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Sunday, May 9, 2021

Analyst Corner – AU SFB: downgrade to “ neutral ”, increase TP to Rs 1,075

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Of this ~ 1.5% of GNPAs are now <90DPD but over 60% of them are 60-90DPD and therefore we do not find this comforting given the current environment.

The AU’s strong asset growth was marred by poor asset quality, with a 100 basis points / t increase in GNPA. The magnitude of the increase in GNPAs was a nasty surprise; Although well endowed, we are concerned about the aggressive disbursements made in the last two quarters (36% of the AUM of March 21), which remain reckless when entering the second wave of Covid. In addition, we believe the AU will need to slow its growth, given the uncertain environment, and will need to demonstrate stable asset quality before the current rich valuations can be justified.

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We’re less concerned with the long-term story and expect the bank to do well relative to its new age banking peers. That said, valuations at 3.8x / 25x FY23F BV / EPS warrant caution in the short term, as the margin for error is small. We are thinking of lower growth of 20% / 25% and a slightly higher cost of credit of 140 / 100bps for fiscal years 22/23, resulting in a 9% / 6% reduction in our PAT forecast. As a result, we lower the rating to “neutral”. We raise the TP to Rs 1075 (multiple target unchanged at 4x FY23F book) taking into account the recent capital increase. We prefer Equitas Holdings (EQUITAS IN, “buy”) within SFBs.

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Asset quality surprises negatively: GNPA rose 60 bps q / q to 4.3% (+ `5 billion), which was a negative surprise, given the strong inflows trends reported by UA. Of this ~ 1.5% of GNPAs are now <90DPD but over 60% of them are 60-90DPD and therefore we do not find this comforting given the current environment.

We could not get enough clarity on whether previously affected segments such as taxi aggregators, school bus operators, are now fully recognized. That said, 50% PCR on this GNPA technical pool is adequate, in our opinion. What worries us the most are the aggressive 3Q / 4T disbursements (36% of AUM) which are clearly unseasoned and the increase in GNPA adjusted for this aggressive growth would have been higher (5.5% over a base shifted by 2 qtr).

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The cost of credit could remain high in FY22F, given the second wave of pandemic affecting the same segment; high probability that part of the customers initially stressed in DPD buckets circulate and a large unseasoned book. As a result, we are now incorporating a cost of credit of 140 / 100bps for FY22 / 23F versus 100 / 85bps earlier.

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