Au Small Finance Bank Ltd. share price target

We continue to admire AUBANK's growth opportunities and execution capabilities. However, given the steep valuations, we maintain NEUTRAL with TP of Rs 641 (4.5xSept-20E ABV of Rs 142). AUBANKs 2Q performance was encouraging with robust AUM growth (66/17% YoY/QoQ), healthy other income (+19% QoQ) and relatively slower opex growth (13%). As expected, asset quality was stable with lower slippages (Rs 950mn, 2.03% ann.) and higher recoveries (Rs 570mn). While the CASA Ratio dipped QoQ (170bps), the SA accretion (Rs 4.9bn; ~3x QoQ) was promising. Further, the broad based fee growth was an additional positive.

AU Small Finance Bank Ltd Q2FY19 results Comment NII increased to Rs. 321.03 Cr in Q2FY19 compared to Rs. 286.37 Cr in Q1FY19. The NII had been increasing from Q3FY18 to Q4FY18. It displayed an erratic but increasing trend from Q3FY18 to Q2FY19.

15 October 2018 AU Small Finance Bank at INR202.2b grew 13.9%/65.6% QoQ/YoY. On book AUM (INR181.2b) was primarily led by retail AUM growth of 57.9% YoY and wholesale AUM growth of 101% YoY. The growth was driven by vehicle finance (+10.8%/47.6% QoQ/YoY), secured MSME segment (+10.7%/67.6% QoQ/YoY) and secured SME segment (-5.0%/4.

While we admire the business model and mgt's execution capabilities, rich valuations compel us to remain NEUTRAL. Our TP of Rs 667 is based on 5x Mar-20E ABV of Rs 133. AUBANKs incredible performance sustained in 1Q as disbursements/AUM grew ~91/56% YoY and asset quality improved (G/NNPAs down 88/77bps YoY). However, margins were under pressure as CoF rose and yields failed to compensate (down 20bps sequentially). The doubling of opex (YoY) is reflective of AUBANKs continued investment in people and technology.

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...