Equitas Holdings is a diversified financial services company, catering to self-employed individuals and the micro & small enterprise (MSE) segment. It has three subsidiaries for its micro finance (under Equitas Microfinance), vehicle finance and MSE loans (Equitas Finance) and home loan (Equitas Housing Finance) businesses.
Expertise in lending to unbanked segments is a key strength and will drive future growth. Additionally, its experience in vehicle finance and MSE loans lends comfort on the management's ability to grow its upcoming Small Finance Bank (SFB), for which it got a licence from the Reserve Bank (RBI) in October 2015. Healthy growth in assets under management and in return ratios for both Equitas Microfinance and Equitas Finance is another positive.
The valuations also seem reasonable, at about 1.7 times the FY17 estimated price to book on a fully-diluted (post Initial Public Offer) basis, says Digant Haria, financials analyst at Antique Stock Broking. Larger peers such as SKS Microfinance and Cholamandalam Investment & Finance are trading at much higher valuations, of 3.8 times and 3.3 times the FY17 estimated book, respectively.
However, the pressure on profit and return ratios will be due to regulatory reasons and to some extent to investments in scaling up the banking business, rather than pressure on the existing businesses. The management's successful record in cross selling and growing in various segments is a positive but deposit building will be gradual. As the SFB grows and achieves scale, these pressures could reduce. Investors with a longer term horizon could, thus, consider the issue.
Notably, the housing finance business is generating low return , those on average assets being only 0.7 per cent for the nine months ending December 2015. Thus, the management is going slow on this business. The micro finance subsidiary is the fifth largest in the segment and forms 53.3 per cent of the company’s consolidated assets under management (AUM). Vehicle finance and MSE finance contribute 25.5 per cent and 17 per cent of its AUM, home loans forming the rest.
Over-dependence on Tamil Nadu, about 60 per cent of its AUM, could expose Equitas to state-specific risks. While the overall asset quality metrics are strong, some segments such as vehicle financing could see increased pressure, on the back of gradual economic recovery.