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Analyst Corner: Equities likely to meet the deadline for SFB listing

Axis Capital

Equitas plans to distribute free shares of Equitas Small Finance Bank to its existing shareholders which will help it list the SFB and bring down the promoter holding in the bank to 53 percent from current 100 percent (as per rough estimate, each share of holding company will get 2.6 shares of the SFB) this will remove a huge overhang on the stock.

Equitas is likely to meet the RBI deadline of 4th Sept 2019 for listing of the SFB.

Q3 performance: Equitas reported PAT of Rs 62.50 crore, ahead of our estimate of Rs 57.10 crore. There was improvement across parameters: (a) AUM growth at 40.7 percent YoY (best in last 8 quarters); (b) Margin improved 121 bps QoQ to 9 percent; and (c) GNPA ratio down 23 bps QoQ at 3.13 percent.

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However, CASA ratio which was on continuous rise witnessed a sharp decline of 415 bps quarter-on quarter to 30.5 percent. (a) Overall disbursements were robust at 43 percent YoY, primarily driven by sub-segments like MFI (up 69% YoY), small business loans (up 69 percent YoY), New CV (up 54 percent YoY) and housing finance book (up 49 percent YoY); (b) Collection efficiency in MFI book has moderated in last 2 months on account of Cyclone Gaja (hit South TN in Nov); (c) Cost to income ratio to remain elevated in FY20 as Equitas plans to add resources in sales (H1FY20) and invest in branches (H2FY20); and (d) CASA ratio declined sharply on account of 5.3 percent QoQ decline in savings deposit book due to run-off of bulk SA as well as conversion to term deposits.

Under current norms, Equitas will have to list the SFB by Sep 2019 and reduce promoter shareholding to less than 40 percent by Sepember 2021.

Equitas has proposed the scheme of arrangement to list the bank without the IPO, which will reduce the stake of holding company in the bank to 53 percent and is awaiting regulators approval on the same. We believe this will remove a huge overhang on the stock and with gradual improvement in core fundamentals; valuations have become attractive at 1.6x/1.5x FY20E/FY21E P/ABV.