Small Finance Bank Stock in India | Quantitative Analysis of Small Finance Bank Stock | Yadnya Investment Academy

AU Small Finance Vs. Equitas Vs. Ujjivan Small Finance Bank

In this blog we will go through the quantitative analysis on certain parameters of three Small Finance Bank stocks on the basis of their Market Capitalization. So, let’s get started!

Introduction:

• Small Finance Banks (SFBs) are initiative of Reserve Bank of India (RBI) to enhance the financial inclusion in India.
• Small Finance Banks are similar to other commercial banks that undertake normal operations of banking business like accepting deposits and lending.
• SFBs are basically formed to serve those segments of the Indian Geography where the commercial banks have failed to reach or limited customer base. SFBs target the unserved and untargeted customers who are still unbanked and since great percentage of India population is deprived or away from banking system, therefore a great opportunity of growth is available for small finance bank in India.
• Customers of Small Finance Banks are: Small Business Units, small and marginal farmers, micro and small industries and unorganized entities.
• In FY20, with growth of 30%, SFBs Total Asset base crossed the level of Rs. 1,30,000 crores & AUM of Rs. 90,000 crores. (As per ET dated 14/09/2020).

Please note that we have done this analysis with the only purpose of screening good companies. Analysis done is completely on quantitative basis. No suggestions are being made to directly make any investment in the top scoring companies of this analysis. We suggest that one should perform a qualitative analysis of top scoring companies in this analysis and take investment decision based on risk profile.

Small Finance Bank Quantitative Analysis

Companies selected for Analysis:

We have selected the following 3 SFBs companies for our Quantitative Analysis.

• AU Small Finance Bank
• Equitas Small Finance Bank
• Ujjivan Small Finance Bank

Procedure of Analysis and its Interpretation

• These 3 SFBs are analysed on following 22+ various quantitative parameters and ranked and scored accordingly.
• The Evaluation of performance is done on the basis of results of December 2020.
• For example, company with higher PE ratio is provided lower rank and hence has scored lesser points. Similarly, if a company has higher RoE, it has higher rank and has scored higher points.
• Here, 1 means that the company has scored lowest points and 3 means the company has scored highest points.
• In the end, we have added all the points together and companies are ranked accordingly.

Market Capitalization of 5 FMCG Stocks:

Parameters of Quantitative Analysis:

1) PE:

• PE generally means how much investors need to pay for each rupee of profit earned.
• In this segment, Equitas Small Finance Bank has the lowest PE of 28.15 and hence given first rank and full points. PE of AU Small Finance bank is 34.57 and therefore given 2 points.
• Since, Ujjivan Small Finance Bank reported a loss of Rs. 279 cr. In Dec. 20 due to heavy increase in provisioning, PE is NA  and hence is rewarded with the 3^rd rank.

2) P/B:

• P/B ratio or Price-to-Book Ratio is an important valuation ratio which evaluates whether company’s stock is overvalued or undervalued by comparing the price with the net assets of the company.
• It can be calculated by the following formula: Current Market Price of a Stock/ Book Value per share.
• Companies with lower P/B ratio are considered better and vice versa.
• So, accordingly, Ujjivan Small Finance Bank tops the list with PB of 1.97 whereas AU Small finance banks ranks the lowest due to highest PB ratio of 7.97 among the peers.

3) Return on Equity (RoE)

• Return on Equity (RoE) is another most common ratio used in fundamental analysis. We can calculate RoE by the following formula: Net Income/ Total Shareholder’s equity (Equity share capital + Reserves/Surplus).
• RoE signifies how well the company generates the return on shareholders’ investment.
• Here also, the company with higher RoE, is considered to be strong and vice versa.
• In this case, AU Small Finance Bank grabs the first position and 3 points for delivering 37.1% of RoE, highest among its peers.
• And since, Ujjivan Small Finance bank has reported loss of Rs. 279 cr in Q3FY21, the RoE is negative and stood at -34.7%. Therefore, Ujjivan is given 1 points and 3^rd rank.

4) Return on Asset (RoA) 

• RoA simply indicated how well the company is able to generate profits from its assets.
• Formula for calculating RoA: Net Income / Total Assets
• In case of Banking & NBFC Institutions, loans are the assets of these institutions and hence profit generated via interests, etc. by banks & NBFC are referred as Return on Asset.
• Like RoE, higher the RoA of a company, stronger its positions and vice versa.
• Here also, AU Small Finance Bank with the highest RoA of 4.20% tops the chart and grabs the first position
• And due to loss in the December quarter, RoA of Ujjivan SFB remains in negative with -5.80% and hence marked and ranked accordingly.

5) Institutional Holding (DII + FII)

• Stake of Institutional investors in the stock builds a strong confidence among the retail investors as well. So more the stake of DIIs & FIIs in a stock, better it is and vice versa.
• In this case also, AU Small Finance Bank takes the full points with 51.70% of Institutional Investors in company’s shareholding.
• Institutional Investors have lowest stake in Ujjivan of only 9.44% and hence given 3^rd rank.

6) Sales & Net Profit Growth (YoY) [March 2019-March 2020]

• Ujjivan Small Finance Bank has recorded the highest sales growth of 48% YoY and hence ranked first. Whereas, with sales growth of 25% year-on-year, Equitas Small Finance Bank is provided with 1 points and last rank.
• In terms of Profit Growth, AU Small Finance Bank secures the first rank with highest net profit growth of 77% YoY and yet again, Equitas Small Finance banks ranks the lowest with Net Profit growth of 16% YoY only.

7) Sales & Net Profit Growth (2-Year CAGR) (March 2018- March 2020):

• Since not much historic data is available for small and mid-companies, we will be taking their 2-Years CAGR growth into consideration.
• In terms of Sales Growth on 2-Year CAGR basis, AU Small Finance Bank delivers the highest growth of 56% and hence given full points. In same criteria, Equitas delivers the lowest sales growth of 31% on 2-Year CAGR among the peers and hence rewarded 1 point only.
• In terms of Profit Growth on 2-Year CAGR basis, scenarios completely changes and Ujjivan with magnificent Net Profit Growth of 607% in 2 years tops the list and grabs the first position. Equitas with Profit growth of 176% in same period gets 2 points and with 52% of profit in 2 years, AU Small Finance is rewarded with 1 point only.
• The simple reason behind the magnificent profit growth on Equitas and Ujjivan Net Profit growth of 2 years accounts to low base effect.

8) Net Interest Income as a % of Operating Income

• For a banks, it is considered better to generate more income from their core banking operations.
• More the Net Interest Income of a bank, better it is for bank and vice versa.
• Here, the first position is awarded to Ujjivan Small Finance Bank, which possess the highest Net Interest Income of 81.2%.
• AU Small Finance Bank have also reported a decent NII of 76.6%, but remains the lowest scorer in the list.

9) Credit to Deposit Ratio (CD ratio):

• This ratio shows proportion of credit to that of deposits in a bank.
• Normally, SFBs face challenges regarding deposits in comparison to Large Banks and therefore if this number is quite large also, then it is considered fine as it may help in building confidence of customers.
• The Credit-to-Deposit ratio of large banks generally ranges between 70%-80%.
• Here, AU Small Finance Bank with CD ratio of 102% receives the first rank and 3 points and 3^rd rank are given to Ujjivan Small Finance Bank, its CD ratio is 116%.

10) Micro Banking Loan Book (%):

• AU Small Finance Bank is gradually shifting from micro to retail banking and therefore having Micro Loan Book (%) of 12.1%. With these percentage, 3 points are awarded to this bank and the first position.
• In threatful situation of NPAs creation, it is better for banks that their Micro Loan Book (%) reduces.
• Ujjivan has the highest percentage towards Micro Loan of 73.2%, which also develops high probability of big NPA numbers and hence ranked 3^rd and given 1 point only.

11) CASA Ratio:

• It is better for the bank to maintain high level of CASA ratio for determining a decent profitability.
• Equitas have the highest CASA ratio of 24% and hence provided with 3 points, contrarily, 1 point and last rank is awarded to Ujjivan for the low CASA ratio of 18%.

12) Gross NPA & Proforma NPA:

• According to the declared Gross NPA of these 3 small finance banks, Ujjivan reports the lowest Gross NPA of 0.96% and hence given 3 points and first rank. Whereas with the highest Gross NPA of 2.23%, Equitas is ranked 3^rd with score of 1 point.
• And in the Proforma Gross NPA, AU Small Finance banks seems to be well managed with 3.3% and hence given 3 points and opposite to situation of Gross NPA, Ujjivan here has the highest Proforma Gross NPA of 4.8%.

13) Net NPA & Proforma Net NPA:

• Here again in terms of declared Net NPA, Ujjivan looks good with the lowest number of 0.05% and hence tops the list in this category with the highest Net NPA of 0.65%, Equitas is ranked the last position.
• In terms of Proforma Net NPA, once again, the situation seems miserable for Ujjivan, with 2.1% of proforma Net NPA, it is ranked 3^rd and with the lowest proforma Net NPA of 1.3%, AU SFB is given full points.

14) Provision Coverage Ratio (PCR):

• It simply refers to the ratio of provisions to gross NPAs.
• So, here the bank with the highest provisioning ratio will definitely be in good positions to cope with the NPA mess, if any. Ideally, Provision Coverage Ratio should be a big number.
• So due to heavy provisioning in Dec. 2020, Ujjivan is able to maintain a high provision coverage ratio and hence this bank is ranked and scored accordingly.
• Equitas Small Finance Bank with the lowest provision coverage ratio of 59.9% among its peers, it is ranked last and with 1 point only.

15) Collection Efficiency:

• In these criteria, we will be measuring the performance of the banks on pre-covid levels.
• So, here, Equitas Small Finance Bank with the highest collection efficiency of 105% gets the full points and first position.
• Here, the second position is provided to AU Small Finance Bank which have 103% collection efficiency and last rank is given to Ujjivan which have collection efficiency of 95%.

16) Net Interest Margin (NIM) (%):

• Due to high micro loan book, Ujjivan Small Finance has the highest NIM of 9.7% and hence awarded with 3 points and first rank.
• With the low micro loan of 12.1%, AU Small Finance have low NIM of 5.4% among the peers as well. Therefore, AU SFB is ranked with 3^rd rank.

17) Cost to Income Ratio:

• Overall, Cost to Income can be considered as a performance ratio which presents the cost incurred for generating income.
• Lower the Cost to Income ratio, better it is and vice versa.
• And once again, AU Small Finance Bank outplays other SFBs with the lowest cost to income ratio of 51.9% and hence ranked and scored accordingly.
• With the highest cost to income ratio of 62%, Ujjivan is awarded with 1 point and 3^rd rank.

18) Capital Adequacy Ratio:

• Ideally, Capital Adequacy Ratio of the bank should be a big number.
• So, Accordingly, Ujjivan Small Finance with Capital adequacy ratio of 26.9%, is awarded with 3 points and first rank.
• And the last rank is given to the AU Small Finance which is having capital adequacy ratio of 18.8% as of Dec. 2020.

19) Liquidity Coverage Ratio (LCR):

• In simple sense, LCR means liquid assets held by banks and other financial institutions in order to meet short term needs.
• Financial Institutions with Liquidity Coverage Ration of more than 100% are considered to be safe and comfortable.
• On this basis, Equitas tops the list with the highest Liquidity Coverage Ratio of 196% and given full points.
• Ujjivan Small Finance Banks and AU Small Finance have also reported a decent LCR for dec. 2020. Their Liquidity Coverage Ratio currently is 179% & 111% respectively.

20) Franchise- Number of Branches as on Dec. 2020:

• Equitas Small Finance have the largest network of branches with 861 branches and hence awarded with first rank and 3 points.
• Next, AU Small Finance have the second largest number of branches i.e., 728 and with just 575 branches, lowest among the peers, Ujjivan gets the 3^rd position.

21) Final Score:

• Considering the above quantitative analysis on certain parameters, AU Small Finance Bank comes up as a clean winner among its peers with the highest 52 points.
• With 47 points, Equitas Small Finance Bank secures the second position and due to lack in various parameters, Ujjivan scores the lowest marks i.e., 45.

Conclusion:

Point to be specially noted down here is we have compared only small finance banks here. This analysis or the comparison of these particular small finance banks should not be done with any large banks. From investing point of view, one should always keep those stock in radar which is leader among its peers or in its sector.