Au Small Finance Bank Ltd. share price target

Current asset quality trends are inspiring, amidst a bleak landscape. Increasing granularity will only help. Oplev (key to our anticipated RoAA expansion) has kicked in recently and is sustainable, in our view. Valuations are rich, but likely to persist so long as asset quality and growth hold up. Maintain BUY. Our SOTP-based TP is Rs 725 (4.75x Jun-21E ABV of Rs 148 + Rs 19/sh for AAVAS). Our recent interaction with the top management of AUBANK, at their first analyst day, bolsters our constructive stance. Managements intent to eventually convert into a full-fledged bank, via granular growth, was visible (AUBANK has to remain an SFB for at least ten more quarters). A book accretive fund raise is likely (though not immediately).

We attended AUBANK's first Annual Investor & Analyst Day, wherein the entire top management team, led by MD & CEO Mr. Sanjay Agarwal and Executive Director Mr. Uttam Tibrewal, highlighted the bank's progress in different businesses. Management shed light on the bank's strategy to transform into a Universal' bank by FY22, by (a) maintaining strong competitive positioning, and (b) delivering sustainable growth across business segments. AUBANK remains confident of deepening its presence by offering full product suite to customers, while strong analytics and targeted customer servicing should enable higher relationship value. Management aims to build a granular retail...

Sector: Banks/Mid Cap | Earnings Update 1QFY20 Background: AU SFB, initially incorporated as a vehicle finance company in 1996, was transformed into a Small Finance Bank in April 2017. The bank has its presence in 11 states and 1 union territory, with 418 branches, 554 ATMs, 81 asset centers and ~5,37,053 loan accounts. The bank offers a comprehensive and tailor made range of products (both asset and liability) and services to cater to the needs of various businessmen (SME and MSME) and other middle and low...

Sustained growth on both sides of the B/S, even as peers struggle (amidst unfavourable macros) is impressive. Outperformance on growth is likely to continue as competition (NBFCs) fumbles. Our growth assumptions have a marginal downside risk as macros deteriorate. Oplev gains will drive of RoAAs hereon. We UPGRADE AUBANK's valuation multiple to 4.75x (vs. 4.5x earlier) with improving margins and cost control in sight. Strong growth, visible cost control and stable asset quality helped AUBANK tick most boxes in 1QFY20. Maintain BUY with a TP of Rs 725 (4.75x June-21E core ABV of Rs 148 + Rs 19/sh for the residual AAVAS stake).

Sector: Banks/Mid Cap | Earnings Update 4QFY19 Background: AU SFB, initially incorporated as a vehicle finance company in 1996, was transformed into a Small Finance Bank in April 2017. The bank has its presence in 11 states and 1 union territory, with 408 branches, 543 ATMs, 83 asset centers and ~4,95,209 loan accounts. The bank offers a comprehensive and tailor made range of products (both asset and liability) and services to cater to the needs of various businessmen (SME and MSME) and other middle and low...

The bank's demonstrable focus on growing both sides of the B/S continues to impress. With a large addressable opportunity, tepid competition from smaller NBFCs and sufficient capital, we expect growth to sustain. A reasonable fix on asset quality is an additional positive. Improvement in operating efficiency will be instrumental in driving RoAAs and is a key monitorable. AUBANKs scorching growth and near-flawless execution will keep valuations sustainably higher than peers. It holds the best of two worlds NBFCs (high yielding, granular retail assets) and SFBs (rapidly expanding deposit franchise). Maintain BUY post the 4QFY19 beat. Our TP is Rs 680 (4.5x Mar-21E ABV of Rs 151).

NII grew 35% YoY (+11% QoQ) to INR3.9b (3% beat), while margins compressed further by 20bp QoQ to 5.1%. CI ratio stood at 60.0% in FY19 v/s 56.7% in the previous year. Other income grew 23% QoQ (-3% YoY) to INR1.3b, driven by an increase in core and distribution fees. Operating expenses increased 13% YoY (+9.6% QoQ) to INR3.0b, leading to a 232bp QoQ decline in the C/I ratio to 58.3%. AUM rose 51% YoY to INR242b, with strong disbursements growth in vehicle/MSME/NBFC books.

While AUBANK's growth and execution capabilities as well as its ability to quickly garner retail deposits are nothing short of spectacular, steep valuations compel us to maintain our NEUTRAL rating with a TP of ~Rs 658 (4.5x Dec-20E ABV of Rs 146). AUBANKs robust growth continued into 3Q (62/8% YoY/QoQ) driven by the retail book, as wholesale disbursals slowed. The CoF increased ~25bps sequentially while yields rose by a meager ~10bps, resulting in NIM compression. Asset quality slipped, with a 13% rise in G/NNPAs sequentially. The mgt conservatively continues to classify assets of ~Rs 940mn that are less than 90 DPD as GNPAs. Term deposit traction was inspiring (~20% QoQ), but SA was sequentially flat.