Why Equitas small finance has massive growth potential | Equitas Small Finance Fundamental Analysis #Finance

while India is now the fifth largest economy in the world in terms of GDP the fact is that in terms of per capita Income India still ranks one of the lowest at 142nd position out of 197 countries today India’s per capita Income that basically suggests

the average Income of a person in a country is around two thousand dollar a year that is around 1.6 lakh rupee a year and there’s a long way for Indian economy before it becomes a developed country and Indian government knows that if India has to grow its rural population has

to grow because more than 60 percent population in India still live in rural parts hence over the last many years Indian government has focused on one theme that is financial inclusion so in this CashNews.co we are going to discuss a small bold; color: #1a73e8; text-decoration: none;">Finance bank that is playing a crucial role in financial inclusion hey everyone my name is sahil and this is my personal friends Academy while Indian government privatized the banking sector way back in 90s there are still millions of people in

India who still do not have access to Credit facilities there is still a huge amount of unbanked population like a farmers small fruit and vegetable vendors small kirana owners who do not have access to Credit facilities and for Indian economy to become a developed

country this unbanked population needs to be catered that is the reason in 2015 Indian government lost a small Finance Bank category that caters to the under privileged section of the society

and that’s where in today’s CashNews.co we’ll look at one of the leading small Finance Bank in India which is equator small

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance now over the last few years Indian banking sector has struggled due to multiple reason in 2016 there was Major challenge due to demonetization and then in 2020 we witnessed kovit that resulted in huge bad

Loans and rise in NPS for banking sector as a result small Finance bank that caters to economically weaker section of the society struggled with high npas however now the

banking sector is in a much better position in terms of asset quality and the growth prospects are looking very promising so I am going to discuss three things in this CashNews.co first I will explain what really is small #1a73e8; text-decoration: none;">Finance bank and how it is different from other commercialized Banks like your icsi or sdfc second we’ll cover the fundamentals of equitas small none;">Finance and third there is a major change in the shareholding pattern of equitas where promoter holding is now showing zero lfidi and public holding as seen big jump in latest shareholding data so we’ll try to understand the reason for this but before that as usual this

CashNews.co is only for educational purpose make sure that you do your own research before investing your money all right let’s get started so first big difference between small none;">Finance and commercialized bank is Target customer small Finance Banks were introduced in 2015 with an objective to serve the underbanked section of the population

including your small businesses Farmers low-Income household which typically don’t get Loan from commercial Banks due to their low Income lack of documentation or poor Credit history commercialized Bank on the other hand

serve a more diverse set of customer including your retail customer High Net Worth individual medium and large corporates and institutional clients then second key difference is regulatory requirement as per RBI 75 percent of Loan Portfolio of

small Finance Bank should be for priority sector including your agriculture micro and small Enterprises and low Income housing they are also required to maintain a higher

level of Capital adequacy compared to other Banks small Finance banks are required to open at least 25 percent of their branches in underbanked rural areas as far as

Loan rates are concerned small Finance Bank charges higher Interest Rates due to their High Cost of Capital and slightly higher risk in

business as compared to your Commercial Bank I hope now you got the difference between Commercial Bank and small Finance bank now let us look at equitas small

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance Bank business model equator small Finance Bank received its small

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance banking license in 2016. before acquiring the banking license it operated as equitas holding limited that started its operation in 2007 in micro

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance segment and diversified into vehicle and house in France in 2011. then in 2013 it expanded its Loan offering with small medium Enterprise that is SME

Loan and Loan against property later it merged with the other two subsidiaries named equator’s microFinance and equitas Housing

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance and formed a bank called Equity small Finance bank if you

look at the Loanbook breakup of the small Finance Bank as of Q4 of fi 23 19 Loan book is micro

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance 36 percent is small business Loan 10 is housing plans 25 percent is vehicle none;">Finance and remaining is MSC Finance and nbfc so in the last 17 years equitas has Diversified its Loan offering and reduced its

dependency from 100 microFinance to current levels of 90 in percent please note that micro#1a73e8; text-decoration: none;">Finance Loans are unsecured in nature so that is a high risk business hence you could have small Finance has shifted its focus

to other Loan categories that are secured in nature for instance weaker Finances secured against vehicle housing branches secured against house small

business Loans are secured against property as collateral MSC Loans are backed by fixed asset so equitas has significantly reduced such Risk by making its 81 percent Loan book as of today secured against Assets and other collateral

this is a major factor that eventually drive better return on asset and return on Equity now before invest your money in banking and financial sector it is very important to understand the Income statement Balance Sheet and key ratios that gives

you a clear picture about the quality of the business so let us look at equidors financials first of all if you look at the Income statement companies net interest Income has grown from 860 crore to 1100 then 1517 2000 and latest at 2500 so overall the net interest

Income has grown at 24.3 percent CGR in last five years next with an Income statement we have to look at the total Income that has grown from 1100 crore to levels of 3200 so again look at the consistent growth in total Income that

represent a growth of 24 CGR next if you look at the pre-provision operating Profit it has grown from 220 crore to again consistently at current levels of 1176 crore although there was a slight dip during covet but overall if you look at the pre-provision Profit

the growth is fantastic at 40 cagr next with an Income statement if you look at the provision companies provision dropped during from 18 to 19 again the provision increased exponentially during covet but now the provisions have fallen to 497 crore and due to fall in Provisions the

Income has grown the Profits have grown look at this the Profit before tax was just 48 crore fi 18 grown to 323 then to 500 crore then again a dip during covet but look at this sharp jump which is 768 latest so Profit before tax

has grown at 24 CGR from 819 to 23 and finally if you look at the net Profit with an Income statement it has grown from 31 to 210 and then it did fall during covert but look at the sharp recovery from FY 22 to 23 and latest net Profit is 573 crore

and it signifies 28.5 CGI growth between FR 19 to 23. next it is important to look at the Balance Sheet where the company’s deposits have grown consistently from 5600 crore to nine thousand ten thousand sixteen and latest it is 25 000 380 crore and if you look at the casa

deposit percentage Casa deposit did fail during initial three years but look at this Casa jumped to highs of 52 percent and latest Casa ratio is at 42.29 percent which is very good then if you look at the Loan book of the company look at the consistent growth from levels of 7711 13

16 19 and latest Loan growth is 25 700 crore so equitas Loan book has grown at a cagr rate of 27.4 percent in last five years and company has guided for 25 to 30 percent growth in Loan book in fy24 then if you look at the asset quality of Bank

asset quality include gross NP and net NPA so gross NPA have remain at levels of two percent and then it spiked during covet and then from fy22 the gross NP has fallen to current levels of 2.76 percent likewise net NPA were constant around 1.5 1.6 percent it did Spike during covet but again it has

fallen to all-time low of 1.21 so asset quality today is at an all-time best then if you look at the business efficiency ratio companies Credit cost did fell down but during covert it jumped and now it is at 1.39 this Credit cost is further expected to go down to

levels of 1.2 to 1.25 and companies cost to total Income is has fallen from 80 percent to 60 it spiked and then again it is 63. so cost to Income Credit cost they are very very important to understand companies underwriting process and companies

cost to Income and Credit costs are very good that shows a very robust underwriting process next if you look at the efficiency ratio look at the net interest margin it is in the range of eight to nine percent latest net interest margin is eight point eight percent

which is very good then it is very important to look at the Profitability ratio within that you got to look at return on Equity and return on asset companies roe has spiked from 1.6 percent to nine percent it did fall down during covet to 7.3 but again it has

spiked to 12.2 percent next if you look at the return on asset it has also again improved significantly from 0.3 to levels of 1.7 it did fail during covet but again it is at 1.9 which is very very good ratio and it is expected to be around 2 to 2.25 percent in fi 24 clearly quitters is growing at a

very good rate on all parameters and its efficiency is also improving with fall in Credit cost and cost to total Income that’s just a very robust underwriting process as a result its Profitability in terms of Roe and Roa has improved

significantly and it’s expected to further improve in coming years the strong financials of company are due to very robust management team leading the business Mr PN vasudevan is the founder MD and CEO of equitas before equitas he has two decades of experience at Chola mandalam group where he

was the vice president and head of vehicle Finance then moonly wedinathan is the senior president at equitas he has 13 years of experience with kotak Mahindra Bank where he was the EVP then

Rohit 4K is the senior president at equitas he also has two tickets of experience at chulamundram group where he was the president and business head of home Loan overall equator small none;">Finance has a very competent and experienced leadership so till now we discuss the business of equitas its financials and Leadership now let us try to understand the future growth respects and key grow drivers the biggest grow driver for small

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance sector is huge untapped opportunity in rural segment rural segment contributed around 47 percent in countries GDP yet their contribution and Credit remains fairly low at around 9 to 10 percent there are

still many informal Credit channels in rural part of the country that offers Loans at very high interest rate again that creates a big opportunity to cater to this unbanked population these small color: #1a73e8; text-decoration: none;">Finance banks are also diversifying their Portfolio by offering multiple types of Loans and expanding their presence and newer untapped geography that again create growth opportunity more importantly today these small

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance banks have major deposit coming via FD and other term deposits so there is still a huge scope for raising Capital via Casa deposit that is current account and saving

account that will help small Finance Bank to lend money at more reasonable rates to customer this will further enhance their cross-sell opportunity finally the growth of fintech sector might

look like a big threat to small Finance bank but it has actually created a great collaboration opportunity to partner and innovate in

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance domain equator’s leadership in their annual report mentioned that we view fintech as complements to our own strength and not as competitors thereby entering into robust partnership to drive Innovation and

engagement at scale some of the partners for equitas include Neo grow Frio Etc recently equitas management has mentioned that they will apply for Universal banking license that would further reduce the regulatory requirement and would result in better return on Equity overall the

future growth perspects of equitas are looking very bright now it is equally important to understand the negatives or key risk so first key risk is geography risk nearly 50 percent of companies Loan book is concentrated in Tamil Nadu and around 78 percent of business comes from top

three state so Geographic concentration is one of the key risk for the bank although bank is diversifying its Loan Portfolio and now is presents in 18 State however in the median term this is one key risk for Equity of small

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance to truly grow in the long term it has to grow and become a pan-india bank at the same time maintain its asset quality then second risk is NPA risk since equitas cater to underbanked

section of the population including our small business farmers and low Income household there’s always a risk of default we have seen multiple cases where Banks NPS spiked during demonetization and recently during covet any negative event in the economy could negatively

impact the asset quality and bank’s Profitability then third key risk is leadership transition who would hang last year Mr vasudevan founder mdn C of announced plans to step down from his position however later there was announcement that he will continue as mdn CEO his

current term is still July 23 but Bankers mentioned that he will continue further for next three years provided they get the approval from RBI so this is one aspect that could impact equatorial sentiments as far as competitors are concerned although there are 12 small

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance Bank in India but nearly 60 percent of Loan book is among three key players including EU small #1a73e8; text-decoration: none;">Finance equator small Finance and ujuven small text-decoration: none;">Finance EU small Finance today has a Loan book of around 59 150 crore with a market cap of 48 000 crore and Price to Book of 6.1 equator of small

Finance today has a Loan book of 25 800 crore with market cap of 8800 crore and tries to book off 2.3 which even small for us today as a Loan book of 16 300

crore with market cap of 6700 crore and pass to book of 2.3 so compared to EU small Finance equitas has a much better Valuation maybe I can do an in-depth comparison of these

three small Finance Bank in separate CashNews.co now finally I want to touch base upon the shareholding pattern if you look at the she Loaning of equitas small

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance you will notice that promoters take in the company are suddenly reduced from 74.48 in December to zero percent latest quarter now the big question is why promoters have sold their entire

stake in the company so the answer is reverse merger earlier record of small Finance promoter company was equitas holding Limited however recently there’s a reverse merger where

equator’s holding limiters is getting merged into equator’s small Finance with this the existing shareholder of equitas holding limited received the Shares of

equitas small Finance and equitas holding limited had no individual promoter its shareholders included fisdis and public now after the merger these shareholders have become

the shareholders of equator small Finance and the list include many Market investors for instance in fi it include MIT government of Singapore Vanguard in di section the

investors include DSP SBI Nippon Franklin sdfc ICICI Canada robeko icsa Prudential sundaram mutual fund so almost all major diss are holding equitas in their Portfolio as far as Valuations are concerned include a small

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance launched its IPO in October 20 at levels of around 33 and currently companies trading at levels of 78. although there is a good rally in last one year but even at current levels it commands a period dish of 15 and tries

to book of 2.3 that is looking decent to add the share in the Portfolio currently it commands a market cap around 8 800 crore so it’s a small cap company with immense growth potential in next 5 10 20 years so better strategy would be to make your entry and buy this stock in a

systematic manner any correction can be utilized to accumulate the stock for long-term wealth creation as far as Broker’s targets are concerned Brokerage houses initiated their coverage post recent Q4 results and all of them have a buy call on equator small

Finance access security has a target of 100 rupee ISIS attack Target is 88 Mozilla lose fault Target is 87 so from current levels that’s an upside of around 10 to 26 percent so in this

CashNews.co we discussed what exactly small Finance bank and we covered the fundamentals of equitas small text-decoration: none;">Finance this bank is growing at a very good rate with high Profitability very good asset quality and bank has a very competent leadership so it checks all the boxes of fundamentally strong company as far as future is concerned the long term Prospect of

Indian banking sector are very bright especially in rural segment so overall equator small Finance is looking very promising at current levels for someone with long-term investment mindset

now tell me in the comment what is your take on this company have you invested in small Finance bank I hope you’ll find this CashNews.co useful I’ll see you next CashNews.co till

then take care