The Banking Sector in India – Perturbing Clouds On The Horizon
Indian BFSI sector is facing testing times once again. Just when credit growth was resurfacing, a new set of challenges has once again engulfed the sector. We believe several issues will weigh heavy on corporate lenders, both private and PSU banks alike, include- lax corporate governance structure, the pervasiveness of Public Sector Banks (PSB) scams, firming up of bond yields, rising complexities for the cases referred under National Company Law Tribunal (NCLT) and stringent norms imposed by RBI for stress recognition.
Amidst such uncertainties, investor scepticism is rising with regards to BFSI stocks. We believe that impact will be more pronounced for the corporate-focused banks, which may report weak Net Interest Income (NII) growth, elevated credit costs and lower treasury gains. However, retail-focused banks are likely to fare much better on all counts during Q4FY18 result season. Given the superior competitive position, we expect private sector banks and retail-focused NBFCs to steadily gain market share. We recommend investing in Banks and NBFCs with better earnings potential, superior asset franchise and expanding distribution from a medium-term perspective.
Equitas Holding – Perfect Mix Of Growth, Reliability and Focus
In our opinion, Equitas offers a strong re-rating potential. We forecast Equitas to report 250-300% YoY jump in PAT in Q4FY18 compared to INR 69 million reported in Q4FY17. NII is expected to grow at 15-17% YoY, with Assets Under Management (AUM) momentum improving due to traction seen in retail segments of used CV, SME, Loan Against Property (LAP) and home loans. Further, operating leverage and reduction in provisions should translate into strong growth in net profits for the quarter.
250-300% YoY jump in PAT in Q4FY18E
15-17% YoY increase in NII in Q4FY18E
~30% Growth in AUM over the next 5 years
SFB status will enrich its product offering
Improvement in liability profile
To achieve 2% and 15% threshold for RoA and RoE by FY21-FY22
We find Equitas very compelling for long-term investment. Various factors that we believe make Equitas an attractive wealth creator stock are as follows:
- Sustainable high growth opportunity – Equitas is focused on underserved segments, the majority of which depend on local money lenders and other informal sources of credit. Given the latent demand, Equitas can leverage its strong Micro Finance Institution (MFI) customer base to add new products and expand both geographically as well as through cross-selling opportunities. Overall we expect Equitas’ AUM to grow at a healthy CAGR of ~30% over the next five years.
- Diversified asset base centered around its MFI core – Diversification has been the backbone of Equitas’ progress story. The company operates as a diversified financial services provider with focus both on individual as well as Micro and Small Enterprise (MSE) credit requirement. To this end, it has prudently diversified its product offerings across high yielding and high growth business segments including microfinance, used-CV finance, MSE finance and housing segment. The mix between MFI and non- MFI activities in loan book currently stands at 46:54 compared to 76:24 in FY13. This is quite unlike other Small Finance Banks (SFB) license winners that mostly operate with a singular micro-financing focus.
- Cross-selling opportunity – We believe that SFB status will further enable Equitas to enrich its product offering, as it can now offer a complete range of product suite to its customers as per their requirement. This will unlock an attractive opportunity for vertical as well as horizontal penetration by way of up-selling and cross-selling.
- SFB transition to improve liability profile – One of the key drivers for becoming a SFB is the access to a stable and granular funding profile. The initial investment phase is over and now the bank will go slow on branch expansions. The benefit of operating leverage due to expected increase in Current and Savings Account (CASA) should therefore, translate in high growth in net profits going forward.
To conclude, new product introductions will provide the much-needed stability, granularity and longevity to the business. With its SFB license in place, Equitas’ funding profile is likely to become granular and its dependence on institutional credit is expected to decline. Even after taking into account the marginal impact of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirement and the rising operating costs on account of improvement in branch network and technology platform, we believe Equitas will be able to cross 2% and 15% threshold for Return on Assets (RoA) and Return on Equity (RoE) by FY21-FY22.
In our view, Equitas will see multiple expansion led by its niche business model, strong growth in operations and sustained high profitability, making it an attractive long-term opportunity.
The following article should not be construed as the Investment Recommendation.
It is safe to assume that this opportunity could be a part of the portfolio recommended to our paid customers.
Most importantly, since we design personalized portfolio as per your risk profile, this investment opportunity may or may not be a part of your portfolio.
Read more: How Long-term investing helps create life-changing wealth – TOI.