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 the 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.

Q2FY21 Updates

Financial Results & Highlights

Consolidated Financials (In Crs)
Q2FY21 Q2FY20 YoY % Q1FY21 QoQ % H1FY21 H1FY20 YoY
Sales 861 703 22.48% 751 14.65% 1612 1366 18.01%
PBT 136 86 58.14% 74 83.78% 209 175 19.43%
PAT 103 49 110.20% 58 77.59% 161 107 50.47%

Detailed Results

  1. The revenues for the company rose 22.5% YoY while PBT & PAT rose 58% and 110% YoY respectively.
  2. The Advances for the company grew 26% YoY in Q2, while disbursements were at Rs 1902 Cr a decline of 20% YoY. 77.37% of advances are secured loans.
  3. Deposits excluding CD grew to Rs 12,588 Cr which is up 31% YoY and 10% QoQ. Retail TD grew 98% YoY & 14% QoQ to Rs 4,983 Cr. Savings deposits grew 53% YoY & 41% QoQ.
  4. CASA ratio for the quarter was 25% at Rs 3,246 Cr. LCR is at 126%.
  5. The bank made a COVID-19 provision of Rs 26 Cr in Q2. Total provisioning for COVID-19 to date came up to Rs 170.63 Cr.
  6. GNPAs were at 2.39% & PCR was at 58.84%.
  7. The cost to income has gone down to 58.15% in Q2 from 68.35% last year.
  8. NIM was at 9.02% in Q2 and NII rose 31% YoY. The cost of funds was at 7.36%.
  9. RoA & RoE were at 1.88% and 14.44% respectively for Q2.
  10. Total CRAR was at 20.93% with Tier 1 at 20.16%.
  11. The loan book breakup is as follows:
    1. Microfinance: 22% of the loan book, 14% YoY growth
    2. Small Business Loan: 42% of the loan book, 30% YoY growth
    3. Vehicle Finance: 25% of the loan book, 28% YoY growth
    4. MSE Finance: 6% of the loan book, ~100% YoY growth
    5. NBFC: 4% of the loan book,
    6. Others: 1% of the loan book, 25% YoY decline
  12. Tamil Nadu is the dominant state for the company with 54% of advances & 28% of deposits belonging to this geography.
  13. The yield on on-book advances is at 19.26%.

The company maintained a cash balance of Rs 426 Cr.

Investor Conference Call Highlights

  1. Management expects collections & disbursements to come back to pre-covid levels.
  2. H2 should have better growth recovery.
  3. The company introduced gold loans and used vehicle finance products in Q2.
  4. The target customer set for gold loans is MFI customers. The used car production is expected to be leveraged using the existing vehicle finance branch network.
  5. The company added 80,000 customers through digital means and sold 32,000 Fastag accounts in Q2. The bank has 15000 account holders in areas with no bank branch.
  6. The bank aims to reach RoA of 2.25% & RoE of 16% in the coming quarters.
  7. The rescheduling requests have come for less than 0.5% of loans and the management doesn’t expect this number to cross 1%.
  8. Cost to income can rise to 60% but it is expected to stay stable at this level.
  9. All rescheduling requests will be looked into individually and will be considered on a case to case basis.
  10. Billing efficiency is at 87% and collection efficiency is in the mid-90s.
  11. The main area for collections to catch up in microfinance.
  12. NIMs & expense ratios should come down as product diversification increases in the long term.
  13. Around 3-4% have not paid 2 EMIs since August end.
  14. The management thinks that a 1% provision is sufficient for COVID-19 and there will not be any additional provisions for it in Q3 & Q4.
  15. For a vehicle loan, the recovery on sale of the underlying asset is 60-65%.
  16. The disbursement trends in the affordable housing segment have been on the up-trend and the overall uptick in disbursements is mainly due to the under penetration for the bank in its operating segments.
  17. The disbursement in vehicle finance is shifting from heavy vehicles to LCVs where the yields are greater.
  18. Most of the money has already been invested and the challenge right now is to leverage the existing facilities. The management states that the current branch network is sufficient to double its liability base. There is also a lot of leverage pending on the asset side as all products are not available in all branches.
  19. The cost of funds is expected to come down in the medium term as operating leverage and digital share increase. AUM growth is expected to be at the same pace in H2 as in H1. The target growth rate is 30-40%.
  20. 58-60% of  the deposit book are primary or active customers at present.
  21. The bank sources around 5000-7000 elite customers per quarter. Around half of these are upgraded from lower accounts.

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 listed now. The company has done well to maintain its deposit and loan book growth despite challenges arising from COVID-19 and not expanding its branch network in the current period. The company is doing well to maintain a high customer acquisition rate through the digital medium and introducing new products like gold loan and used vehicle loan which is aimed at existing customers from microfinance and vehicle finance divisions. 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 whether the bank will be able to maintain its growth momentum and achieve the ambitious liability growth from the current branch network. Nonetheless, given the company’s history of consistent performance and the highly anticipated IPO of its SFB, Equitas Small Finance Bank remains a good stock to watch out for in the Microfinance and Small Finance Banking market.


Q1FY21 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q1FY21 Q1FY20 YoY % Q4FY20 QoQ %
Sales 5 6 -25.00% 5 -10.00%
PBT 4 4 0.00% 3 33.33%
PAT 3 3 0.00% 1 200.00%

 

Consolidated Financials (In Crs)
Q1FY21 Q1FY20 YoY % Q4FY20 QoQ %
Sales 787 663 18.70% 803 -1.99%
PBT 67 108 -37.96% 23 191.30%
PAT 52 70 -25.71% 16 225.00%

Detailed Results

    1. The consolidated revenues for the company rose 18.7% YoY while PBT fell almost 38% YoY. PAT also fell 26% YoY in Q1.
    2. The Advances for the company grew 27% YoY in Q1, while disbursements were at Rs 564 Cr a decline of 79% YoY. 76% of advances is secured loans.
    3. Deposits excluding CD grew to Rs 11,471 Cr which is up 30% YoY and 11% QoQ. Retail TD grew 96% YoY & 15% QoQ to Rs 4,377 Cr.
    4. CASA ratio for the quarter was 21% at Rs 2,354 Cr. LCR is at 139%.
    5. The bank made provisions of Rs 68.34 Cr including COVID-19 provision of Rs 45 Cr in Q1. Total provisioning for COVID-19 to date came up to Rs 144.63 Cr.
    6. GNPAs were at 2.68% & PCR was at 48.79%. The cost to income has gone down to 66.41% in Q1 from 69.09% last year. Overall opex rose 5% YoY. Opex to total average assets was at 5.74% in Q1 vs 6.76% last year.
    7. NIM was at 8.63% in Q1 and NII rose 20% YoY. The cost of funds was at 7.63%.
    8. RoA & RoE were at 1.2% and 8.72% respectively for Q1.
    9. The company added 57,044 new accounts under digital means in Q1. Equitas SFB has now gone live with video KYC.
    10. Total CRAR was at 21.59% with Tier 1 at 20.61%.
    11. The lending spread increased to 11.18% in Q1 from 10.67% last year.
    12. The loan book breakup is as follows:
      1. Microfinance: 23% of the loan book, 16% YoY growth
      2. Small Business Loan: 42% of the loan book, 32% YoY growth
      3. Vehicle Finance: 24% of the loan book, 25% YoY growth
      4. MSE Finance: 5% of the loan book, 154% YoY growth
      5. Corporate Loans: 5% of the loan book, 39% YoY growth
      6. Others: 1% of the loan book, 38% YoY decline
    13. Tamil Nadu is the dominant state for the company with 61.91% of advances belonging to this geography.
    14. The yield on on-book advances is at 18.81%.
    15. The company maintained a cash balance of Rs 429 Cr.

Investor Conference Call Highlights

  1. 90% of customers are from the informal economy who are into trading or providing of daily use goods and services.
  2. The moratorium level in May was at 90% which went down to 51% in May and is at 43% for July.
  3. The average loan per client excluding microfinance is at Rs 4 Lacs.
  4. The total COVID-19 provisions of Rs 145 Cr is around 0.95% of total advances.
  5. The company disbursed Rs 875 Cr in July which is at 75% of pre-COVID levels.
  6. The company has already filed its DRHP for the upcoming IPO of Equitas SFB.
  7. The company is calculating the moratorium on a monthly basis. Those who have not made their monthly payment are considered to be under a moratorium for that month.
  8. The company has not yet disbursed any loans under the new MSME scheme announced by the govt. It has however registered under it. Most of the bank’s customers will not be eligible for it as they are individual loan customers.
  9. The management expects NIMs to stay in the current range or near 9% going forward.
  10. The collection efficiency in the MSE segment is 21%.
  11. The management has stated that only one segment is a cause for worry for them. It is the heavy commercial vehicle finance segment. Thus the company had taken steps before COVID to reduce volumes in this segment and focus more on small and light commercial vehicles. Now it has taken additional steps to put in loan caps and more conservative measures.
  12. The company is going to focus on gold loans in the next 2-3 months. It has already launched it across 100 branches and is disbursing around 1000 loans in July. The management is expecting to double this portfolio in August.
  13. The company has streamlined the loan process so that the end to end execution for a gold loan takes no more than 40 mins. It is also planning to open up the digital gold loan side in the next few months.
  14. The management has stated that for the customers that have not paid their EMIs in moratorium they will not need to pay interest on that and these EMIs will instead be paid at the end of the loan thereby effectively extending the loan tenure by the number of months that the client has missed his payments. This rescheduling will not be available for everyone and it will be granted only after assessment on an individual basis on possible impairment on the client repayment ability.
  15. In the vehicle finance division, around 49% of LCV customers have not availed moratorium while in HCV around 47% have not availed moratorium.
  16. The SA for the bank has been divided into 2 segments. The first is the mass segment where the bank provides 3.5% interest and this segment has deposits up to Rs 1 Lac and the average ticket size of Rs 34000. In the second category are mass affluent which has to have deposits above Rs 1 Lac. The company is only offering a 7% interest rate for incremental funds above Rs 1 Lac in this category.
  17. The company has reduced term deposit rates by 75 bps.
  18. Overdue accounts at the end of July was at Rs 345 Cr. These overdue accounts are from cases where the company has not collected even 1 EMI in the last 4 months. This is at 11% of the customer base.
  19. The LGD in used commercial vehicle business is at 40% and in small business loans, this is expected to be less than 30%.
  20. In the MSE segment, 70% of loans are of CC/OD type for working capital needs. Around 65% of CC/OD loans were under moratorium in at the start. Now the figure has fallen to 32% in June and 26% in July.
  21. The new circular on current accounts by RBI is expected to be beneficial for the SFB as it opens up the lower and middle areas of the supply chain for a new entrant like Equitas. In the current accounts, the company is offering 2 features which are 20% savings from the change in banking patterns and a new feature called TD suite where any deposits above a threshold value will be automatically put into TD to earn interest.
  22. To maintain customer uniformity and reduce discrimination issues, the company has decided that it will only accept full payments in the case of JLG loans and not collect partial loans as it has had a very adverse impact on customer behavior in the past when implemented. This stance is limited to microfinance only.
  23. The management does not expect employee costs to go down as it will keep its current workforce and not remove anyone. It is widely expected that overall opex should remain at current levels going forward.
  24. In Q1, Rs 132 Cr was disbursed to MFI customers where 15% were for new customers and 85% were for existing customers. In July, 9% was for new customers and 91% was for existing customers.
  25. According to the management, Tamil Nadu is picking up faster than Maharashtra and Maharashtra should take 1-1.5 months more to recover as compared to Tamil Nadu. The management expects normalcy to come back to TN in the next 2-3 months.
  26. Around 68% of SCV customers in vehicle finance have not applied for the moratorium. The demand has shifted more towards LCV from HCV. This is driven by an increase in online commercial activities and a higher quantum of home deliveries.
  27. The company is still in the process of renegotiating rents in many locations. The company is also looking to leverage its investment in digital platforms to fuel growth for the company now that physical growth has been kept muted due to COVID-19.
  28. The management states that rescheduling moratorium loans will be carried out on a very selective basis and it will only be applied as a last resort for customers with no other options.
  29. Small business loans are not considered a high-risk segment as the average LTV here is less than 40% and in most cases, the collateral put in are the homes of customers which they will try and repay to keep out of repossession at all costs.
  30. The high-risk segment according to the management is the space in vehicle finance where the customer’s equity is less than the company’s equity. This figure comes out to be around Rs 750+ Cr. The company is keeping track of these vehicles to ensure that they are in good condition and that the company is aware of any developments for them.

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 and they have already released the DRHP for it. The company has done well to maintain its deposit and loan book growth despite challenges arising from COVID-19 and not expanding its branch network in the current period. The company is doing well to maintain a high customer acquisition rate through the digital medium and to have successfully implemented video KYC. 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 affected when the moratorium closes and what kind of collections it can achieve. Nonetheless, given the company’s history of consistent performance and the highly anticipated IPO of its SFB, Equitas Holdings remains a good stock to watch out for in the Microfinance and Small Finance Banking market.


Q4FY20 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 4.6 7.2 -36.11% 4.5 2.22% 19.1 22.5 -15.11%
PBT 3.4 1.3 161.54% 2.5 36.00% 13.0 12.7 2.36%
PAT 1.0 0.8 25.00% 1.9 -47.37% 7.7 9.3 -17.20%

 

Consolidated Financials (In Crs)
Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 805 621 29.63% 761 5.78% 2936 2359 24.46%
PBT 23 62 -62.90% 98 -76.53% 316 271 16.61%
PAT 16 42 -61.90% 79 -79.75% 206 177 16.38%

Detailed Results

    1. The consolidated revenues for the company rose 30% YoY while PBT fell almost 63% YoY. PAT also fell 62% YoY in Q4. The reason for the fall was impairment in financial instruments.
    2. FY20 performance for the company was good with 24.5% YoY revenue growth and 16% YoY PAT growth.
    3. The Advances for the company grew 31.3% YoY in FY20, while disbursements grew 15.5% YoY. 75.39% of advances is secured loans.
    4. Deposits excluding CD grew to Rs 10,299 Cr which is up 25.7% YoY. Retail TD grew 132.9% YoY to Rs 3,811 Cr.
    5. CASA ratio for the quarter was 21.44%. LCR is at 133%.
    6. GNPAs were at 2.72% while PCR is at 45%. The cost to assets was 6.75%. The cost to income has gone down to 66.38% in FY20 from 70% in FY19.
    7. NIM was at 9.11% in FY20. The cost of funds was at 7.97%.
    8. RoA & RoE were at 1.39% and 9.84% respectively for FY20.
    9. The loan book breakup is as follows:
      1. Microfinance: 24% of the loan book, 17.8% YoY growth
      2. Small Business Loan: 41% of the loan book, 37.2% YoY growth
      3. Vehicle Finance: 24% of the loan book, 27.4% YoY growth
      4. MSE Finance: 5% of the loan book, 270% YoY growth
      5. Corporate Loans: 5% of the loan book, 79.4% YoY growth
      6. Others: 1% of the loan book, 52% YoY decline
    10. Tamil Nadu is the dominant state for the company with 54.6% of advances belonging to this geography.
    11. The growth in disbursements in FY20 in different products is as follows:
      1. Microfinance: 6.4% YoY growth
      2. Small Business Loans: 13.7% YoY growth
      3. Vehicle Finance: 12.6% YoY growth
      4. MSE Finance: 162% YoY growth
      5. Corporate Loans: 104.7% YoY growth
      6. Others: 81% YoY decline
    12. The yield on on-book advances is at 18.9%.
    13. The company maintained a cash balance of Rs 380 Cr.

Investor Conference Call Highlights

  1. The company has provisioned Rs 99.6 Cr for COVID-19. This represents the full 10% COVID provision on accounts that were overdue but not NPA as of 29th February.
  2. The company had made opting for a moratorium as default.
  3. About 53% of microfinance and 50% small business loans and about 20% of vehicle finance are located in semi-urban and rural locations.
  4. The company acquired 20000 new to bank customers in April.
  5. The total moratorium applied by the company is around 90% of advances by value.
  6. The company had zero disbursements microfinance, small business loans, and vehicle finance in April.
  7. The management states that the small business loan segment should bounce back easily after the lockdown.
  8. The management has stated that the company is focussing more on LCVs and smaller commercial vehicles to cover short-haul distances and those who are dependent on local economies since long haul transport has been disrupted due to COVID-19.
  9. Among MSME borrowers for the company, 16% were positively impacted while 66% had a neutral impact from COVID-19.
  10. The company is also helping 60% of centre meetings in microfinance happen with adequate social distancing norms.
  11. Heavy commercial vehicles constitute Rs 1500 Cr from the total vehicle loan book of Rs 3700 Cr.
  12. In FY21, the company is looking to reduce discretionary expenses like travel and conveyance while looking to surrendering office space and instituting work from home wherever possible. There is also a lot of effort going into digitalization in terms of trying to cut further the operating processes and manual processes.
  13. More than 90% of the company’s customers are from the informal economy and the bank is the first to lend to them. Thus the management made the decision to apply to opt-out mechanisms so that almost all of its customers may benefit from the relief provided by the moratorium.
  14. The bank is the only lender to 98% of its small business loan customers. It is also the only lender to 80% of used commercial vehicle loan customers.
  15. The management has stated that if it were to offer the guaranteed loan finalized by the government of India to all eligible customers, the amount would come up to Rs 5500 Cr (roughly MSME loans).
  16. The company is offering bounce back loans to its MFI customers called Vishwas Loans which is expected to bridge the immediate requirement for them.
  17. The company has stopped providing any new unsecured business loans and the outstanding currently is around Rs 153 Cr with NPA of Rs 42.5 Cr and provision of Rs 25.6 Cr.
  18. In corporate loans, the company is primarily lending to emerging NBFCs. The company makes it a point that it lends to only those NBFCs that keep their CAR above 30%.
  19. Around 67% of the MFI book is in the red zone. In terms of the total loan book, 11% is in the green zone, 44% is in the orange zone and 45% is in red zones.
  20. The company has only made one claim under CGTMSE for an NPA. There is an 18-month window from the date of disbursement after which the company will receive the 75% claim.
  21. The management has stated that it has not received any requests to waive interest in the moratorium period.
  22. The management believes that the period between June to September will be critical to see as people who are able to pay two EMIs between the period should not turn NPA from October onwards.
  23. The management has stated that 40% of OD loans have already paid back their overdue and thus the field for loans turning NPA has narrowed significantly.
  24. Around 35% of this OD loan book or Rs 350 Cr are the ones that have not yet paid anything since Feb. Thus the company shall focus on collections from this set so that no one turns NPA.
  25. Since that start of lockdown, the company has added around Rs 700-800 Cr of deposits and are bringing up their customer acquisition rate to almost 24000-25000 a month.
  26. The company keeps a forward liquidity cover of 1 to 1.5 months which is parked in government securities and reverse repos. The total cover is around Rs 1000-1200 Cr.

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 is doing well to maintain a high customer acquisition rate despite the lockdown. 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 affected when the moratorium closes and what kind of collections it can make then. 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.


 

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.

 

Disclaimer

This is not a piece of investment advice. Please read our terms and conditions.