Equitas Holdings
BSE SENSEX
28,179
S&P CNX
8,709
24 October 2016
Update
| Sector:
Financials
CMP: INR177
TP: INR240 (+36%)
Buy
Investing for the brighter future
Takeaways from 2QFY17 conference call
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)/ (USD b)
Avg Val. (INR m)
Free float (%)
EQUITAS IN
335.7
206 / 134
-1/19/-
62.1/0.9
741
100.0
Financials Snapshot (INR b)
Y/E March
2017E 2018E 2019E
NII
9.0
11.9
15.7
OP
4.5
5.1
6.9
NP
2.3
2.5
3.3
NIM (%)
12.6
10.3
9.3
EPS (INR)
6.7
7.4
9.8
EPS Gr. (%)
8.5
9.7
32.8
BV/Sh. (INR)
68
75
85
ABV/Sh. (INR)
66
73
81
RoE (%)
12.5
10.3
12.2
RoA (%)
2.6
1.8
1.7
Valuations
P/E(X)
27.5
25.1
18.9
P/BV (X)
2.7
2.5
2.2
P/ABV (X)
2.8
2.5
2.3
Stock Performance (1-year)
Equitas Holdings
Sensex - Rebased
210
180
150
120
90
Equitas’ robust corporate governance standards and risk management architecture offer
it a strong competitive advantage. While initial investments in people, processes and
branches would be high for its small finance bank, management believes this will be the
key in building a successful/sustainable business model and achieving first-mover
advantage. Focus on diversification on liability and asset side increases our confidence on
the business. In our view, liability diversification will partially help the company to absorb
higher branch-related costs. Management remains comfortable on asset quality and is
prudently slowing down growth in MF business. While no specific profitability guidance
was shared, we believe our estimate of ~1.8% RoA for FY18 has upside risk. Reiterate
Buy.
Significant investment in liability branches
Management plans to open 412 (unchanged v/s earlier guidance) liability branches
(approval in place from the RBI) over next 12 months. Key senior-level hiring for
liability branches is already done. Management expects average 8-9 employees per
branch, initial cost of branch opening to be INR3.5-4m (to be capitalized) and
INR3.5-5m (depending upon location) regular cost. Of the expected ~3,500 new
employee addition (50-55% to be sales personnel) for liability branches, ~40% were
already on payrolls as of September 2016. Technology-related cost is already
capitalized. Of the expected branch expansion in the first month (September),
Equitas opened three branches and one zonal office. Significant investments into
franchise are already factored in our estimates, and we expect opex to increase
65%/40%+ in FY17/18.
Liability diversification a key focus area
For a bank, no fresh NCD issue is permitted (current will be grandfathered) and
thus its share will come down on maturity (average NCD tenure 22-23 months,
average CP tenure 7-8 months). Of current loans from banks, 22% is refinanced
loans, whereas balance is from banks. High-cost bank loans have already been
repaid in 2Q, and prepayment penalty is thus unlikely to be meaningful. Equitas
expects deposits (mainly bulk deposits initially) to gain share in the liability mix.
Please refer to our report
dated 24 October 2016
Share of bulk deposits to go up
Bulk deposits are likely to replace wholesale borrowings initially; incremental cost
of raising those is ~100bp lower than current cost. The company is seeing traction
at 8-8.5% levels, and for some tenors, Equitas offers additional ~0.5% to attract
customers. The immediate focus of its liability branches is to generate float/term
deposits rather than fee income.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 6129 1526
Sunesh Khanna
(Sunesh.Khanna@MotilalOswal.com); +91 22 6129 1540

Equitas Holdings
CASA build-up to be gradual
Equitas is focusing on creating branch/BC network as well as training employees to
be customer-ready before accepting CASA deposits. The company has only three
liability branches, which are sourcing FDs and not CASA. Branches are expected to
accept CASA deposits from mid-November, and meaningful build-up of CASA is
expected from January.
Remains comfortable on asset quality; constraining growth in micro-finance
Equitas focuses on a business model of small ticket-large volume revenue stream. Its
cautious growth strategy in this segment is evidenced from the following: a) it has
refrained from raising ticket sizes (current average ticket size of INR21,000-22,000)
and b) it is sticking to the two institution lending guideline – refraining from lending
to households which are already served by two players. This is reflective in GNPAs of
just 0.25% in the MF segment. As per management, Equitas has never incurred any
cash collection losses (for example fraud on part of the employee, customer, etc.),
while this has been an issue for other MF players. NPAs have plateaued in the
vehicle finance segment, giving comfort to Equitas to grow rapidly in this business
(55% YoY disbursement growth in 2QFY17).
Other highlights
Currently, the company generates 50% of its business from the south, 30% from
the north and 20% from the west. Equitas has no plans of strong expansion to
additional states due to a) under-penetration in its existing geographies and b)
its plans to build on expertise/capabilities in its existing geographies.
Tamil Nadu contributes 61% of microfinance AUM, with the proportion holding
steady at this level. With the opening of branches in other geographies, the
proportion of Tamil Nadu clients is going down, while the share of
business/clients is going up (high branch maturity of TN branches). 1
st
cycle loan
constitutes 60% of customers, 2
nd
cycle - 30%, and balance - 10%.
MSE Finance – 70% of the business constitutes cross-selling to existing top-end
MF customers, again providing long-term earnings visibility to the company.
Housing finance is not a focus area, with Equitas primarily focused on exploring
its business model in this space. The company is trying to understand how this
portfolio will perform. Post initial learning experience, this could be a growth
driver for Equitas in next 2-3 years.
BC commentary:
71 branches where BC operations are underway. Hiring the
right partners and their training are the biggest challenges. Currently, Equitas
has 800 BCs on board, with all of them primarily sourcing asset leads. Once all its
branches are operational, they will start liability-side operations. Commission:
0.5-0.9%.
Considering that a lot of loans were pre-closed at the end of the quarter, the
bank needed to maintain liquidity. As a result, finances were deployed in SLR
and CRR, keeping their proportions high. In the coming quarter, these
proportions will move closer to the regulatory requirement. However, some
buffer will be kept to maintain liquidity.
Technology investments have been completed; depreciation has been provided
in this quarter.
24 October 2016
2

Equitas Holdings
Upgrade to Buy with a
revised target price of
INR240 (3x September
FY18BV)
Valuation and view
The growth opportunity remains huge in the under-penetrated micro credit
customer segment. While the yields and return ratios are very high, a low ticket
size, high cost of operations and challenges in understanding the customers’
financials creates high entry barriers for large universal banks.
SFBs like EQUITAS are in an unmatched position to cater to such customers
based on their experience and ecosystem set around their MFI business model.
New products (especially secured loans) will provide the much-needed stability,
granularity and longevity to the business.
EQUITAS is one of the most diversified small finance banks (SFBs), with a
presence in the MFI business (50% of AUM), Used Commercial Vehicles finance
(25%), MSE finance (20%) and Housing finance (5%). Over last five years,
EQUITAS recorded a CAGR of 50% in AUM, led by strong traction in MFI business
(33% CAGR) and commencement of new business lines. Given the deep under
penetration in its key areas of operations, we expect EQUITAS to record CAGR of
38% in AUM over FY16-21E, led by increasing share of non-MFI business (64%
vs. 46% in FY16).
Post its conversion into an SFB, EQUITAS’ funding profile is likely to become
granular and its dependence on institutional credit is expected to decline, thus
reducing risk during times of liquidity shocks. We expect mobilization of low cost
deposits to be a gradual process.
Apart from having 400+ new liability branches, EQUITAS plans to build a strong
BC network, which will help reduce the cost of acquisition for EQUITAS and
provide a sustainable income model. As its liability mix evolves towards low cost
funding, we expect a decline in both cost of funds and proportion of unsecured
lending (MFI loans), thus providing additional stability to its business model.
During our preview we had raised earnings estimates by 15% for FY17 and 7-8%
for FY18/19 on back of sharp fall in cost of funds. While NIMs surprised us
positively in 2Q, control over cost is also leading us to upgrade estimates by
~10% for FY17-19.
We expect RoA to initially decline to ~1.8% (FY18E) and stabilize around that.
The company’s RoE is expected to gradually increase to 18%+ by FY21E.
We roll over the target price to September 2018. We value EQUITAS based on its
residual income model (estimated earnings CAGR 30% over FY16-21E and 18%
over FY21-36E, terminal growth of 5%, Rf of 7.25%, β of 1.4, and 5% risk
premium.
In our view, EQUITAS will trade at premium valuation, led by its niche business
model, earnings/asset growth visibility, reduced liquidity risk, and diversified
asset mix, with a strong focus on risk management. On back of upgrade in
earnings and roll over to September 2018, we upgrade the rating to Buy with
revised target price of INR240 (3x (unchanged) September 2018 BV).
24 October 2016
3

Equitas Holdings
Exhibit 1: DuPont: Operating performance to remain healthy
Y/E March
Net Interest Income
Core Fee and Secu. Inc
Fee to core Income (%)
Core Income
Operating Expenses
Cost to Core Income (%)
Employee cost
Employee to total exp (%)
Others
Core operating Profits
Trading and others
Operating Profits
Provisions
NPA
Others
PBT
Tax
Tax Rate (%)
RoA
Leverage (x)
RoE
FY13
9.4
2.7
21.4
12.1
9.0
74.4
5.5
61.5
3.5
3.1
0.4
3.5
0.6
0.2
0.4
2.8
0.6
19.8
2.3
3.6
8.2
FY14
10.1
2.6
20.0
12.6
7.0
55.6
4.4
62.0
2.7
5.6
0.1
5.7
0.8
0.6
0.2
4.9
1.7
34.7
3.2
3.8
12.2
FY15
9.8
2.8
21.7
12.6
6.9
54.4
4.3
62.7
2.6
5.8
0.2
5.9
1.4
1.2
0.2
4.5
1.6
34.7
3.0
3.8
11.1
FY16
9.2
2.9
23.6
12.2
6.6
53.9
4.3
65.0
2.3
5.6
0.2
5.8
1.1
0.8
0.3
4.7
1.7
35.7
3.0
4.4
13.3
FY17E
10.3
1.7
13.7
11.9
6.9
58.0
4.5
65.6
2.4
5.0
0.2
5.2
1.2
1.1
0.1
4.0
1.4
35.0
2.6
4.8
12.5
FY18E
8.7
1.1
11.2
9.8
6.2
63.5
4.2
68.3
2.0
3.6
0.2
3.7
1.0
0.8
0.1
2.8
1.0
35.0
1.8
5.7
10.3
FY19E
8.0
0.9
9.7
8.9
5.5
62.1
3.8
68.9
1.7
3.4
0.2
3.5
1.0
0.8
0.1
2.6
0.9
35.0
1.7
7.3
12.2
Source: MOSL, Company
24 October 2016
4

Equitas Holdings
Financials and Valuations
Income Statement
Y/E March
Interest Income
Interest Expense
Net Interest Income
Change (%)
Non Interest Income
Net Income
Change (%)
Operating Expenses
Pre Provision Profits
Change (%)
Provisions (excl tax)
PBT
Tax
Tax Rate (%)
PAT
Change (%)
Equity Dividend (Incl tax)
Core PPP*
Change (%)
2012
1,673
642
1,031
-24.7
314
1,344
-21.1
1,178
167
-76.8
58
109
144
131.9
-35
-112.2
0
108
-84.2
2013
2,405
1,076
1,329
28.9
427
1,755
30.6
1,269
487
192.3
89
398
79
19.8
319
-1,018.2
0
436
302.8
2014
4,218
1,895
2,323
74.8
617
2,940
67.5
1,618
1,322
171.6
184
1,138
395
34.7
743
133.0
0
1,293
196.6
2015
6,496
2,947
3,549
52.8
1,063
4,612
56.9
2,472
2,140
61.9
508
1,632
566
34.7
1,066
43.5
0
2,076
60.6
2016
9,431
4,360
5,071
42.9
1,718
6,789
47.2
3,597
3,192
49.2
591
2,601
930
35.7
1,671
56.8
0
3,077
48.2
2017E
14,763
5,802
8,961
76.7
1,616
10,576
55.8
6,037
4,539
42.2
1,069
3,470
1,214
35.0
2,255
34.9
0
4,373
42.1
2018E
20,797
8,929
11,869
32.5
1,761
13,630
28.9
8,506
5,124
12.9
1,318
3,806
1,332
35.0
2,474
9.7
0
4,884
11.7
2019E
28,641
12,912
15,729
32.5
2,040
17,769
30.4
10,843
6,926
35.2
1,870
5,056
1,770
35.0
3,286
32.8
0
6,610
35.4
Balance Sheet
Y/E March
Share Capital
Reserves & Surplus
Net Worth
Deposits
Change (%)
of which CASA Dep
Change (%)
Borrowings
Other Liabilities & Prov.
Total Liabilities
Current Assets
Investments
Change (%)
Loans
Change (%)
Fixed Assets
Other Assets
Total Assets
2012
444
2,578
3,023
0
0
5,798
788
9,608
1,845
2
0.0
6,160
-1.7
250
1,351
9,608
2013
578
4,142
4,719
0
0
12,794
1,026
18,539
4,460
75
3,674.0
12,135
97.0
236
1,633
18,539
2014
726
6,694
7,420
0
0
19,702
394
27,516
4,147
36
-52.3
21,232
75.0
272
1,829
27,516
2015
2,689
9,019
11,708
0
0
30,992
1,949
44,649
5,574
1,757
4,779.2
34,646
63.2
467
2,204
44,649
2016
2,699
10,714
13,414
0
0
46,833
4,819
65,065
9,470
119
-93.2
50,700
46.3
623
4,154
65,065
2017E
3,357
19,367
22,725
11,749
1,749
65,486
9,737
109,697
8,354
19,457
16,291.8
70,541
39.1
1,998
9,346
109,697
2018E
3,357
21,842
25,199
35,098
198.7
5,098
191.5
91,200
12,321
163,819
11,141
31,760
63.2
105,394
49.4
3,374
12,150
163,819
2019E
3,357
25,128
28,485
56,872
62.0
8,872
74.0
126,800
15,551
227,708
12,142
46,150
45.3
148,872
41.3
4,749
15,795
227,708
Asset Quality
GNPA (INR m)
NNPA (INR m)
GNPA Ratio
NNPA Ratio
Credit Cost
PCR (Excl Tech. write off)
E: MOSL Estimates
73
7
1.18
0.12
0.95
90.1
33
22
0.27
0.18
0.34
35.3
155
128
0.73
0.60
0.83
17.2
374
278
1.08
0.80
1.53
25.8
681
478
1.34
0.94
0.97
29.9
1,695
678
2.37
0.96
1.60
60.0
2,754
1,101
2.57
1.05
1.30
60.0
4,334
1,734
2.86
1.16
1.30
60.0
24 October 2016
5

Equitas Holdings
Financials and Valuations
Ratios
Y/E March
Spreads Analysis (%)
Avg. Yield-Earning Assets
Avg. Yield on loans
Avg. Yield on Investments
Avg. Cost-Int. Bear. Liab.
Avg. Cost of Deposits
Interest Spread
Net Interest Margin
Net Interest Margin on AUM
Profitability Ratios (%)
RoE
RoA
Int. Expense/Int.Income
Fee Income/Net Income
Non Int. Inc./Net Income
Efficiency Ratios (%)
Cost/Income
Empl. Cost/Op. Exps.
Busi. per Empl. (INR m)
NP per Empl. (INR lac)
2012
26.9
25.5
0.0
11.0
NA
16.0
16.6
12.7
2013
26.2
25.3
215.5
11.6
NA
14.6
14.5
11.5
2014
25.2
24.4
243.9
11.7
NA
13.5
13.9
11.7
2015
22.5
22.9
10.3
11.6
NA
10.9
12.3
10.9
2016
21.6
21.8
12.4
11.2
NA
10.4
11.6
10.0
2017E
20.7
22.8
7.0
9.4
8.6
11.4
12.6
12.2
2018E
18.0
21.2
7.0
8.8
7.5
9.2
10.3
11.5
2019E
16.9
20.1
6.8
8.3
7.1
8.6
9.3
10.9
-1.2
-0.4
38.4
23.3
8.2
2.3
44.8
24.3
12.2
3.2
44.9
21.0
21.0
11.1
3.0
45.4
23.0
23.0
13.3
3.0
46.2
25.3
25.3
12.5
2.6
39.3
15.3
15.3
10.3
1.8
42.9
12.9
12.9
12.2
1.7
45.1
11.5
11.5
87.6
54.2
-0.1
72.3
61.5
1.0
55.0
62.0
1.7
53.6
62.7
1.7
53.0
65.0
2.0
57.1
65.6
5.0
1.7
62.4
68.3
7.1
1.6
61.0
68.9
9.5
1.8
Valuation
Book Value (INR)
Change (%)
Price-BV (x)
Adjusted BV (INR)
Price-ABV (x)
EPS (INR)
Change (%)
Price-Earnings (x)
Dividend Per Share (INR)
Dividend Yield (%)
E: MOSL Estimates
68.0
0.1
67.9
-0.8
-112.2
0.0
81.7
20.1
2.3
81.5
2.3
5.5
-806.2
33.5
0.0
0.0
102.2
25.1
1.8
101.0
1.8
10.2
85.3
18.1
0.0
0.0
43.5
-57.4
4.2
42.9
4.3
4.0
-61.2
46.7
0.0
0.0
49.7
14.1
3.7
48.5
3.8
6.2
56.1
29.9
0.0
0.0
67.7
36.2
2.7
66.4
2.8
6.7
8.5
27.5
0.0
0.0
75.1
10.9
2.5
72.9
2.5
7.4
9.7
25.1
0.0
0.0
84.8
13.0
2.2
81.5
2.3
9.8
32.8
18.9
0.0
0.0
24 October 2016
6

Equitas Holdings
NOTES
24 October 2016
7

Disclosures
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Equitas Holdings
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In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun Kumar
Varun.kumar@motilaloswal.com
Contact : (+65) 68189232
Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931
Kadambari Balachandran
kadambari.balachandran@motilaloswal.com
(+65) 68189233 / 65249115
Motilal Oswal Securities Ltd
24 October 2016
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
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