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AU Small Finance Bank Ltd. has evolved as a strong franchise not just in small finance banks but in overall mid-cap banking space, and given strong investments in the business, improving geographical and product diversity and a track record of execution, we believe the stock will be a compounder in the long term.
AU SFB’s stock has corrected by ~12% in recent months due to concerns over margin and high opex, which also led to a moderation in return ratios.
While near-term pressure on margins will remain an overhang on the stock’s performance, we estimate earnings growth to accelerate from FY25 onward to 35% YoY after 22% YoY growth in FY24, leading to return on asset/return on equity of 1.9%/17%.
The stock is now trading at 3.2x FY25E book value versus three-year/five-year average valuations of 3.times/4.0 times price/book value.
We thus upgrade our rating to ‘Buy’ with a target price of Rs 825 (based on unchanged 3.7 times FY25E book value).
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