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Equitas Holdings Limited

Investment Case

April 2019
Equitas Holdings Limited
Company Background
 Equitas Holdings Limited is a diversified financial services provider focused on low income groups and economically
weaker individuals operating small businesses, as well as MSEs with limited access to formal financing channels on account
of their informal, variable and cash-based income profile.

 The Company has well diversified product portfolio with low ticket size and high yields.

Equitas Product
Portfolio

Micro Finance Non – Micro Finance


(27%) (73%)

Avg. Ticket Size:


INR 29,000
Yields: 23%
Vehicle LAP & Housing Business & Agri, Gold & Corporate
Finance Micro-LAP Finance MSE Finance Other Loans Loans
(25%) (27%) (6%) (5%) (6%) (4%)

ATS: INR 4-6 Lacs ATS: INR 3-7 Lacs ATS: INR 34 Lacs ATS: INR 18.6 Cr.
Yields: 18-21% Yields: 18-20% Yields: 17-18% Yields: 11%

 As on Q2FY19, Equitas has a total AUM of INR 9,981 Cr., spread across categories such as Micro-finance, Vehicles, Micro
LAP/Small business, Housing, Agri, Gold, MSE and corporate. The retail liability front is shaping up well, with deposits
forming 52% of total borrowings and CASA forming 35% of the deposit base.

 The Company has an asset network of 500 branches and a liabilities network of 375 branches.
Source: Company website and press releases 2
Evolution of Equitas
Fast Paced Diversification Towards High-Yield Secured Products
Stage IV:
FY18-FY20E
Stage III:
FY16-18

Stage II:
FY11-16

 Market believes this period


Stage I: represents the commencement of
 Implemented the strategy growth phase for Equitas.
FY09-11 to reduce its MF portfolio.
 Diversified its  The Company is expected to have
 Inception in portfolio into  Run down of MF book the potential to repeat its
Dec-07. secured lending for contracted net interest impeccable past performance
housing finance and margins (NIMs). with a balanced mix of secured
used commercial high yielding products, lower cost
 Provided  Was one of the 10 of liability deposits and grow its
vehicle finance.
micro-finance applicants to be granted loan book at 37% CAGR during
(MF) to  Diversification approval to convert into a FY18-21E.
households in helped the company Small Finance Bank (SFB).
the unserved grow its AUM at  A pro-active, highly skilled
areas. 52% CAGR.  Conversion into SFB inflated management team, prudent
opex; thus pulling down approach, right strategy can help
profitability. Equitas outperform the banking
and NBFC industry in the coming
years.

Source: Company website and press releases 3


Management Team
Highly Experienced and Skilled Team
Name Designation Joining Date Role

Mr. Vasudevan is the founder of the company. He has extensive experience in


the financial services sector and had served as Head – Consumer Banking Group
P. N. Vasudevan Managing Director Jul 2007 in Development Credit Bank Limited, for more than one and half years prior to
starting Equitas. Before DCB Bank, he worked for 20 years at Cholamandalam
Investment and Finance Co Limited, heading the vehicle finance business.

Mr. Bhaskar S, joined Equitas in Oct, 2007 and served as the CFO prior to his
appointment as the Executive Director & CEO in Oct, 2016. He is a Chartered
Accountant. He started his career with Pricewaterhouse & Co., where he worked
Executive Director &
S. Bhaskar Oct 2007 for one and a half years and later moved to Cholamandalam Investment and
CEO
Finance Company Limited where he worked for two decades. Prior to joining
Equitas Group, he was the Group Treasurer and Senior Vice President – Audit for
the Murugappa Group, Chennai.

Prior to joining Equitas he was with SRA Systems Ltd as General Manager -
Chief Financial Officer
Sridharan N. Aug 2010 Finance for nine years and prior to that, he was associated with Subhiksha
– SFB
Trading Services as Vice President – MIS and Commercial Control.

Srimathy Prior to joining Equitas Group, she had 6 years professional experience working
Chief Financial Officer Oct 2013
Raghunathan with Tata Capital Limited and Hinduja Leyland Finance Limited.

President (Incl. Vast experience of 25 years in Micro finance, lending and FMCG. He has worked
HKN Raghavan Dec 2008
Banking) with various FMCG majors like Hindustan Unilever Ltd, Dabur Ltd etc.

President (SME 25 years’ experience of in retail, SME financing. He has earlier worked with Axis
Bhadresh Phatak NA
Banking) Bank, IDBI Bank and Yes Bank.

Head – Emerging He has a vast experience in Vehicle financing from his previous association with
Ajit Balkrishnan NA
Enterprise Banking Cholamandalam, GMAC and Apple Credit.

He has 16 years of experience in capital markets, advisory and planning. He has


Dheeraj Mohan Head – Strategy & IR NA
earlier worked with Cholamandalam and Edelweiss.

Source: Company website, annual report and Bloomberg 4


Key Financial Metrics
Investment Evaluation

• Micro Finance Loan Growth

• Non-Micro Finance Loan Growth

• Industry Specific Key Ratios


− Yield on Advances
− Yield on Total Assets
− Cost of Borrowings
− Spread
− NIM

Equitas Holdings • Profitability Ratios


− Cost / Income Ratio
Investment Case
− ROA
− ROE

• Asset Quality Ratios


− GNPA Ratio
− NNPA Ratio

• Balance Sheet Ratios


− CASA
− CAR

• Valuation Ratios
− P/E
− P / BV
− P / Adj. BV

5
Financial Overview
Source: Annual Report
Income Statement Balance Sheet
(INR Cr.) FY17 FY18 FY19E FY20E FY21E (INR Cr.) FY17 FY18 FY19E FY20E FY21E
Interest earned 1,443 1,598 2,103 2,740 3,563 Equity share
338 340 340 340 340
capital
Int. expended 576 674 955 1,255 1,705
Reserves &
NII 867 924 1,148 1,484 1,858 1,893 1,936 2,143 2,481 2,982
surplus
Non-interest inc. 114 189 263 330 439 Net worth 2,231 2,276 2,483 2,821 3,323
Total income 981 1,114 1,411 1,814 2,297 Deposits 1,572 4,719 7,770 11,670 16,370
Growth 44% 14% 27% 29% 27% Growth - 200% 65% 50% 40%
Opex Costs 615 891 966 1,105 1,265 Borrowings 4,971 5,888 5,283 6,333 7,715
Growth 71% 45% 8% 14% 15% Other liabilities &
670 612 572 592 612
Staff Costs 396 520 551 634 729 provisions

Other Opex 219 371 451 471 536 Total liabilities 7,213 11,219 13,625 18,595 24,697

Profit before Total liabilities &


366 223 445 710 1,032 9,443 13,495 16,108 21,416 28,019
prov. equity

Growth 15% (39%) 100% 59% 45%


Provisions 103 172 124 184 252 Cash & bank
1,064 1,194 932 934 1,146
balances
Growth 74% 67% (28%) 49% 37%
Investments 1,896 3,857 3,108 3,501 4,420
Exceptional items (11) 0 0 0 0
Net advances 5,829 7,800 11,249 16,002 21,317
PBT 252 51 321 526 780
Growth 15% 34% 44% 42% 33%
Taxes 92 20 115 188 278
Other assets 326 313 438 553 668
Net profit 159 31 207 338 502
Fixed assets 329 330 380 426 468
Growth (5%) (80%) 559% 64% 48%
Total assets 9,443 13,495 16,108 21,416 28,019

Source: Company annual report and Moneycontrol database 6


Key Financial Metrics
Ratio Analysis
Key Ratios Asset Quality
Particulars FY17 FY18 FY19E FY20E FY21E Particulars FY17 FY18 FY19E FY20E FY21E
Yield on GNPA 206 213 369 559 743
21.5% 19.7% 20.2% 19.6% 19.1%
advances
GNPA ratio 3.5% 2.7% 3.3% 3.5% 3.5%
Yield on total
18.5% 14.3% 14.6% 14.9% 14.7% NNPA 86 112 206 256 323
assets
Cost of NNPA ratio 1.5% 1.4% 1.8% 1.6% 1.5%
10.1% 7.6% 7.8% 7.8% 7.8%
borrowings PCR (reported) 47% 44% 54% 56% 57%
Spread 11.4% 12.1% 12.4% 11.8% 11.2% Credit Cost 2.0% 1.3% 1.4% 1.4% 1.4%
NIM 9.4% 8.0% 7.6% 7.8% 7.4%

Profitability Ratios Balance Sheet Ratios


Particulars FY17 FY18 FY19E FY20E FY21E Particulars FY17 FY18 FY19E FY20E FY21E
Cost / income CD Ratio 370.8% 81.7% 40.0% 30.0% 27.0%
62.7% 80.0% 68.4% 60.9% 55.1%
ratio
CASA 1.1% 34.6% 34.6% 35.0% 35.3%
ROA 2.1% 0.3% 1.4% 1.8% 2.0%
CAR 35.5% 28.6% 22.2% 19.6% 18.4%
ROE 9.3% 1.4% 8.7% 12.7% 16.3%

Per Share Data Valuation Ratios


Particulars FY17 FY18 FY19E FY20E FY21E Particulars FY17 FY18 FY19E FY20E FY21E
EPS 4.7 0.9 6.1 9.9 14.7 P/E 26.0 133.1 20.2 12.3 8.3
BVPS 66.0 66.9 72.9 82.9 97.6 P / BV 1.9 1.8 1.7 1.5 1.3
Adj. BVPS 63.5 63.6 66.9 75.3 88.1 P / Adj. BV 1.9 1.9 1.8 1.6 1.4

Source: Moneycontrol database 7


Comparable Companies
Investment Attractiveness
Particulars Small Finance Bank Banks Comparison NBFCs
As on Q2FY19 Ujjivan AU Bandhan City Union Average Equitas Chola MMFS
Loan Book (INR Cr.) 8,317 18,117 33,373 29,785 19,077 9,981 47,721 55,482
Loan CAGR FY18-20E 31% 51% 46% 16% 35% 39% 21% 23%
CASA 9% 26% 37% 24% 24% 35% - -
NIM 11.7% 6.0% 10.3% 4.3% 9.0% 7.8% 6.9% 8.2%
Cost/Income 74.9% 60.5% 33.2% 42.7% 49.4% 68.5% 38.9% 54.1%
GNPA 1.9% 2.0% 1.3% 2.9% 1.8% 3.4% 2.8% 9.0%
NNPA 0.3% 1.3% 0.7% 1.7% 0.8% 2.0% 1.6% 6.0%
ROA FY18 0.1% 1.7% 4.1% 1.6% 1.9% 0.3% 2.6% 1.9%
ROA FY20E 1.9% 1.8% 5.8% 1.6% 2.8% 1.8% 2.6% 2.3%
ROE FY18 0.4% 13.7% 26.0% 15.2% 13.8% 1.4% 20.8% 13.3%
ROE FY20E 13.1% 16.2% 20.7% 15.6% 14.9% 12.7% 21.1% 15.0%
P/ABV FY20E (x) 1.6 5.0 4.1 2.7 3.3 1.6 2.8 3.5

 Equitas has successfully reduced the microfinance mix in its loan book from 54% in FY16 to 27% today.

 Prior to turning into a bank, Equitas grew its AUM at 60% CAGR over FY13-16, way ahead of industry growth.

× Equitas’s transition to a SFB resulted in lower AUM growth and higher opex growth during FY17-18, translating to lower return ratios.

 Market expects Equitas’ ROAs/ROEs to improve to 1.4-1.8% / 9-15% respectively, over FY19-21E from a slump in FY18, led by margin
stabilization, fees improvement and opex/credit costs moderation.

+ An investment in this company can be contemplated as the current market price of INR 135 is lower than the estimated
target price band of INR 150-190.
Source: Emkay, Investec and Nirmal Bang Research 8

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