Au Small Finance Bank Ltd. share price target

India has ~63mn MSME units and AU SFB's branch network encompasses 5 states, which account for ~35% of the total units (Top 10 states account for ~75% of the total MSME units) . Of the 63mn units, only ~5mn units (8%) have access to formal sources of credit. In FY17, the total MSME credit (from formal sources) stood at INR 16tn, of which bank credit accounts for ~84%,(ie ~INR 13tn, forming 17% of overall bank credit in FY17) and the rest by NBFCs. We expect AU SFB's AUM from MSME and SME loans (retail) to grow at a CAGR of 28% and 29% respectively over FY18-21E, outpacing the overall growth in bank credit to MSME (which is expected to grow at a CAGR of 9-11% over FY18-23E vs. the overall bank credit is expected to grow by 10-12% in FY19E), considering its aggressive stance and...

In Q4FY18 and FY18 Bank's total income grew by ~71% and ~52% to Rs. 666 crore and Rs. 2,155 crore respectively, YoY. Net interest income clocked YoY growth of 30% and 20% to Rs. 287 crore and Rs. 940 crore in Q4FY18 & FY18 respectively. PAT grew by ~7% to Rs. 83 crore, YoY in Q4FY18. It has recommended a dividend of 5% in the first year of its banking operations and listing. As on March 2018, its gross loan AUM grew by 49% YoY to Rs. 16,038 crore. Gross NPA and Net NPA of the Bank stood at Rs. 270 crore and Rs. 169 crore respectively as on March 31, 2018. In Q4FY18 its Gross NPA ratio and Net NPA ratio improved...

AU Small Finance Bank (AUBANK) has reported strong progress as it undertakes transitioning from a leading retail-focused NBFC (AU Finance) to a small finance bank(SFB). While migration to an SFB is expected to weigh on the return ratios over the near term, we believe operating costs should peak out in FY18E and will begin to gradually improve thereafter. The bank continues to record robust balance sheet growth and has also surprised positively in terms of liability franchise development (2.7x CD ratio, 37% CASA ratio within three quarters of banking operations), which should provide cushion against a decline in yields. We expect 42% earnings CAGR over FY18-20E, driving RoA/RoE to 1.98%/20.1% in FY20E. Post the recent correction, the stock trades at 4.9x FY20E BVand 27x FY20E EPS. In view of its long-term sustainable business and earnings growth potential, we believe that AUBANK should continue trading at a premium. We thus upgrade the stock to Buy with a target price of INR705 (unchanged), based on 5.9x FY20E BV/32.7x FY20E EPS.

However, given valuations, we maintain our NEUTRAL stance with higher TP of Rs 585 (5.5x FY20E ABV). AUs 3QFY18 performance was in line with our expectation. The loan book grew by 10.6% QoQ (37.6% YoY) on the back of higher growth in the Wholesale book. Traction in CASA was very encouraging, with QoQ growth of 110.6%. Operating cost increased 17.6% QoQ, as it scaled up branch operations.

AU Small Finance Bank (AUBANK) has emerged from the transition of a leading retail-focused NBFC (AU Finance) to a bank. It primarily serves low and middle-income individuals/businesses, with distinct focus on three key lending products - Vehicle finance, MSME finance, and SME finance. During FY13-17, AU delivered 36% loan book CAGR and 46% earnings CAGR. With the grant of a Small Finance Bank (SFB) license AUBANK plans to rapidly expand the scale of its operations and has shown strong progress in building its deposit franchise in the early days of its SFB launch. The migration to an SFB will weigh on return ratios in the near term; however, we believe significant under-penetration in the states where AUBANK operates, strong credit underwriting, and rapid scale- up of new product launches will enable it to emerge as a leading SFB over the long term. We expect 42% earnings CAGR over FY18-20e, driving FY20e RoA/RoE to 1.94%/20.1%. While we appreciate the long term opportunity that AUBANK presents we believe that the stock is fairly valued at current valuations (~ 96% gain over the IPO price). We thus initiate coverage with a Neutral rating and TP of INR705 (5.9x Mar-20E BV, 32.1x FY20E EPS).

AU Small Finance Bank (AU SFB) formerly known as AU Financiers Ltd. is a diversified retail focused financial services player with presence across vehicle financing segment, MSME segment and SME finance segment. It started banking operation in April 2017 after securing Small Finance Bank (SFB) licence from the Reserve Bank of India (RBI) in December 2016. During FY14-17, the company's assets under management (AUM) and net interest income (NII) grew at a strong CAGR of 34.1% and 48.9%, respectively. The company reported...

However, given valuations, we maintain our NEUTRAL stance with a TP of Rs 550 (5.2x FY20E ABV). AUs 2QFY18 performance exceeded our estimates. The loan book grew by 12.8% QoQ (29.5% YoY) on the back of higher growth in the Wholesale book. Traction in CASA was also good, with QoQ growth of 31%. Operating cost increased 48.1% QoQ, owing to full quarter performance.

Initiate coverage with NEUTRAL and a TP of Rs 530 (5.2x FY20E ABV, 31x FY20E EPS). Faster growth and fund raising at high valuations are typically book value accretive and rewarding for shareholders, as seen in lenders like Bajaj Finance, IndusInd Bank, Kotak, etc. However, with AU adequately capitalised for the next two to three years (Tier 1 ~18.9%), this upside may not materialise immediately. AU Small Finance Bank (AU) was an NBFC till Mar-17. Its loan portfolio of Rs 108bn (Jun-17) is well-diversified across Vehicle Finance (VF), MSME and SME loans. AUs lending is focussed on underserved segments in urban, semi-urban and rural India, and offers investors multi-year growth opportunities. While headline valuations appear stiff (5.6x FY20E ABV), underlying business opportunities and management strengths are strong.

IPO Note - Au Small Finance Bank Issue Open: June 28 - June 30 2017, Price Band: Rs. 355 - 358. Offer Size: Rs.1912.5 crs

Background: AU Small Finance Bank had commenced operations in 1996 in Jaipur, Rajasthan and was registered as an NBFC with the RBI in 2000. In 2005, it became a commercial associate of HDFC Bank for originating and servicing vehicle loans which assisted the company in the implementation of various processes and systems. AUSFB has recently transitioned from a prominent, retail focused non-banking finance company (NBFC), which primarily served low and middle income individuals and businesses that have limited or no access to formal banking and finance...