Improved Vehicle Finance Collections And New ForEx Services Will Strengthen Future Operations

Key Takeaways

• Enhanced technology and optimized funding costs could improve operational efficiencies and stabilize earnings growth through better customer service and reduced funding expenses.
  
• Strategic focus on diversified products like personal loans and credit cards aims to drive revenue growth and sustain net interest margins despite microfinance decline.
  
• Rising operational costs and stressed microfinance portfolio could strain profitability and earnings, challenging revenue stabilization despite growth in certain loan segments.

Catalysts

Provides various banking products and services to for individuals and corporates, as well as micro, small, and medium enterprises in India.

• The bank is focusing on improving collection efficiencies in its Vehicle Finance segment, with collection efficiencies reaching 97.1% in October, traditionally a strong half for collections. This could positively impact future earnings by reducing delinquency rates.
  
• Investments in new product offerings, such as personal loans, credit cards, and ForEx services, are expected to roll out by the end of the financial year. These initiatives are likely to drive revenue growth in the coming quarters.
  
• Continuous enhancements in technology infrastructure, including CRM, super apps, and customer apps, are anticipated to improve operational efficiencies, potentially boosting net margins by optimizing costs and customer service.
  
• The bank has realigned loans to healthier yields, maintaining yield on advances despite a decline in microfinance contribution. This strategic shift should help sustain revenue levels and improve net interest margins.
  
• The bank's focus on its growth in retail deposits, which are now 74% of total deposits, along with efforts to reduce costs of funds, are expected to support earnings growth by optimizing funding costs and stabilizing net interest income.

Equitas Small Finance Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Equitas Small Finance Bank's revenue will grow by 17.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.0% today to 22.7% in 3 years time.
• Analysts expect earnings to reach ₹14.9 billion (and earnings per share of ₹10.25) by about January 2028, up from ₹4.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹9.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, down from 18.0x today. This future PE is lower than the current PE for the IN Banks industry at 12.2x.
• Analysts expect the number of shares outstanding to grow by 8.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Equitas Small Finance Bank Future Earnings Per Share Growth

Risks

• The deterioration in the microfinance portfolio and elevated levels of stress, slippage, and high non-performing assets (NPA) could negatively impact the bank’s earnings and increase credit costs.
  
• The dependency on retail deposits and reduction in savings account interest rates might not be sufficient to offset the increased provisions made for stressed sectors, which may put pressure on net interest margins and overall revenue.
  
• Despite the growth in segments like small business loans and used car loans, the subdued performance in new commercial vehicle loans and the stress in the microfinance section may hinder the overall disbursement growth and revenue stabilization.
  
• The increase in cost to income ratio reflects rising operational costs, which could strain profitability if not matched by proportional revenue growth.
  
• The persistent industry-wide challenges in microfinance, compounded by a notable borrower overlap in loans with more than three lenders, could exacerbate the risk of credit loss, thereby affecting the bank's profitability and earnings.

Valuation

• The analysts have a consensus price target of ₹81.12 for Equitas Small Finance Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹110.0, and the most bearish reporting a price target of just ₹60.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹65.6 billion, earnings will come to ₹14.9 billion, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 12.2%.
  
• Given the current share price of ₹70.97, the analyst's price target of ₹81.12 is 12.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.