Bandhan bank’s robust business traction & customer acquisition is poised to continue post-merger. In the current scenario facing challenge, the bank remains resilient on both - growth and asset quality. Bank envision to be a pan India player & intends to leverage distribution network of both entity forcross selling. Gradual replacement of Gruh’s borrowing is seen to aidimprovement in margins ahead. Given robust growth & superior asset quality, we remain positive on business growth as well profitability, along with steady asset quality. Therefore, we believe that bank’s premiumvaluation to its peers to continue ahead on back of superior fundamentals. Accordingly, we revise our target price to Rs 680 per share, valuing the stock (post-merger) at 24x FY21E EPS. Maintain BUY rating.
We believe the merger is short-term negative due to high dilution but remains positive in the long run. However, given recent headwinds in home finance sector, balance sheet growth trajectory is seen getting impacted. Factoring in the risk, we lower our multiple to 26.5x FY21E EPS (Rs 24.5 per share). Subsequently, our target price is Rs 650 (earlier Rs 725). We maintain our BUY recommendation on the stock.
We are upbeat on the future performance of the bank and expect bank will continue to outperform. We expect PAT to grow at CAGR of 28.5% during FY19-21E backed by superior return ratios (ROE ~22% and ROA ~4%) and strong visibility of credit growth. However, the rich valuations (4.6x FY20E & 3.8x FY21E ABV) coupled with the overhang pertaining to the reduction of promoter holding offer limited room for upside at current level. We maintain our Hold rating with a revised TP of Rs 528 based on 4x P/ABV to its FY21E.
We are lowering our FY20/21 revenue estimate downward by 2.7% and 2.4% respectively to factor immediate loss of revenue from Puducherry plant. However we believe that Strides can achieve a ~18% YoY growth in the US given good filing momentum and new launches. We are also adjusting our FY20/21 PAT estimate downward by 15% and 7% respectively to factor lower other income and muted profit share from JV/ Associates. We value Strides at 15x on FY21E EPS and downgrade the rating to Reduce from ‘Buy’ to factor uncertainty around the USFDA outcome as well as the Arrow exit deal.
Bandhan Bank’s Q4FY19 result was largely ahead of our estimate and shown great performance during the quarter. Strong NII growth led to improvement in margin. Higher other income growth, improvement in operating efficiency & best in class asset quality aids best return ratios. We expect growth momentum will continue and bank will outperform the industry going ahead. However, promoter stake reduction issue is likely to weigh on stock performance. We have a positive outlook on the stock. By using DDM (ROA: 3.8%, Ke: 15.2% and Dividend payout ratio: 8.9%-12.5%), we arrived at P/ABV multiple of 5.1(x) and valued the stock to its FY21E ABV of Rs 129 which ascribed a fair value of Rs 658 per share. We have “Hold” rating on the stock.
Robust growth, better margins and control on asset quality continue to remain strong attributes of the bank. Robust pace of customer acquisition and increase in ticket size bode well for future growth of micro loans. With respect to merger with Gruh Finance, the bank awaits approval from NCLT. Post merger basis, RoE of Bandhan Bank is expected at ~23.5% with RoA at 3.6% on an FY21E basis. We believe that though the merger is short-term negative due to high dilution, it will be positive from a longer term perspective on a core business basis. Given the pace of business growth, we revise our target price to Rs 725 per share (earlier Rs 575 per share), valuing the stock at 30x FY21E EPS of merged entity (Rs 24. 5 per share). Hence, we maintain our BUY recommendation on the stock.