ICICI Securities Bullish On This Small Cap Payments Bank Stock, Sees More Than 60% Returns, Buy

ICICI Securities recently published a report on Fino Payments Bank, recommending the stock "buy" with a target price of Rs 325 per share. According to the broker's target price, the stock has the potential to return 61% on investment in 12 months. Fino Payments Bank is a smallcap bank having a market cap of Rs 32,187.13 crore. It is one of 6 payments banks operating in India. The Bank is present in 90% of India's districts with over 724671 banking outlets, 54 Bank Branches and 130 Customer Service Points, according to the bank.

Stock Outlook & Returns In 5 Years

 On NSE, the Current Market Price of the Fino Payments Bank is Rs 202.60 apiece, trading 2.61% up from its previous close of Rs 197.45 apiece. The stock's 52 week high is Rs 582.95 recorded on 12 November 2021 and the 52 week low is Rs 187.85 recorded on 11 October 2022, respectively.

The bank was listed on the stock exchange on 12 November 2021. The stock has fallen 62.93% since its listing date. In the past 1 month, it has given 12.38% negative returns, in the 3 months 23.87% negative returns and in 6 months 33.89% negative returns, respectively.

Higher share from own banking channel and steady scale-up in high-margin focused products like CASA and CMS drove 36% QoQ growth in earnings

Net earnings, after falling >40% QoQ in Q1FY23, grew 36% QoQ to Rs138mn. While Q2FY23 earnings growth looks impressive, PAT in absolute terms is still lower than the Q4FY22 PAT of Rs176mn. During Q2FY23, earnings were driven mainly by 60bps QoQ gross margin expansion and tight control on operating expenses (up only 2% QoQ). Gross margin expansion was driven largely by increasing share of business via own banking channels and increasing share of CASA renewal income (>55% margins).

Management is cognisant of volatile margin trend; plans to improve the share of own channel business to 67% from currently 62%

Sharp recovery in domestic remittances (85% of volumes via open banking as of Sep'22) post covid led to share of open banking revenues increasing to 38% as of Jun'22. Given that open banking margins are very low at 4% vs 47% in own banking channel, management highlighted that they are cognisant of the margin contraction and have initiated measures to arrest the same. Q2FY23 started reflecting trend reversal as reflected in share of open banking revenues declining to 36% vs 38% in Q1FY23. Within existing products, Fino will continue to focus on scaling CASA and CMS revenues going forward given that renewal margin in CASA is as high as >60%.

Strong growth in focused segments like CASA / CMS sustained; MATM continued to face headwinds

Fino reported strong 14% QoQ growth in CMS and 23% QoQ growth in new CASA customer acquisitions (both are >40% margin products). It added >0.76mn new CASA customers during Q2FY23 and the current monthly run-rate implies CASA customer addition at >2.4mn in FY23E. Combined revenue share of CASA + CMS now stands at 26% vs 21% in Q1FY23 and 17% in Q2FY22. Revamped Fino Pay app, increased volumes in UPI and strategic acquisition of Paysprint will drive 'off-us' conversion and higher retention of existing customers.

MATM throughout fell 18% QoQ / 29% YoY owing to higher 'on-us' conversion and intense competition. However, management remained committed to revive growth in MATM given that it is a >40% margin product.

Increasing share of subscription revenues brings stability

Fino's gross revenues now stand at Rs3.0bn vs Rs2.4bn in Q2FY22, implying growth of 25% YoY. During past two years, management has incrementally focused on building a sustainable subscription-based revenue stream. As a result, the share of subscription-based revenues increased to 30% vs 25% in Q1FY23.

Encouraging 'off-us' to 'on-us' conversion ratio improves visibility on better cross-selling

Management highlighted that ~20mn-25mn customers visit Fino platform every month and that it converts ~2.5% of the traffic into 'on-us' customers. Organic customer acquisition remained at ~0.76mn in Q2FY23. Conversion ratio was 0.75-0.8% six months back. Improving customer retention, strong traction in new customer acquisition with planned new product launches in the near term, are likely to drive higher cross-sell going ahead.

 

CASA - renewal revenues grew 16% QoQ

Fino added 2mn CASA customers during FY22, which is ~2x of total accounts opened in FY21. The traction continued as reflected in addition of 1.4mn CASA customers during H1FY23. ~68% of total accounts opened in FY22 already opened in H1FY23. ~87% of accounts opened are on subscription basis. Fino commands robust renewal margin of >60% and acquisition margin of >40% in CASA. Hyper-local personalised service, extended banking hours and wide range of products are driving a renewal rate of >50% in first year. The share of renewal revenues currently stands at 29%.

Strong traction in CMS continued

CMS throughput registered robust 14% QoQ growth to Rs105bn, with monthly throughput crossing >Rs30bn in Sep'22. Take rate remained stable at 23bps and it continued to be one of the highest-margin products at 40%. 

Sequential improvement across the board; sustainability is key

Fino Payment Bank's (Fino) Q2FY23 financial performance showed improvement across business parameters as reflected in 36% QoQ growth in earnings at Rs138mn -driven largely by 60bps QoQ gross profit margin expansion and benefits of operative leverage. Gross revenues grew 5% QoQ while total operating expenses rose only 2% QoQ. As a result, cost/income ratio moderated to 95% vs 97% in Q1FY23. Strong revenue growth and operating leverage benefits led to 100bps QoQ PAT margin expansion to 4.5% during Q2FY23 vs 3.5% in Q1FY23. Margin expansion was primarily driven by strong 66% QoQ growth in CASA revenues (margin @ 58%), 16% QoQ growth in CMS revenues (margin @ 40%) and higher share of revenues from own banking channel at 64% during Q2FY23 vs 62% in Q1FY23. Total throughput remained flat QoQ at Rs605bn due to sequential decline in MATM volumes (down 18% QoQ), AEPS (4% QoQ) and remittances (2% QoQ). Strong 14% QoQ growth in CMS volumes restricted further decline in overall throughput during Q2FY23.

Buy for a target price of Rs 325/share

Management unveiled Fino 2.0 digital initiative during Q1FY23 aiming at converting 'offus' customers to 'on-us' and then cross-sell other financial services and products. Earlier investments towards digital platforms have already started yielding positive results as reflected in digital throughput now contributing 17% to total throughput as of Sep'22. Maintain BUY with a Target Price of Rs 325, valuing at 32x P/E FY24E EPS.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.