Target: ₹925

CMP: ₹725.10

AU Small Finance Bank has made it clear in its investor communication that in the immediate future the loan growth rates of its ‘core’ segments (Wheels and SBL-MSME, especially the latter) are likely to be slower than aggregate.

We interpret this as the bank’s natural countercyclical reaction to increased appetite for the MSME space from a slew of NBFC/HFCs, which have historically not been focused on the segment. This selectiveness has started to show up, with Q1-FY24 disbursements for SBL-MSME registering y-y growth of only 9.8 per cent.

Given the economies of a now healthy CASA of 35.4 per cent in Q1-FY24, this does not tamper AUBANK’s overall growth aspirations. Despite building in a CAGR of only 22 per cent in core segments over FY23-26, our overall loan CAGR expectation over the same period is 31 per cent. This ensures that leverage crosses 9x in 12-18 months, which, in our opinion, is the dilution threshold.

We trim our FY24-25 earnings by 9.6/18.3 per cent due to margin revisions from asset mix. Rolling over to Q1-FY26E, our unchanged target multiple of 4x P/BVPS yields a higher target price of ₹925 (₹910 earlier).