Morgan Stanley’s upgrade lifts AU SFB’s stock 3% higher, brokerage sees 37% upside

Analysts at Morgan Stanley opined that AU SFB’s merger with Fincare SFB would provide material upside if well-executed

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Shares of AU Small Finance Bank (SFB) marched 3 percent higher to Rs 729 per share on November 13 after global brokerage firm Morgan Stanley raised target price for the stock to Rs 1,000 per share, implying an upside of 37 percent from current levels. The S&P BSE Sensex was down 336 points or 0.5 percent to 64,923 levels, as of 12:25 pm.

So far this year, the stock of AU SFB has surged 11 percent as against 7 percent rise in the benchmark Sensex. Earlier, shares of AU SFB touched 52-week high of Rs 794 per share on May 29, 2023.

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Highlighting the rationale behind the target upgrade, analysts at Morgan Stanley opined that AU SFB’s merger with Fincare SFB would provide material upside if well-executed. “AU SFB is well-placed to more than double its earnings per share (EPS) over the next three years (FY23-26) helped by strong growth outlook and peak of rate cycle,” they wrote in a recent note.

The Jaipur-based lender specialises in providing financial services primarily to individuals and small businesses, particularly in semi-urban regions.

In an earlier note, analysts at Centrum were cautious on AU SFB’s acquisition of Fincare SFB in an all share swap deal. They believe that the stock is on the brink of entering a realm where market sentiment will diverse significantly with strong opinions forming on both sides of the spectrum.

ALSO READ: Buy AU Small Finance Bank; target of Rs 780: Motilal Oswal

“The acquisition presents both a strategic opportunity and operational challenge for AU SFB. We would maintain our cautious stance on the stock given the gravity of the acquisition and no room for error (stock is trading at 50 percent premium multiple versus peers). We retain an ‘add’ rating on the counter,” the brokerage firm added.

In the September-ended quarter (Q2FY24), AU SFB’s net profit rose to 17 percent on-year aided by improvement in net interest income (NII). Total income, meanwhile, jumped 32 percent on-year to Rs 2,957 crore.

Asset-quality of the small finance bank, however, worsened during the quarter. The bank’s gross non-performing assets (NPAs) rose to 1.91 percent in Q2FY24 versus 1.90 percent in the year-ago period.

Net NPAs or bad loans, too, climbed to 0.6 percent in Q2FY24 as compared to 0.56 percent in Q2FY23.

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