Emkay Global Financial has given Hold recommendation for AU Small Finance Bank with a target price of Rs. 1230 in its research report issued on Aug 31, 2021

Emkay Global Financial’s report on AU Small Finance Bank

As per media reports, Mr. Sumit Dhir, who was recently hired as Chief Audit Officer (ex-KMB with 19 yrs of experience), has resigned from the post. He was hired to replace Chief Audit Officer Mr. Nitin Gupta who resigned four months ago. This is the third top-level exit at AU SFB after Mr. Alok Gupta (Chief Risk Officer) and earlier Chief Audit Officer Mr. Nitin Gupta. In our view, steadily rising asset-quality concerns (higher NPAs + RSA + ECLGS) amid the Covid-induced disruption, the series of resignations in the audit/risk functions and delayed disclosure of these resignations have irked investors. We believe the bank’s rich valuations (~4.4x FY24E ABV, pre-correction) leave no margin for error. This was reflected in today’s stock reaction – ~13% correction in the stock price at day’s close.

Outlook

Currently, we have a Hold rating/UW in EAP on the stock with a TP of Rs1,230 (based on 4.5x Sept’23E ABV), given concerns about asset-quality and expensive valuations. Management attrition has added to these concerns, and thus, we will be closely monitoring the corrective measures to be taken by the bank.

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