The current weak sentiment may be just the right opportunity to gradually accumulate these high quality businesses for the long term.
Once a darling of the markets, with bumper listing gains in 2017, AU Small Finance Bank (AU) and MAS Financial Services (MAS) have had a rough ride in recent times. AU is down almost 22 percent from its 52-week high and 16 percent lower than the level at which Temasek had picked up equity in the company last June. MAS (CMP: Rs 542, M Cap: Rs 2,963 crore) too has seen a significant correction, down by close to 18 percent from its listing price.
Did investors get their investment thesis wrong? Or are there still long-term opportunities that are now available at a more reasonable valuation?
We believe there are fundamental reasons for these businesses doing well, going forward. Here are the reasons:
Both entities are relatively smaller entities with assets under management of Rs 21,765 crore and Rs 4,915 crore respectively. That means there is enough headroom for growth without getting impacted by broader macro headwinds.
AU and MAS are run by first generation entrepreneurs who know their respective businesses well and have a proven track record of navigating their businesses through different economic cycles. The presence of marquee shareholders in both companies showcases the faith of long-term investors in their growth journey.
Finally, in a system where growth is hamstrung by lack of capital for many players, both AU (capital adequacy ratio of 19 percent) and MAS (CAR: 29.43 percent) have enough resources to capture market share in a weak competitive landscape.
AU Small Finance Bank – all about the growth journey
Promoted by first generation entrepreneur Sanjay Agarwal, AU successfully transitioned to a small finance bank (SFB) from its earlier asset financing NBFC avatar in April, 2017. It operates in eleven states of the country (Rajasthan and a few states of north and west India) and created a niche by focusing on a high growth segment (customers include low and mid income individuals and micro and small businesses) while ensuring minimum asset quality issues, thanks to robust processes and long experience in the market.
The reported earnings post listing and conversion to the bank have been much less impressive compared to the robust growth in business. The high upfront cost of conversion to a bank coupled with compression in interest margin took a toll on the numbers.
The advances book has risen by 2.8 times to Rs 20,000 crore over the last seven quarters with diversification to newer businesses like business banking, gold loans, home loans, agri-SME, consumer durables and two-wheelers. The diversification and de-risking of the book has resulted in close to 200 basis points decline in yields. However, the riskiness of the portfolio is coming down with a declining ratio of risk weighted assets to total assets.
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