Motilal Oswal Bets On This Midcap Banking stock, Suggests Buy For 750 Target Price

Motilal Oswal recommends 'buy' AU Small Finance Bank (AUBANK) for decent gains of up to 12% gains with a target price of Rs 750 apiece. AUBANK is a mid cap bank having a market cap of Rs 44,808.68 crore.

The brokerage recently attended the fourth session of AUBANK's virtual Insights Day. The management dwelled upon its two SBUs: Secured Business loans and Commercial Banking. As these businesses provide significant growth opportunities, the management aims to grow this book at a healthy pace. It intends to offer superior digital capabilities and cross-sell its wide bouquet of services, which will enhance its fee income. Here are the key takeaways:

Stock Outlook & Returns

The stock of AUBANK is last traded at Rs 672.95 apiece on NSE, 0.19% up from its previous close of Rs 671.65 apiece. Its 52 week high is Rs 636.25 and its 52-week low is Rs 441, respectively.

The stock has given positive returns in the past 5 years. In a week, it moved up by 5.26%. In 1 month it moved up by 9.16%. Whereas, over a year, it grew by 15.98%, and in 3 years it grew by 66.53%, respectively. It has given a maximum 95.07% positive returns in the past 5 years.

Secured Business loans (SBL) – Mr. Amar Bahl, Head SBL

• It has made a segment-wide and profile-wise questionnaire to assess cash flow and the income profile of borrowers for the purpose of underwriting. It has put in place a robust mechanism and has an in-house team to assess the property and the collateral offered.
• The bank has created a sustainable model for a deep understanding of the business and to assess each factor in greater detail.
• MSMEs constitute 30% to India's GDP, 50% of its exports, and employs ~110m.
• Around 75% of AUBANK's exposure is to borrowers (average exposure of up to INR2.5m) with lower capex and OPEX requirements. Rajasthan and Madhya Pradesh are home to ~2.6m MSMEs, which offers it significant growth opportunities. Over 30% of the book is outside Rajasthan and Madhya Pradesh. It has increased the number of branches under SBL lending to 450.
• It offers collateral-backed loans of INR0.2m-10m with a tenure up to 15 years.
• Snapshot: Average tenure stands at 101 months, with an ATS of ~INR1m and a LTV of ~46%. Around 75% of its customers are NTB, with a GNPA of 2.69%. About 70% of its customers make payments without any follow up. Even customers that availed of the moratorium have started to make payments.
• About 63% of its book sports a RoI of 14-18% and a ticket size of sub-INR1.5m. The bank is witnessing good opportunities in the Mid segment as well.
• Sourcing mix: Direct sourcing (73%), AU Connect - local city referral (21%), cross-sell (3.5%), digital (1.5%), and BC (1%). Sourcing via alternate channels are gaining scale and growing at a faster pace.
• Credit score mix: New to credit (16%), 700 and above (68%), 650-699 (12%), 600-649 (3%), and less than 600 (1%).
• To assess the collateral, the bank follows a dual legal check and an in-house technical team. Around 85% of collateral are self-occupied properties, with 75% being residential and 98% fully constructed.
• The underwriting process has been made more stringent, with a reduction in portfolio concentration to COVID-impacted sectors.
• Portfolio concentration in the Education/Hospitality/Daily and Allied sector has fallen to 1.5%/1.3%/0.7% from 6.3%/2.2%/1.8% earlier.
• As most of the impacted sectors have either recovered or are in the last phase of a recovery, the management believes it is well placed to capture this growth opportunity and is likely to grow at a healthy pace.
• As SBL is a low OPEX and a high margin business, it aids overall profitability of the bank.

Commercial Banking - Mr. Vivek Tripathi, Head Commercial Banking

• Commercial Banking includes Business Banking, Agri Banking, NBFC lending, Real Estate lending, and Transaction Banking services. Business and Agri Banking constitute 70% of the total business.
• Business mix: ~55% is working capital and 45% is term loans.
• Commercial Banking customers have a deposit balance of INR52.7b.
• The business has a C/I ratio of 35%. The recurring fee income profile stands at 28% of NIM, with a RoA of over 2.5% and very low credit cost. Around 98% of its book sports a GNPA of 0.48%.
• A large part of the book (barring Real Estate) is at a floating rate, which is linked to the repo rate and is reset on a quarterly basis.
• AUBANK's market share in Commercial Banking stands at 0.2%, with the share of Private Banks constantly rising, providing a significant growth opportunity.
• Business Banking: ATS stands at INR8.5m, with working capital constituting 70% of total loans. WIRR stands at 10.15%, with GNPA at 0.17%.
• Sourcing mix: Branch (32%), self-sourced via referrals (29%), and channel partner (39%). Urban areas account for 58% of the book, while 42% is from its core region, with 80% being PSL compliant. Around 63% of the book has a ticket size of less than INR50m.
• Agri Banking: ATS stands at INR9.8m, with working capital constituting 60% of total loans. WIRR stands at 10.11%, with GNPA at 0.74%.
• Sourcing mix: Branch (19%), self-sourced via referrals (34%), and AU Value (47%). Urban areas account for 54% of the book, while 46% is from its core regions, with 93% being PSL compliant. Around 64% of the book has a ticket size of less than INR50m.
• NBFC lending: It has an exposure to 146 NBFCs, with 90% of the book sporting an investment grade. ATS stands at INR130m, with secured lending constituting 78%. Average residual tenure stands at 21 months. This floating rate book is linked to the repo rate, with an IRR of 10.8% (up 110bp since Mar'22). GNPA stands at a mere 0.01%.
• REG book: The focus remains on growing the cash flow backed business in Tier I cities, while reducing the mix in the LAP business. AUBANK is focusing on loans with an ATS of less than INR150m and Affordable Housing projects.
• Affordable Housing constitutes 42% of the book. RERA projects constitute 92% of the portfolio, with an average loan cycle of 30 months. ATS stands at INR142m, with average Retail ticket size of INR9m.
• GNPA ratio stands at 1.85%, with 97% of the book being current. Only three customers are 90+dpd. No customer loans disseminated after Apr'17 have turned into an NPA. GNPA is 100% provided for and the book has a security/receivable cover of 1-5-2x/2-2.5x.
• Transaction banking: The number of customers on-boarded have grown 4x in the past few years. The management aims to build the CASA business and expand the bank's product suite.
• Overall, its focus remains on expanding digital adoption of internal processes and digital channels for a superior customer experience.

Valuation and view

AUBANK has been reporting a healthy performance, led by an expansion in margin and controlled credit cost. On the business front, growth in advances remains strong. The traction in deposits, particularly Retail deposits, remains healthy. It carries contingent reserves of INR1.29b (25bp of loans), which, coupled with a 17% coverage on restructured assets, provides comfort. "We expect 25% earnings CAGR over FY22-24, with a RoA/RoE of 1.8%/14.9% in FY24. We maintain our Buy rating, with a TP of INR750 (premised on 3.6x Sep'24E BV)," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. 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.