AU Small Finance Bank - Priced to perfection; no room for disappointment - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

AUBANK's earnings were ~15% below our expectations on account of lower fee income and higher provisioning. Asset quality deteriorated, largely due to the second wave of the pandemic after a sharp disappointment in Q4FY21. Slippages were at 3.3%, relatively lower than FY21 (4.1%), with restructured portfolio at about 4% of loans and SMA-I + SMA-II book stable at ~7%. Disbursements were muted largely on account of sluggish trends in the MSME segment. The bank has revamped its digital product offerings, along with launch of credit cards, implying higher investments over the coming quarters. With the customer franchise (ex-wheels) largely in the investment mode and vulnerable to economic shocks, muted growth outlook in the near-term, and foray into new asset classes (retail unsecured credit), we argue that the current valuations (>5x Mar'23 ABVPS) are demanding and leave little room for any disappointment. We downgrade AUBANK to REDUCE with a target price of INR 1,046.

In-line operational performance: AUBANK reported strong NII growth of 40% YoY, driven by funding cost tailwinds (90bps compression on a YoY basis) and a strong 22% YoY growth in AUM. Disbursement run-rate declined significantly (59% lower than FY21 average), predominantly due to the MSME segment, leading to lower fee income, dragging YoY PPOP growth to 1.3%. Liability franchise continued to make steady progress with average CASA ratio at 26% (Q4FY21: 22.5%).

Marginal sequential deterioration in asset quality: Considering the macro environment during the quarter, AUBANK's asset quality held up relatively well compared to peers, with slippages at ~3.3% (annualised) and another~2% of portfolio restructured during the quarter. PCR declined marginally to 49% (FY21: 50%), as nearly the entire provisioning was allocated towards restructured assets and standard assets. Wheels/REG GNPA increased to 5.9%/5.3%, while SME/MSME GNPA declined marginally to 18%/4.2%. While the collection efficiency improved during Jun-Jul'21, we believe this cannot be straight-lined in the current macro environment, especially given AUBANK's aggressive foray into the credit cards business.

Near-term challenges at odds with a lofty valuation: AUBANK's foray into credit cards and other new segments are likely to be a drag on its operating efficiency, even as the franchise invests in new growth avenues. The bank's historically-low LGDs were driven by its secured asset portfolio (wheels in particular), which is unlikely to sustain in the case of unsecured businesses. We also highlight that AUBANK's ability to deliver profitability at scale is yet to be proven outside of the wheels business. We downgrade the stock to REDUCE with a revised TP of INR 1046 (4.3x Mar'23 ABVPS).

Shares of AU Small Finance Bank Limited was last trading in BSE at Rs. 1258 as compared to the previous close of Rs. 1248.4. The total number of shares traded during the day was 396438 in over 4292 trades.

The stock hit an intraday high of Rs. 1270.65 and intraday low of 1233.3. The net turnover during the day was Rs. 495003791.

Source : Equity Bulls

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