Digital Capabilities And SFB Transition Will Unlock New Opportunities

Key Takeaways

• Fino Payments Bank's digital shift and transaction strategy is set to boost revenue and margins through lower costs and internally managed services.
  
• Planned small finance bank transition and tech upgrades aim to expand service range, improve scalability, and enhance financial efficiency.
  
• Operational shifts and technology investments create profitability challenges amid cyber risks and industry regulations impacting various revenue streams.

Catalysts

Provides various types of financial services in India.

• Fino Payments Bank's strategic progression towards digital capabilities is expected to significantly enhance their revenue streams, with digital revenue anticipated to rise from 21% of total revenue in FY '25 to above 25% in FY '26. This shift is likely to bolster both revenue and profit margins due to the lower operational costs associated with digital services.
  
• The transition from off us to on us transactions continues to show results, with higher revenue per customer noted for on us transactions. This strategy is expected to drive up revenue per customer and improve net margins as more services become internally managed.
  
• Fino Payments Bank is positioning itself for a transition to a small finance bank (SFB), which will enable it to go beyond its current limitations and offer a wider array of financial services. This expansion could potentially lead to significant revenue growth and earnings enhancement once regulatory approval is obtained.
  
• Technology infrastructure overhauls, including a new core banking platform and AI implementation for risk management, are expected to unlock scalability, reduce operational costs, and enhance system resilience, positively impacting the net margins and overall financial efficiency.
  
• The bank is focusing on leveraging their extensive distribution network and fintech partnerships to capture new market segments, particularly in underserved areas. This focus on expanding customer bases and deepening merchant engagements is likely to yield greater revenue and market presence, supporting long-term earnings growth.

Fino Payments Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fino Payments Bank's revenue will grow by 22.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 5.7% in 3 years time.
• Analysts expect earnings to reach ₹1.8 billion (and earnings per share of ₹21.57) by about May 2028, up from ₹925.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.5x on those 2028 earnings, up from 22.1x today. This future PE is greater than the current PE for the IN Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to decline by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.53%, as per the Simply Wall St company report.

Fino Payments Bank Future Earnings Per Share Growth

Risks

• The digital payments space is witnessing increased cyber fraud risks, necessitating heavier investments in risk mitigation, potentially impacting net margins.
  
• The remittance business is experiencing a decline due to regulatory changes and shifts in customer behavior, leading to a potential decrease in revenue in this segment.
  
• The CMS business is facing headwinds from increased competition, resulting in declining take rates and thus potentially contracting revenue growth in this segment.
  
• The transition to a small finance bank (SFB) involves operational and regulatory challenges, including the need to exit the BC business and invest significantly in technology, which may affect earnings during the transition phase.
  
• The high costs associated with technology upgrades and maintaining a low cost-to-income ratio could exert pressure on net margins and may impact near-term profitability.

Valuation

• The analysts have a consensus price target of ₹345.0 for Fino Payments 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 ₹390.0, and the most bearish reporting a price target of just ₹300.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹31.7 billion, earnings will come to ₹1.8 billion, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of ₹246.2, the analyst price target of ₹345.0 is 28.6% 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.