Research Report - 20th Jun 2016

Banking | Published on Jun 20th 2016

IT

Equitas Holdings is one of the fastest growing microfinance institutions in India having a wide portfolio of product. Backed by strong Management and recently procured license for setting up a small finance bank (SFB), it is all set for its next leg of growth. Post its conversion into a SFB, Equitas intends to continue to focus on high yielding assets like microfinance and used vehicle financing. We believe the company is ahead of other MFIs and upcoming SFBs in its learning curve as it has already been financing used vehicle, MSE and home loans. Hence it is in a position to scale up faster than its peers. Transition to SFB likely to be smooth: Once Equitas migrates to a SFB model it will have to adhere to all the regulations applicable to commercial banks including maintenance of CRR and SLR, which could possibly levy pressure on its yields. However, once an SFB, it will have access to low cost funds, ie below the current ~11.5% rate via deposits, which in our view can insulate against any major fall in profitability. Although initial transitional expenses with regards to technology and manpower would be high, but we see operating leverage playing out in the next few years which should result in strong growth for the company post the absorption of initial one-time costs. Further, meeting the 75% Priority Sector Lending (PSL) target will not be a challenge for Equitas as its entire portfolio qualifies for PSL and hence the migration from NBFC to SFB should be smooth. Underleveraged balance sheet leaves enough scope for growth: Equitas’ AUM has grown at a CAGR of 65% over FY2012-16 to Rs6,131cr. AUM of used vehicle financing and MSE has scaled up to Rs1,510cr and Rs1,087cr in its 5th & 3rd years of operations, respectively. There is a huge untapped potential as microfinance is targeted to the lower income segment which often lacks access to formal financing sources. With a portfolio of only ~Rs53,200cr, and streamlining of regulatory aspects, the microfinance industry is positioned for healthy growth going ahead. We believe there would be enough scalability for Equitas without further dilutions given its relatively low leverage of ~4.4x. Reducing dependence on microfinance: Equitas has successfully diversified its business over the past few years as the share of microfinance in terms of its total AUM has declined to 54% in FY2016 from 100% in FY2011, while that of vehicle finance and MSE has risen to 42% from nil over the same period. Despite aggressive growth, it has been able to maintain strong asset quality with GNPA at 0.2% for microfinance and 1.3% at the consolidated level. Conversion to SFB will put pressure on the yield however access to low cost funds will help to some extent. However, we expect ~100 bps decline in NIM over the next two years. Outlook Valuation: Equitas is rightly placed and adequately capitalized to encash on the opportunity arising out of growing credit need from the underserved segment and has the potential to deliver a high double-digit earnings growth for multiple years. At the current market price the stock is trading at 2.3x its FY2018E BV of Rs75.6. Despite regulatory compliance we expect it to deliver a ROE of 11.5% and ROA of 2.5% in FY2018. We recommend BUY on the stock with a target price of Rs235.

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CMP 174
Target Price 235
Investment Period12 Months

Stock Info

MCAP BSE (Rs in Cr)5,295.96
MCAP NSE (Rs in Cr)5,292.59
P/E (x)25.41
EPS (Rs.)6.18
BV (Rs.)49.46
Div Yield (%)0.00
FV (Rs.)10.00
P/BV (x)1.87
EV/Sales (x)8.21
EV/EBITDA (x)12.91

Shareholding Pattern (%)

Public & Others59.0
Institution29.0
Foreign12.0
Corporate0.0
Promoter0.0
Grand Total100.0

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