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.