Maintain ADD on AU Small Finance Bank - Promising trends persist - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities

AUBANK's 2QFY21 net earnings were ~110% ahead of estimates, buoyed by gains from the stake sale in AAVAS. Adjusted earnings, too, were ~28% ahead of estimates, on account of lower-than-expected provisions. The bank saw a sustained improvement in collection efficiency and did not make incremental COVID-19 related provisions. While these trends are promising, we continue to model for a sharp rise in GNPAs and elevated provisions in FY21E. Strong CASA growth, led by retail deposits, was another positive. We like the bank for its strong fundamentals and believe that its long-term prospects remain intact. We maintain ADD with a target price of Rs 770.

QoQ deposit growth was muted at just 0.9% (+21.8% YoY) as the bank chose to shed some wholesale deposits. However, CASA growth (+60.2/37.9% YoY/QoQ) was strong, led by 64.5/41.1% SA growth. Consequently, the CASA% increased to 19.8% (the highest ever). The management reiterated its focus on granular deposits. We will watch out for trends on this front.

AUM and disbursal trends: Disbursals rebounded QoQ (+188.7%) but were 27.8% lower YoY. Wholesale disbursals were 9.5% higher YoY, while growth in this segment was led by the NBFC (+32.4% YoY) and business banking (+45.6%) sub-segments. Retail disbursals were 36.2% lower YoY. In September, disbursals were just ~1% lower YoY. AUM growth expectedly slowed further to 9.7/1.8%. MSME (+24.7/5.6%), SME (+21/8.7%), and business banking (+39.9/17.2%) were the fastest-growing sub-segments. We expect an AUM CAGR of ~19% over FY21-23E. AUBANK's strong fundamentals, the potential for geographical expansion, and dwindling competition provide a significant long-term growth opportunity.

Collection efficiency and asset quality trends: Including prior periods' receipts, collection efficiency reached 96% in 2QFY21. The proportion of loans under moratorium stood at 5.5% at the end of August (vs. ~11% in June). Of this, 3% did not make any repayment. The management views this as the potential stress pool. However, the customer activation rate stood at 78% (vs. 80% between April 2019 and February 2020). We continue to conservatively build GNPAs of 3.0% in FY21E.

Non-tax provisions dipped (-5.9/-68.3%). The bank chose not to make any COVID-19 related provisions during the quarter. The total stock of such provisions was Rs 2.8bn (~90bps of AUM). Calculated coverage stood at 71% (+2,711/747bps). This increase is optical due to the impact of the recent SC order and end of the moratorium. We expect LLPs of 1.42% over FY21-23E.

Shares of AU Small Finance Bank Ltd was last trading in BSE at Rs.775 as compared to the previous close of Rs. 781.2. The total number of shares traded during the day was 3725 in over 412 trades.

The stock hit an intraday high of Rs. 790 and intraday low of 775. The net turnover during the day was Rs. 2905560.

Source : Equity Bulls

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