Buy AU Small Finance Bank; target of Rs 720: Motilal Oswal (2024)

Motilal Oswal is bullish on AU Small Finance Bank recommended buy rating on the stock with a target price of Rs 720 in its research report dated March 13, 2024.

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Motilal Oswal's research report on AU Small Finance Bank

AUBANK has historically delivered healthy RoAs; however, this has seen compression over FY24, primarily due to a decline in margins and an uptick in credit costs. The merger with Fincare SFB will enable AUBANK to achieve sustainable growth, while stronger return ratios for Fincare will boost profitability in the coming years, particularly as operating leverage improves. Post-merger, the AUBANK will also gain presence in high-yielding MFI and Gold loan segments, while its positioning in SBL and the Housing vertical will be strengthened. Moreover, Fincare's robust presence in southern India complements AUBANK's stronger presence in the North, thus helping AUBANK significantly expand its geographical foothold. While the merger is BV and RoA accretive, aided by stronger return ratios in MFI, Gold, and SBL loan portfolios, the intense competition for liabilities and integration costs will largely offset any near-term benefit. However, we estimate RoA to gradually improve to 1.7% by FY26E as the bank benefits from operating synergies, while moderation in funding costs also enables an improvement in margins. Furthermore, as Fincare is a rural-focused SFB with 85% of its advances meeting the PSL criteria, the merger will enable AUBANK to fulfill its PSL target without compromising on growth.

Outlook

We believe that the bank’s execution capability will play an important role in maintaining robust growth, asset quality while delivering healthy RoA to its stakeholders. We are optimistic about smooth execution, given the management’s execution prowess and track record over the past couple of decades. We reiterate Buy on the stock with a TP of INR720 (2.7x FY26E BV).

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AU Small Finance Bank - 14032024 - moti

Broker Research

first published: Mar 14, 2024 12:22 pm

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