Motilal Oswal reiterates ‘buy’ on Equitas Small Finance Bank; here’s why
Motilal Oswal Financial Services has reiterated ‘buy’ rating on Equitas Small Finance Bank over robust growth and strong upside potential in neat-term. Recently, the Reserve Bank of India (RBI) gave an approval for the re-appointment of PN Vasudevan as the Managing Director (MD) and Chief Executive Officer (CEO) of the bank for a period of three years. The brokerage firm believes that the overhang of management succession has been removed.
Vasudevan’s current tenure as MD & CEO is set to end on July 22, 2023. In May of 2023, he announced his decision to step down from his position to dedicate his time to social welfare initiatives through his public charitable trust.
Motilal Oswal Financial Services highlighted that the focus will now return to the fundamental performance of the lender now that the overhang is removed, according to a report by Moneycontrol.
The brokerage firm has estimated that the lender will deliver a Return on Asset (RoA) and Return on Equity (RoE) of 2.1 percent and 16.7 percent in FY25, with a target price of ₹105. On June 23, shares of Equitas Small Finance Bank settled 3.17 per cent lower at ₹82.07 apiece on the BSE. Motilal Oswal says that the stock price implies an upside potential of 28 per cent. The brokerage firm believes that the bank’s robust growth will be a trigger for re-rating of the stock.
The stock has gained 27 per cent in the past three months whereas in the past one year, it has rallied 114 per cent. Equitas Small Finance Bank reported a 58 per cent on-year rise in net profit for the March quarter in FY23 at ₹190 crore, backed by business expansion and betterment of asset quality.
The net interest income (NII), the difference between interest earned and interest expended, grew by 28 per cent to ₹706.9 crore in the quarter. The lender has been reporting a gradual improvement in its operating performance over the past few quarters with healthy growth in deposits and loans along with strong asset quality.
Motilal Oswal expects the asset quality ratios to improve further and expect Provision Coverage Ratio to improve to 70 percent by FY25 (with Provision Coverage Ratio improving over 1,400 basis points in FY23).
The bank’s loan growth was strong at 33 per cent in FY23, and Motilal Oswal Financial Services has estimated a robust compounded annual growth rate of 27 percent in loans over FY23-25. Equitas Small Finance Bank sees a huge opportunity in vehicle finance and expects the segment to be one of the key drivers of loan growth while small business loans and microfinance segments maintain healthy growth traction, Motilal Oswal Financial noted.
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Updated: 24 Jun 2023, 04:43 PM IST
