Analyst Corner AU SFB: Downgrade to neutral, raise TP to Rs 1,075

By Nomura7 days ago

We are less worried about the long-term story and expect the bank to deliver well relative to new-age banking peers. That said, valuations at 3.8x/25x FY23F BV/EPS warrant caution in the near term as room for error is low.

Of this, ~1.5% of GNPAs are now <90DPD but more than 60% of these are 60-90DPD and hence we dont find it comforting given the current environment.

AUs strong asset growth was marred by weak asset quality, with a 100bps q/q increase in GNPAs. The extent of the increase in GNPAs was a negative surprise; while well provided for, we are concerned about the aggressive disbursals done in the past two quarters (36% of Mar21 AUM), which remain unseasoned entering into the second wave of Covid. Further, we think AU will have to slow down 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 are less worried about the long-term story and expect the bank to deliver well relative to new-age banking peers. That said, valuations at 3.8x/25x FY23F BV/EPS warrant caution in the near term as room for error is low. We pencil in lower growth of 20%/ 25% and slightly elevated credit cost of 140/100bps for FY22/23F, resulting in 9%/ 6% cuts in our PAT forecasts. Accordingly, we downgrade the rating to neutral. We raise the TP to Rs 1,075 (target multiple unchanged at 4x FY23F book) as we factor in the recent capital raise. We prefer Equitas Holdings (EQUITAS IN, buy) within SFBs.

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