AU Small Finance Bank share price: Sharekhan maintains Buy rating with a revised price target of Rs 1500

AU Small Finance Bank has announced its plans to raise equity funds via Qualified Institutional Placement (QIP). According to some analysts, QIP is likely of size Rs 600-700 cr (floor price of Rs 1,181.06 per share; may offer a discount up to 5%). AU Small Finance Bank Management had earlier indicated in its Q3 concall that it may go for capital raising in Q4 to target growth prospects and strengthen the balance sheet. AU Small Finance Bank Share price closed at Rs 1253 in last session, up Rs 21 or 1.7%. 

Hence, the present capital raising is likely part of AU Small Finance Bank's plans to raise funds for meeting its growth requirements, which had earlier been delayed due to unfavourable market conditions due to the pandemic. AU Small Finance Bank’s Tier 1/CRAR ratio was at 16.3%/18.8% in Q3, while including profits stood at 20.3%/23.5% and is comfortable. Post the capital raising, as per Sharekhan’s calculations, Tier-1 ratio will likely increase by 240 bps (based on Q3FY2021 RWA), net worth will rise by 11.8%. While the equity dilution in AU Small Finance Bank will be small (1.6%) the book value (Calculated) will likely increase by 9.7%.

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Sharekhan expects capital raising will pave way for growth, increased products/services portfolio and help the bank on its way to become a Universal Bank, once it completes five years of operations as SFB. Since the bank has a clear promoter led shareholding structure, the transition to a Universal Bank should be relatively smooth. AU Small Finance Bank is well placed on the asset-quality part, with collections returning to normal levels; expect Q4 FY21 to positively surprise in terms of growth and collections.

AU Small Finance Bank is currently carrying Rs 733 cr (72% coverage) on proforma GNPA and Rs. 48 crore on restructured assets (19% coverage). AU Small Finance Bank had indicated that current provisioning levels were adequate and expects credit costs to normalise from Q4 FY21. Strong disbursements in Q3 FY21 were a reflection of improved confidence and management indicated disbursements growth was likely to sustain. Sharekhan have accordingly revised our estimates and target multiples. Sharekhan maintains Buy rating on AU Small Finance Bank with a revised price target of Rs 1500.

AU Small Finance Bank Key Risks:

A prolonged delay in pick-up in economic activity will affect growth and profitability of the bank. Further, the bank has high exposure to the informal/SME segments, which may be vulnerable if economic recovery is delayed.