Hold AU Small Finance Bank; target of Rs 1000: Emkay Global Financial

Emkay Global Financial recommended hold rating on AU Small Finance Bank with a target price of Rs 1000 in its research report dated March 10, 2021.

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//$ .each(d.ac,function(i,v) //{ // accStr+=”+v.nm+”; //}); $ .each(d.data,function(i,v) { if(v.flg == ‘0’) { var modalContent = ‘Scheme added to your portfolio.’; var modalStatus = ‘success’; //if error, use ‘error’ $ (‘.mc-modal-content’).text(modalContent); $ (‘.mc-modal-wrap’).css(‘display’,’flex’); $ (‘.mc-modal’).addClass(modalStatus); //$ (‘#acc_sel_port’).html(accStr); //$ (‘#mcpcp_addportfolio .form_field, .form_btn’).removeClass(‘disabled’); //$ (‘#mcpcp_addportfolio .form_field input, .form_field select, .form_btn input’).attr(‘disabled’, false); // //if(call_pg == “2”) //{ // adtxt =’ Scheme added to your portfolio We recommend you add transactional details to evaluate your investment better. x‘; //} //else //{ // adtxt =’ Stock added to your portfolio We recommend you add transactional details to evaluate your investment better. x‘; //} //$ (‘#mcpcp_addprof_info’).css(‘background-color’,’#eeffc8′); //$ (‘#mcpcp_addprof_info’).html(adtxt); //$ (‘#mcpcp_addprof_info’).show(); glbbid=v.id; } }); } }); } else { AFTERLOGINCALLBACK = ‘pcSavePort(‘+param+’, ‘+call_pg+’, ‘+dispId+’)’; commonPopRHS(); /*work_div = 1; typparam = t; typparam1 = n; check_login_pop(1)*/ } } function commonPopRHS(e) { /*var t = ($ (window).height() – $ (“#” + e).height()) / 2 + $ (window).scrollTop(); var n = ($ (window).width() – $ (“#” + e).width()) / 2 + $ (window).scrollLeft(); $ (“#” + e).css({ position: “absolute”, top: t, left: n }); $ (“#lightbox_cb,#” + e).fadeIn(300); $ (“#lightbox_cb”).remove(); $ (“body”).append(”); $ (“#lightbox_cb”).css({ filter: “alpha(opacity=80)” }).fadeIn()*/ $ (“#myframe”).attr(‘src’,’https://accounts.moneycontrol.com/mclogin/?d=2′); $ (“#LoginModal”).modal(); } function overlay(n) { document.getElementById(‘back’).style.width = document.body.clientWidth + “px”; document.getElementById(‘back’).style.height = document.body.clientHeight +”px”; document.getElementById(‘back’).style.display = ‘block’; jQuery.fn.center = function () { this.css(“position”,”absolute”); 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Emkay Global Financial’s report on AU Small Finance Bank

According to media reports, AU Small Finance Bank (AU SFB) plans to raise ~Rs6.15bnRs6.32bn (US$ 0.08bn-US$ 0.09bn) at an indicative price band of Rs1,230-Rs1,265 vs. CMP of Rs1,231 (SEBI floor price: Rs1,181 per equity share). The issue will open on March 9 and close on March 10 by 8.30 am IST (with an option to close earlier). Despite lumpy stake sale in Aavas Financiers, AU SFB’s Tier 1/CRAR ratio, ex-9M profit, dropped to 16.3%/18.8% in Q3 while including profits stood at 20%/23.5%, mainly due to a sharp rise in RWA. AU SFB’s CAR is based on credit risk as the bank still enjoys the leeway to not maintain capital on operational/market risk. After the capital raise, Tier-1 ratio will increase by 244bps/251bps (based on Q3FY21 RWA). Though the capital ratios remain well above the regulatory requirement of 7.5%/15% even including operational/market risk-weighted assets, we believe the capital raise is primarily to fund future growth and also a preparatory measure to apply for Universal Banking license once it completes 5 years of operations as SFB in April 2022.

Outlook

We expect the bank to report healthy pre-money RoE of 23%/19%/20% over FY21/FY22/FY23, which post-money without factoring in the benefits of capital raised, should stand at 22%/17%/18%. At the higher QIP band of Rs1,265, the stock is valued at 5.3x FY23 ABV pre-money and 4.9x FY23 ABV post-money. Currently, we have a Hold rating on the stock, given rich valuations. Asset-quality movement too remains a key monitorable given its relatively vulnerable portfolio.

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