Our strong conviction on AU Small Finance Bank is backed by our belief that a banking platform provides a durable growth visibility to the bank. Also, AU Small Finance would more than proportionately benefit from the recent NBFC crisis, through market share gains devoid of margin sacrifice. With outlook on margin improving and asset quality staying strong, the near-term profitability will stay largely immune to franchise investments in the areas of branch banking and digital banking. In the longer term, fruits of these investments and operating leverage would drive return on assets expansion.
Q4 FY19 PAT of the bank was 20 per cent higher than our expectation. Management commentary suggests that NIM can improve in FY20 and opex growth will be well-controlled over the next two years. Accordingly, we tweak our assumptions which leads to a 4-5 per cent upgrade in our earnings estimates for FY20-22. The earnings growth over FY19-22 is projected at a robust 40 per cent+. We believe AU’s valuation at 2.7x FY22 P/BV is not commensurate with the longevity of its earnings growth.
In our view, the stock offers 25-30 per cent a year compounding for the next three years.