About the Company

Equitas Small Finance Bank is a small finance bank founded in 2007 by Equitas as a microfinance lender, with headquarters in Chennai, India. After receiving a license from the Reserve Bank of India (RBI) on 30 June 2016, Equitas began banking on 5 September 2016 as a subsidiary of holding company Equitas Holdings Ltd. With effect from 4 February 2017, Equitas became a scheduled bank. The small finance bank remains a subsidiary of Equitas Holdings.

 

Q3 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
  Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 4.44 5.19 -14.45% 4.42 0.45% 13.18 15.33 -14.02%
PBT 2.49 4.14 -39.86% 2.72 -8.46% 9.59 11.4 -15.88%
PAT 1.9 3.07 -38.11% 1.44 31.94% 6.69 8.49 -21.20%

 

Consolidated Financials (In Crs)
  Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 760.88 613 24.12% 704.81 7.96% 2130.73 1737.77 22.61%
PBT 97.83 84.45 15.84% 87.38 11.96% 293.08 209.65 39.79%
PAT 79.27 53.53 48.09% 41.25 92.17% 190.8 134.65 41.70%


Detailed Results

    1. The revenue for the company rose 24% YoY while PBT rose almost 16% YoY. PAT rose 48% mainly due to a fall in the tax rate.
    2. The Advances for the company grew 37% YoY, while disbursements grew 36% YoY. Microfinance accounts for 24% of total advances.
    3. Total Deposits grew to Rs 10,400 Cr. Retail TD grew 152% YoY to Rs 3,075 Cr.
    4. CASA ratio for the quarter was 23%.
    5. GNPAs were at 2.86%. The cost to assets was 6.96%. The cost to income has gone down to 66.24% in Q3 from 69.06 in Q2.
    6. NIM declined 13 bps to 9.17% in Q3.
    7. The loan book breakup is as follows:
      1. Microfinance: 24% of the loan book, 19% YoY growth, GNPA 1.04%
      2. Small Business Loan: 41% of the loan book, 45% YoY growth, GNPA 2.96%
      3. Vehicle Finance: 25% of the loan book, 32% YoY growth, GNPA 4.48%
      4. MSE Finance: 4% of the loan book, 448% YoY growth, GNPA 1.07%
      5. Corporate Loans: 5% of the loan book, 97% YoY growth
      6. Others: 2% of the loan book, 40% YoY decline
    8. Tamil Nadu is the dominant state for the company with 55% of advances belonging to this geography.
    9. The growth in disbursements in different products is as follows:
      1. Microfinance: 30% YoY growth
      2. Small Business Loans: 22% YoY growth
      3. Vehicle Finance: 34% YoY growth
      4. MSE Finance: 160% YoY growth
      5. Corporate Loans: 456% YoY growth
      6. Others: 15% YoY decline
    10. The yield on on-book advances is 18.62% while the cost of funds has also fallen to 7.96% from 8.23% in Q2.
    11. The company maintained a healthy cash balance of Rs 482 Cr.

Investor Conference Call Highlights

  1. During Q3, the company has raised Rs 250 Cr of primary capital by private placement.
  2. SMB loan business saw strong growth and 60% of the customers in this segment are new to credit, showcasing good untapped potential in this segment,
  3. In the MF segment, the company saw some issues in 4 districts in Maharashtra mainly due to floods and political disturbances. The company has started cross-selling recurring deposits to MF customers and more than 3 lac customers have engaged in this already.
  4. The company has also issued 80,000 FASTag stickers in the quarter.
  5. The slippages in this quarter have grown in line with advances according to the management. The above-mentioned incidents of floods and political disturbances have also contributed to this rise. Overall, on a net slippage basis, the company has remained flat for the last 3 quarters.
  6. The company has not seen any issues arising from its existing Karnataka portfolio as it does not operate in the regions affected by the political disturbances that happened in the state in the recent past.
  7. The company is also seeing its unsecured business loan assets unwinding and this has also led to somewhat stable NPA figures. These assets are at Rs 200 Cr now and are expected to be run down within a year when the loan terms end.
  8. The company has around 65000 customers in retail TD which is around 13% of the total CASA portfolio.
  9. The growth in the SMB loan segment is driven by the Rs 5 to 15 lac tickets. The <5 lac ticket loans have grown around 20% YoY.
  10. The average ticket size for the SMB book is around Rs 6-7 lac. The management has stated that accounting for the inherent risk of the business, the NPAs levels were expected to be around 4% but the current NPA levels of 2% showcase the company’s good risk management and performance in this business segment.
  11. The NIM has risen in Q3 primarily due to a fall in cost of funds in the quarter.
  12. The employee cost has grown 27% YoY mainly due to the addition of 328 and 247 people into the workforce in Q1 and Q2.
  13. The company has moved to the new corporate tax rate from Q2 onwards. The new tax rate is expected to be a little less than 25% overall for the company.
  14. The company is seeing stress in the M&HCV segment in the vehicle loan business which comprises 65% of the vehicle loan book. Thus the company is trying to shift the product mix from M&HCV to LCV and SCVs to reduce stress on the loan book.
  15. Around 65% of customers in the vehicle loan business are first-time borrowers and thus have no CIBIL scores. The management believes it to be a characteristic of the segment and are confident in the company’s risk assessment and disbursement system to properly handle this issue.
  16. The company has more than 100% cover for its secured working capital loan portfolio. The customer composition in this segment is 47% trading, 27% manufacturing and 27% services. The growth in this business segment is driven by tickets in the 50 lac to 1 Cr range segment. The company is also looking to expand the lower ticket segment to build a more granular portfolio with better collateral security.
  17. The company also made recoveries of Rs 35 Cr in both the CV and SMB loans businesses.
  18. The PCR for the company has remained stable QoQ.
  19. The company is primarily targeting loan customers of banks with weak finances and takeover or merge targets. It is also looking to expand its working capital loans business by adding more customers who are uninitiated to working capital.

Analyst’s View

Equitas Holdings has been one of the important players in the MFI industry in India. The company has successfully formed its own SFB which is expected to get listed in the near future. The company has done well to maintain its revenue and loan book growth. The company’s SMB loan division, in particular, has been performing well while keeping NPAs at manageable levels. The company is focussing more on growth in lending operations rather than aggressive expansion into new territories. Dependence on Tamil Nadu remains a big risk for the company as any adverse event in the region may drastically affect the company’s performance. It remains to be seen how the company will be able to differentiate itself from other rising players in the SMB industry. Nonetheless, given the company’s history of consistent performance and the highly anticipated IPO of its SMB, Equitas Holdings remains a good stock to watch out for in the Microfinance and Small Finance Banking market.


Q2 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % H1FY20 H1FY19 YoY%
Sales 4.42 5.09 -13.16% 4.32 2.31% 8.74 10.13 -13.72%
PBT 2.71 3.53 -23.23% 4.38 -38.13% 7.1 7.26 -2.20%
PAT 1.44 2.62 -45.04% 3.34 -56.89% 4.78 5.41 -11.65%

 

Consolidated Financials (In Crs)
Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % H1FY20 H1FY19 YoY%
Sales 704.81 591.68 19.12% 665.04 5.98% 1369.85 1124.75 21.79%
PBT 87.38 79.7 9.64% 107.86 -18.99% 195.24 125.19 55.95%
PAT 41.25 51.74 -20.27% 70.27 -41.30% 111.52 81.12 37.48%

 

Detailed Results

    1. The revenues for the company rose 20% YoY while PBT rose almost 10% YoY. PAT fell 20% mainly due to a one time increase in deferred tax.
    2. The Advances for the company grew 33% YoY, while assets grew 22% YoY and deposits grew 64% YoY.
    3. Net interest income was up 29% YoY.
    4. The cost to avg assets remained stable at 6.76%.
    5. NIM was at 8.83% which was up 67 bps YoY.
    6. GNPA level was at 2.88% while NNPA was at 1.63%.
    7. The company maintained a CRAR of 21.58%.
    8. The loan book breakup is as follows:
      • Microfinance: 24% of the loan book, 18% YoY growth
      • Small Business Loan: 41% of the loan book, 45% YoY growth
      • Vehicle Finance: 25% of the loan book, 31% YoY growth
      • MSE Finance: 3% of the loan book, 637% YoY growth
      • Corporate Loans: 5% of the loan book, 63% YoY growth
      • Others: 2% of the loan book, 46% YoY decline
    9. Tamil Nadu is the dominant state for the company with 55.87% of advances belonging to this geography.
    10. The growth in disbursements in different products is as follows:
      • Microfinance: 14% YoY decline
      • Small Business Loans: 9% YoY growth
      • Vehicle Finance: 19% YoY growth
      • MSE Finance: 448% YoY growth
      • Corporate Loans: 104% YoY growth
      • Others: 73% YoY decline
    11. The yield on on-book advances is 18.6% which is down 96 bps YoY.
    12. The cost of funds has also fallen 60 bps to 8.49%.
    13. The company maintained a healthy cash balance of Rs 1118 Cr.

Investor Conference Call Highlights

  1. The management has seen strong traction in the Rs 5-10 Lac ticket range of the small business loan division.
  2. The growth in corporate loan book was mainly driven by loans made to NBFCs and MFIs.
  3. The working capital book for the company is around Rs 435 Cr.
  4. The company has turned down deferred tax assets of around Rs 24 Cr.
  5. The yield on the used vehicle finance book is between 20-21%.
  6. The management has mentioned that the company had entered into the risky part of the used vehicle business and as it enters into other areas of vehicle finance, the risk-adjusted returns go down.
  7. The management has mentioned that it finds that the major players in the MFI industry are not facing any liquidity shortage but it is the smaller guys with portfolios of < Rs 500 Cr which are facing these challenges.
  8. The management believes that the issue of promoter stake dilution is a prevalent issue for most SFBs and it is still yet to decide how it will go about doing so with the Equitas SFB.
  9. The management has indicated that the DRHP for the Equitas SFB IPO has been approved and the IPO should take place in the next 6 months.
  10. The SBL product of the company has now been in place for 5-6 years and is now in the second cycle for this product.
  11. The management has stated that due to collection efficiencies falling in H1 due to a variety of factors like elections, floods, etc the NPAs have gone up.
  12. The vehicle finance division is mainly in the business of funding SCVs and LCVs and thus this division has been able to weather the slowdown whose maximum impact has been in the HCV segment. The management acknowledges that there is market stress in this division.
  13. Nearly 80% of the company’s borrowers are first-time borrowers.
  14. The management expects the cost to income ratio to reduce even further as leveraging opportunities arise from the branches established in the last 6 quarters.
  15. The management has stated that most of the recently added headcount is for sales and collections in the front end.
  16. The company is yet to be able to provide all of its available products in all of the branches. Thus the growth rate can be expected to rise in the future as more opportunities arise from the availability of all products in all branches.
  17. The management admits that it is remaining cautious while pushing for growth especially in sensitive sectors like vehicle finance.
  18. The management state that the provisioning was increased in Q2 due to higher provision requirements due to the aging of the NPA of certain books.
  19. The management refrains from providing any concrete guidance or forward-looking statements.
  20. The management state that the main reason for the restatement of P&L numbers from previous quarters in Equitas SFB before the IPO is mainly because those numbers were stated according to the GAAP guidelines while on a consolidated EHL basis, these figures need to be stated in Ind AS basis.

Analyst’s View

Equitas Holdings has been one of the important players in the MFI industry in India. The company has successfully formed its own SFB which is expected to get listed in the next 6 months. The company’s performance has been considered good given the current economic conditions and the company’s reliance on vehicle finance and small business loans which make up more than 65% of the company’s loans. The company has done well to diversify into and grow different lending segments like the ones mentioned above and reduce its reliance on unsecured MF loans. The biggest risk for the company currently comes from its overwhelming geographical concentration in Tamil Nadu which is responsible for over 50% of all loans. The company was still in expansionary mode until a few quarters ago and should see good value creation and leveraging of opportunities as the branch establishments bear fruit. It remains to be seen how the company will reduce the geographical concentration risk and how long will it take for the newly created branches to run at full optimization. Nonetheless, given the company’s position in the MFI industry, Equitas Holdings remains a good MFI stock to watch out for.

 

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