UPI Expansion And Gullak Launch Set To Improve Efficiency And Customer Loyalty

Key Takeaways

• Investments in digital infrastructure and expansion into the UPI ecosystem are expected to boost revenue growth and net margins due to increased efficiency.
  
• Transitioning to a Small Finance Bank model could expand revenue and earnings through new product offerings like recurring and fixed deposits.
  
• Regulatory challenges, increased expenses, competition, and strategic transitions may pressure Fino Payments Bank's growth, profitability, and expansion efforts.

Catalysts

Provides various types of financial services in India.

• The significant investments in digital infrastructure and the expansion of Fino Payments Bank's digital services, particularly in the UPI ecosystem, are expected to drive both revenue growth and an enhanced net margin through increased efficiency.
  
• The growth in Fino's CASA holdings, coupled with a shift towards customer ownership and new product offerings like the Gullak savings product, is anticipated to bolster revenue consistency and improve net margins over time due to increased customer loyalty and annuity income.
  
• The potential transition to a Small Finance Bank (SFB) model, which involves groundwork preparation and increased engagement with the RBI, could expand Fino's revenue base and improve earnings by allowing the introduction of new products like recurring and fixed deposits.
  
• As technology investments take hold, with implementations like the new core banking platform and advanced UPI switch, there is expected to be a continued reduction in the cost-income ratio, supporting improved net margins and operational efficiency.
  
• The strategic focus on B2B digital offerings, such as pay-in and prepaid instruments, alongside existing digital services, is expected to increase throughputs and revenue, contributing to EPS growth over the long term by capturing a larger share of the digital payments market.

Fino Payments Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fino Payments Bank's revenue will grow by 23.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.7% today to 5.5% in 3 years time.
• Analysts expect earnings to reach ₹1.7 billion (and earnings per share of ₹21.17) by about February 2028, up from ₹937.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.3x on those 2028 earnings, up from 20.4x today. This future PE is greater than the current PE for the IN Banks industry at 9.8x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.77%, as per the Simply Wall St company report.

Fino Payments Bank Future Earnings Per Share Growth

Risks

• The remittance business has experienced a decline, largely due to new regulatory guidelines, which can impact revenue given its role as a previous significant driver.
  
• The regulatory landscape necessitates higher investments in compliance, which could increase operating expenses and potentially reduce profit margins.
  
• The intense focus on technology investments may strain financial resources, affecting net margins and cash flow if not matched with proportional revenue growth.
  
• The competition in the payment bank space could hinder the company's ability to maintain its growth trajectory in digital services, impacting future revenue streams.
  
• The company's transition to a Small Finance Bank (SFB) involves uncertainties and potential delays, which could affect planned strategic expansion and future earnings.

Valuation

• The analysts have a consensus price target of ₹460.0 for Fino Payments Bank based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹31.5 billion, earnings will come to ₹1.7 billion, and it would be trading on a PE ratio of 31.3x, assuming you use a discount rate of 12.8%.
  
• Given the current share price of ₹229.8, the analyst price target of ₹460.0 is 50.0% 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.