In a game-changing move, Morgan Stanley analysts have projected a promising future for AU Small Finance Bank (SFB), as its stock soared by 3% to Rs 729 per share on November 13. The financial giant revised the target price to Rs 1,000 per share, hinting at a substantial 37% surge from its current standing. This positive development unfolded even as the S&P BSE Sensex faced a dip of 336 points, marking a 0.5% decrease to 64,923 levels at 12:25 p.m.
Riding the Wave: AU SFB’s Remarkable Performance
AU SFB’s stocks have witnessed an impressive 11% surge this year, outperforming the benchmark Sensex’s 7% rise. On May 29, 2023, the shares reached a pinnacle, touching a 52-week high of Rs 794 per share.
Merger Insights: AU SFB’s Strategic Move with Fincare SFB
Analysts at Morgan Stanley believe the merger of AU SFB with Fincare SFB could be a game-changer if executed efficiently. However, Centrum analysts have taken a more cautious stance, expressing concerns about the all-share swap deal. They emphasize that AU SFBs find themselves at a critical juncture where market sentiment may be significantly affected, giving rise to diverse opinions.
Strategic Opportunity Amid Operational Challenges
Centrum acknowledges the strategic opportunity that the acquisition presents for AU SFB but remains wary of the operational challenges it may bring. Maintaining a cautious stance, they highlight the gravity of the acquisition and the lack of room for error, especially given the stock’s 50% premium multiple compared to peers. Despite these reservations, Centrum retains an ‘add’ rating on the counter.
Financial Highlights: Q2FY24 Performance
In the quarter ending September 2024 (Q2FY24), AU SFB witnessed a commendable 17% year-on-year increase in net profit, fueled by an improvement in net interest income (NII). The total income recorded a substantial 32% YoY jump, reaching Rs 2,957 crore.
Navigating Challenges: Asset Quality Concerns
Despite the positive financial trajectory, the small finance bank faced challenges in asset quality during Q2FY24. Gross non-performing assets (NPAs) increased to 1.91% from 1.90% in the same period last year. Furthermore, net NPA or bad loans increased to 0.6% in Q2FY24 from 0.56% in Q2FY23.
