Equitas Holdings - Axis DIrect

03 OCT 2016 Company Report
BUY
Target Price: Rs 215
CMP : Rs 169
Potential Upside : 27%
MARKET DATA
No. of Shares : 335 mn

Market Cap : Rs 57 bn
Equitas Holdings
Free Float : 100%
Avg. daily vol (1mth) : 1.1 mn shares
52-w High / Low : Rs 206 / Rs 134
Bloomberg : EQUITAS IB Equity
BANKS & FINANCIAL SERVICES
Promoter holding : 0%
FII / DII : 49% /29%
Beyond the metamorphosis

Price performance
180
Sensex Equitas Holdings
140
100
60
Apr-16 Jun-16 Aug-16
Financial summary (standalone)

Y/E PAT EPS EPS c hg BV Adj. BV P/E P/BV P/ABV R oE R oA Net NPA
Marc h (R s mn) (R s) (% ) (R s) (R s) (x) (x) (x) (% ) (% ) (R s)
FY15 1,066 4.0 (61.0) 43 43 42.7 3.9 4.0 11.1 3.0 0.8
FY16 1,671 6.2 56.3 50 48 27.3 3.4 3.5 13.3 3.0 0.9
FY17E 1,796 5.3 (13.6) 66 64 31.6 2.6 2.7 10.1 2.4 1.9
FY18E 2,224 6.6 23.9 72 68 25.5 2.3 2.5 9.6 2.2 2.2
Source: Company, Axis Capital
Equitas Holdings
The big picture BANKS & FINANCIAL SERVICES
Equitas has the makings of a lucrative investment proposition given it is a small finance bank with (1) strong corporate
governance, (2) AUM growth CAGR (FY17E-20E) of ~36% and ~25% in steady state, (3) RoAA/RoAE of ~2.5%/16.4%
in FY20E, and (4) adequate capital no dilution risk till FY20E.
While the initial two years of transition from a regional MFI to a pan-India small finance bank will keep return ratios
suppressed (till FY18E), we believe a look beyond the metamorphosis' is warranted given low execution risk (strengthened
management bandwidth, geographically concentrated operations) and a bank-ready (diversified) loan book
What exactly will change for Equitas?

Structure and regulation: 3 subsidiaries will fold into one small finance bank; more stringent regulation as a bank vs. as MFI
Financing: Ability to garner retail term deposits from public/institutions, offer CASA
Network and operations: Liability branches will be opened; pilot testing of scalability of Business Correspondent (BC) model
Way forward: Beyond the metamorphosis

Further expand product portfolio by including loan against gold and housing finance (mass banking)
Build a community bank channel by leveraging the BC model
Leverage technology for better mapping of customer risk, reduced cost of funding
Risks to our hypothesis

Failure to raise term deposits at a reasonable cost can severely hamper ability to grow
Operations are concentrated in Tamil Nadu and other southern states (concentration risk)
Managing asset quality can become tricky, especially if the systems lending discipline wanes
Our 1-year forward target price of Rs 215 (implying 27% upside) values Equitas at 3.1x ABV given top quartile
growth/return ratios, no legacy issues, and healthy capitalization.
Our sensitivity analysis suggests Equitas can deliver ~23% CAGR returns over ~3 years. Initiate with BUY
2
Equitas Holdings
Contents BANKS & FINANCIAL SERVICES
Page
Executive summary 4
Equitas metamorphosis 11
Growth opportunities 21
Asset quality & risk management 32
Corporate Social Responsibility 37
Risks to investment thesis 40
Company financials 42
Annexure 44
3
Executive summary
Equitas Holdings
Bajaj Finance multi-bagged. Can Equitas? BANKS & FINANCIAL SERVICES
First mover advantage; Tapped India's India has 20% of worlds unbanked
consumption & small-ticket CD loan Sizable market population; Equitas first to launch SFB
market segment grew 5x in 5 years MFI, affordable housing, MSE are big
opportunities
Captured wallet share through

data mining from CD and Scalable CASA accounts, CSR activity, close customer
long-tenor books, and product business model connect ensure customer stickiness
innovations (~20 product lines) Cross sell to large customer base, geographic+
product expansion, increase in ticket sizes
Analytics got the right customers; Portfolio to get more diversified & secured
Diversified portfolio cushioned against
De-risked
portfolio CASA transaction data will make it data-rich,
growth and asset quality shocks
help detect frauds early and price risk better
5
Equitas Holdings
Rerating of multiples by FY20 BANKS & FINANCIAL SERVICES
AUM breakup FY16

MSE
18% Key milestones ahead
MFI
UCV 53%
25%
Housing
HFC begins
4%
attaining material AUM breakup FY20*
New retail products scale (~100% Others
Transition CAGR) 10%
commences, Cross sell ratio for
technology top tier clients Leverage MFI &
Launch of MSME
set-up, biz improves to 2x increases from 20% Agri
liability
heads hired (incl. fee income) ~4x to ~7x 40%
branches
Customers adopt Low-cost deposits
CASA & retail
debit cards/online gain traction
term deposit Vehicle Housing
accretion start banking 20% 10%
*indicative
(FY16)to a multi-asset NBFC (FY20E) ...to a pan-India SFB

(FY08) From a regional MFI
AUM: Rs 61 bn;
AUM: Rs 0.2 bn; AUM: ~Rs 207 bn; ~750 branches
549 branches across 14 states
8 branches in Chennai Products: CASA, term deposits, various loans
Products: MFI, UCV, MSME, micro
Products: Microfinance loans products, third party product distribution
housing loans
6
Equitas Holdings
Snapshot of current operations BANKS & FINANCIAL SERVICES
Former structure Current structure
Equitas consolidated (FY16) Equitas Holdings Ltd
AUM (Rs bn) : 61.3 (Non Operating Finance

Holding company)
Branches : 549
GNPA : 1.34%
Equitas Technologies
Pvt Ltd.
Equitas Small Finance Bank Ltd
AUM (Rs bn) : 61.3

Branches : 549
Equitas Microfinance Equitas Finance Equitas Housing Finance
GNPA : 1.34%
AUM (Rs bn) : 32.8 AUM (Rs bn) : 26.0 AUM (Rs bn) : 2.5
% of AUM : 54 % of AUM : 42 % of AUM : 4
Branches : 399 Branches : 136 Branches : 14 Equitas Technologies Pvt Ltd.
GNPA : 0.23% GNPA : 2.46% GNPA : 2.84%
UCV MSE
AUM (Rs bn) : 15.1 AUM (Rs bn) : 10.9

% of AUM : 25 % of AUM : 18
Branches : 136 Branches : 136
GNPA : 3.36% GNPA : 0.62%
Source: Company, Axis Capital 7

Equitas Holdings
Smooth sailing in long run, but minor bumps along the way BANKS & FINANCIAL SERVICES
Transition into SFB structure (high one-time costs, slower growth to meet regulatory requirements) will drag RoA down in medium
term, but this will be a transitory phenomenon
R o A dec o mp o sitio n Befo re Metamo rp ho sis After
(as % o f av g assets) F Y15 F Y16 F Y17E F Y18E F Y19E F Y20E

Net interest inc o me 10. 9 10. 5 9. 7 10. 3 9. 9 9. 7
Non-interest income 1.9 1.8 3.3 3.4 3.1 2.7
Net rev enue 12. 8 12. 4 13. 0 13. 7 13. 0 12. 4
Op ex 6.9 6.6 7.8 8.4 7.7 6.9
Provisions 1.4 1.1 1.6 1.8 1.7 1.6
Taxes 1.6 1.7 1.3 1.2 1.3 1.4
R o A (R H S ) 3. 0 3. 0 2. 4 2. 2 2. 3 2. 5
One-time transition costs to skew RoA down in medium term Stages of Equitas metamorphosis
Before Metamorphosis After
Opex RoA (RHS)
9.5 3.5 AUM CAGR Advances CAGR of 32% over Expect loan
(%) (%) of 105% over FY16-18E as management growth to pick up
8.5 3.0 FY11-16 bandwidth shifts towards materially 40%
FY16 ROA of transition process CAGR over FY18-
7.5 2.5 3% IT, branch expansion and HR 20E and ~25% in
Focus on costs will cause Opex to steady state
6.5 2.0 expanding Assets (%) to rise from 6.6% ROA also to start
reach, to 8.4% going up ~10bps
5.5 1.5
capturing RoA to hit a trough of ~2.2% p.a. reaching
customers before starting to recover 2.5% in FY20E
FY15 FY16 FY17E FY18E FY19E FY20E
BEFORE METAMORPHOSIS AFTER
8
Equitas Holdings
Cross section of comparable peers BANKS & FINANCIAL SERVICES
F Y16 Equitas Ujjiv an C IF C J anal ak shmi T yp ic al new- age Pv t. Bank

AUM (R s b n) 61.3 53.9 298.1 109.9 > Rs 250 bn
Asset mix Diversified across MFI, UCV, Largely MFI loans for All types of vehicle finance, Largely MFI loans for Mix of Retail, SME & large & mid
MSE and home loans business and personal LAP and housing finance business and personal corporate loans
consumption; individual loans consumption
AL M 12-24 months ~12 months 12-60 months ~12 months 24-36 months
Asset sec urity Mix of secured & unsecured Unsecured loans Secured loans Unsecured loans Secured loans
loans
Pro duc ts to b e business loans, gold loans, Retail asset products Scale up of home loan Retail asset products Orientation towards more retail
added affordable housing loans business products
Geo grap hies Largely south-based with 549 Pan India MFI with 469 Pan-India NBFC with 534 Pan-India MFI with 332 Large banks are pan India players;
branches across 10 states branches across 24 states branches across 25 states branches across 18 states smaller banks are region-specific
(~80% of AUM from Tamil and union territories
Nadu, Maharashtra and
Karnataka)
Geo grap hies to b e Expansion away from Branches in liability Expansion away from Branches in liability NA
added Southern states catchment areas southern states catchment areas
C usto mer segment Low income groups currently, Low income groups Middle to high income group Low income groups Middle to high Income customers,
middle income groups going SME & large corporates
ahead
R o AA (% ) F Y16 3.0 3.7 2.2 2.0 15-24
5 year l o an b o o k 41.0 58.5 26.1 133.7 15-25
C AGR (% ) F Y11- 16
9
9
Equitas Holdings
Making sense with sensitivity analysis BANKS & FINANCIAL SERVICES
C MP R OA (% ) R OE (% ) P/ABV (x) AUM/L o ans AUM C AGR (% ) GNPA (% )

C o mp anies
(R s) F Y17E F Y18E F Y17E F Y18E F Y17E F Y18E (R s b n - F Y16) F Y13- 18E F Y16
BFIN# 831 5.5 4.8 24.9 25.9 5.2 3.8 77 50 0.1
MF Is Equitas 169 2. 4 2. 2 10. 1 9. 6 2. 6 2. 5 61 48 1. 3
Ujjivan# 431 3.2 2.4 16.0 13.2 2.8 2.5 54 56 0.2
CIFC 1,117 2.4 2.5 18.2 18.8 4.6 3.9 255 17 2.1
NBF C s SCUF 2,106 2.8 2.8 13.5 13.9 3.1 2.8 190 15 1.5
Repco 816 2.1 2.1 17.6 19.5 5.0 4.2 77 28 1.2
New Age IIB 1,197 1.9 2.0 15.7 17.3 3.7 3.2 884 25 0.9
Bank s Yes Bank 1,231 1.8 1.8 17.9 16.3 2.6 2.3 982 26 0.8
#Bloomberg/street estimates; BFIN - Bharat Financial Inclusion Ltd. (erst. SKS Microfinance)
FY20E sensitivity analysis We value Equitas at 3.1x ABV i.e. ~20% discount to
comparable RoAA generating NBFCs like
Mu ltip le (x) CIFC, SCUF, Repco to factor in a discount for execution risk
2.7 3.0 3.3 3.5 3.8 to arrive at TP of Rs 215
2.0 214 238 262 277 301
225 250 275 292 317 We expect the TP to touch ~Rs 300 by FY19 (valued at
RoAA (%)
2.3
2.5 237 263 290 307 334 3.3x FY20 P/ABV, as banking operations stabilize and
2.8 249 277 304 323 350 overhang of execution risk gets removed)
3.0 261 290 320 339 368
This would generate ~20% stock price CAGR by FY19 end
Source: Company, Bloomberg, Axis Capital 10

10
The metamorphosis
What, Why & How
WHAT -- What exactly will change
WHY -- Pros and cons of SFB structure
HOW -- The way forward

Equitas Holdings
What exactly will change? BANKS & FINANCIAL SERVICES
Structure Branch network Liabilities Business model Regulation
All the 3 ~400 new As a bank, Business Ability to collect

existing liability-only Equitas will be Correspondent deposits and
subsidiaries will branches and able to offer (BC) model will operate CASA
fold into 1 ~50 asset retail & bulk be used to scale accounts albeit
consolidated branches will deposits and the business with SLR/CRR
entity the be opened CASA accounts (25-30 BCs/ obligations on
small finance This is in Securitization branches) deposits raised
bank addition to will be done Currently, Equit Far more
Equitas ~399 existing under IBPC as is checking stringent
Technologies MFI branches model (vs. PSL the feasibility of regulatory
(non-finance) and ~150 EFL loan sell-down the existing architecture of
business will be and EHL model currently) model through RBI under a
hived off into a branches ~400 bank structure
separate entity appointed BCs as compared to
an NBFC/MFI
12
Equitas Holdings
Small finance bank -- Pros outweigh Cons BANKS & FINANCIAL SERVICES
Negatives:
SLR/CRR/ PSL (direct Agri) drag
Transition process to cause Opex to Assets (%) to rise
from 6.6% to 8.4% in the near term
Positives:
Loan growth will slow down to ~32% CAGR over
Diversified liability profile and lower cost of funds FY16-18E (vs. ~100%+ in 5 year period ending FY16)
Amassing a database of rich information Risk of failure to adapt into the new structure
Ability to retain clients and garner new ones by
offering a complete bouquet of financial products
Regulatory advantages in the long run
Move towards more regulated shareholding
structure
13
Equitas Holdings
Rationale for turning into an SFB BANKS & FINANCIAL SERVICES
Expected diversification in funding base

Diversified liability profile and lower cost of funds
Other Loans CA SA Term Deposits
As a Small Finance Bank, Equitas would incrementally
become less reliant on bank borrowings linked to 100% -
11
base rates 80%
28
45
56
This will help lower cost of funds in the long run as low 60%
cost CASA deposits and retail term deposits accrue 100
86
40%
However, benefits will accrue fully once retail term and 64
20% 40
CASA deposits achieve some scale (~30-40% of deposits 24
to total liabilities) 0%
FY16 FY17E FY18E FY19E FY20E
In near- to medium-term, due to the sub-scale level of low
cost CASA and retail deposits, there may not be a large
difference in the cost of funds and the landed costs of
raising deposits under an SFB Expected trend in CASA ratio and cost of funds
Nonetheless, raising funds as an SFB would be easier vs.
as an NBFC-MFI Cost of Funds CASA (RHS)
15 25
(%) (%)
13 20
Equitas cost of borrowings (calc.) in FY16 11
15
was11.3%, and has come down to ~9.5% 9
10
incrementally. Cost of funds would trend down to 7
~8% by FY20E from 11.3% now. 5 5
Bulk deposit rates would be ~100 bps lower than the 3 0

current cost of funds yet 50-100 bps above deposit FY14 FY15 FY16 FY17E FY18E FY19E FY20E
yields of other banks Source: Company, Axis Capital
14
Equitas Holdings
Rationale for turning into an SFB BANKS & FINANCIAL SERVICES
Ability to offer complete bouquet of financial products, making existing clients stick and attracting new clients
Besides the advantage of lower cost of funds, the ability to provide CASA accounts to existing clients would make customers
sticky (higher rates may be offered in initial years)
Under bank structure, Equitas will be able to provide the entire gamut of banking products meeting the requirements of not
only MFI clients but also small- and medium-sized corporates
Incrementally, most of the lending can be done electronically, reducing the cost and fraud risk of disbursements in cash
Relationships with existing clients (economically weaker sections, first-time borrowers in CV segment etc. who would benefit
from disintermediation) will deepen
Amassing a database of rich information

With analytics becoming a necessity in modern banking, it is important to amass all data relevant for risk-pricing and
decision-making
As banking habits proliferate among Equitas customers, data generated from transactions can be mined to observe cash
utilization habits of customers
This will help accessing risk better and enable safer lending in later years and detect frauds early
Regulatory advantages in long run

Though reserve requirements (SLR, CRR, LCR) may drag margins and profitability, an SFB (unlike an NBFC-MFI) is not subject
to restrictive provisions like 10% spread cap, maximum indebtedness etc. (refer regulations mentioned in annexure 5 and 6)
Stricter regulatory governance will help mitigate risk further and diversified shareholding will ensure stability
15
Equitas Holdings
Arguments against the transition BANKS & FINANCIAL SERVICES
Cost-to-income will rise led by spends on infra, IT, HR,

Opex to Assets (%) to rise from 6.6% in FY16 to compliance
8.4% by FY18E on higher spends on 9.5
infrastructure, technology and HR, which will impact 8.4
8.5 7.8
return ratios (%) 7.7
7.5 6.9 6.9
However, operating leverage & higher loan ticket size 6.6
6.5
is likely to cushion the impact, as Equitas gains scale
5.5
Loan growth will slow down over FY16-18E as FY15 FY16 FY17E FY18E FY19E FY20E
management focuses on engineering the transition and
manage regulatory requirements BEFORE METAMORPHOSIS AFTER
Finally, there is also a large execution risk to be borne

during the transition phase Source: Company, Axis Capital
ROA will decline in FY17-18E as Equitas begins its transition

process
As with a Chinese Bamboo tree, which
builds a strong root structure before 18
RoE RoA (RHS)
3.5
sprouting above the ground, Equitas (%) (%)
16
(under transition phase) will incur high
3.0
costs in the short term as it becomes 14
bank-ready. Though this would drag 12

2.5
return ratios down, we believe, it is a 10
temporary and necessary evil and will
8 2.0
substantially improve the stability of the FY14 FY15 FY16 FY17E FY18E FY19E FY20E
business model in the long run
16
Equitas Holdings
RoAs will decline as Equitas becomes bank-ready BANKS & FINANCIAL SERVICES
Costs to go up during the transition

Infrastructure costs Regulatory costs
~Rs 1.8-2 bn of one-time capex costs will be incurred on As a bank, Equitas would have to comply with RBIs CRR
~400 new branches to be opened (amortized over and SLR norms (causing net negative carry of ~300 bps
3-4 years) on SLR of 21% and of ~950 bps on CRR of 4%)
Equitas has already opened 3 SFB branches in However, most of Equitas book qualifies for refinance
Chennai, as it commenced operations as an SFB on 5th from institutions like NABARD, SIDBI, and NHB. Not only
September 2016. It has 399 MFI branches, 136 UCV and are the cost of funds from these sources lower (~9%) and
MSE branches and 14 home loan branches more stable, they are also exempt from SLR/CRR
An urban focused lender, Equitas will have to requirements
incrementally open disproportionately higher number of Hence, in effect, as Equitas plans to refinance ~20-25%
branches in rural areas to comply with RBIs mandate of of its AUM from these institutions, effective SLR drag
25% of branches being in unbanked rural areas would be restricted to ~15-16% of NDTL (instead of 21%)
Equitas would also selectively offer debit-cum-ATM cards
to clients maintaining higher CASA balance. We believe HR costs
the costs of setting up and maintaining an ATM network Lateral hiring from MFIs, NBFCs and banks will be
infrastructure will nullify the early advantages from required to better service widening geographic
low-cost deposits presence, introduction of liability products, and more
IT costs stringent regulatory compliance needs
We estimate Equitas will incur ~Rs 700-800 mn to Most of the functional management heads (e.g.
acquire requisite software and technology treasury, liabilities etc.) and 60-70% of branch staff are
solutions, including CBS, regulatory reporting, systems already
related to customer service, management information on board. Save for a business head for mortgages, the
systems etc. top management team is largely in place
These costs, too, would be amortized over 3-4 Training costs for branch staff is expected to be minimal
years, minimizing strain on return ratios in the near term and would not move the needle much
17
Equitas Holdings
Other hurdles Deliberate slower growth, risk of failure BANKS & FINANCIAL SERVICES
Loan growth to slow down AUM growth trend

Loan growth will moderate to ~32% CAGR over
AUM growth Disbursements Growth
FY16-18E (vs. ~100%+ CAGR in past 5
years), as management focuses on engineering 80 (%)
the transition and meet regulatory requirements
Growth will revert to ~40% CAGR over 60
FY18-20E
40
Risk of failure
Though we are confident that Equitas 20
management can manage the transition well, the
risk of being unable to seamlessly raise 0
deposits, manage costs and meet regulatory FY14 FY15 FY16 FY17E FY18E FY19E FY20E
requirements remains
18
Equitas Holdings
Small finance bank structure The way forward BANKS & FINANCIAL SERVICES
Offering a range of liability and value-added

Build a community bank channel by leveraging
products to the existing customer base
the Business Correspondent (BC) model
including CASA accounts with net banking and
Appointing BCs from the local community to
mobile banking facilities, 3-in-1 accounts as
provide mainstream banking services at
well as distributing third party insurance and
customers doorstep
pension products
Continue to offer entire bouquet of existing

products and further expand product portfolio Use technology to improve operational
by including loan against gold, business loans efficiency and risk management
and home loans
Equitas operations are relatively concentrated (~80% of AUM coming from Tamil Nadu, Maharashtra
and Karnataka); hence, onboarding of SFB processes and technology to existing NBFC-MFI operations will
be smoother
Further, Equitas CSR (Corporate Social Responsibility) spends are geared towards improving the lives of its
clients, which helps maintain regular connect (reduced risk) and build loyalty (refer CSR section for details)
Equitas commenced operations as an SFB on 5th September, 2016 with 3 branches in Chennai
19
Equitas Holdings
Slowly expanding its footprint across the country BANKS & FINANCIAL SERVICES
J&K
HP Most of Equitas
Punjab (8) Uttaranchal incremental expansion
Arunachal Pradesh
Haryana (9) (1) will be in newer
Delhi
(3)
Sikkim geographies outside
Rajasthan UP
Tamil Nadu, as it
(46)
Bihar
Assam Nagaland believes there is decent
Meghalaya Manipur penetration level in the
Gujarat
(38) MP
WB Mizoram
southern states
(43)
Tripura
Jharkhand
Maharashtra Orissa
(95)
Telangana
(6)
Goa AP
(9)
Equitas is a strong player in South India with
Karnataka Tamil Nadu alone contributing
(47)
Pondicherry ~75% to its micro & small enterprise book
TN (6)
Kerala (222)
~60% to its MFI book and
~33% to its UCV book
549 branches as of FY16
20
Growth opportunities
Ample room for growth in existing segments
Addition of new sub-segments
Lower cost of funds to make housing finance scalable

Equitas Holdings
Microfinance A key growth, earnings driver BANKS & FINANCIAL SERVICES
With India accounting for ~21% of the worlds unbanked population (source: Deloitte), much of this
un-served/under-served populace has traditionally had to turn to unorganized moneylenders for its credit needs
Such informal credit providers charge interest rates as high as 24-120% p.a., fleecing borrowers
Banks reluctance to cater to these segments (due to low ticket size, lack of documentation or collateral, unjustifiable
branch costs) presented itself as an opportunity to specialized microfinance institutions like Equitas
Innovative credit appraisal methods, ground level field staff deployed with tablets, higher yield on loans and
weekly/fortnightly repayment schedules helped manage risk better, while disintermediation still added value
to clients
AUM trend of Equitas MFI business

ICRA estimates the potential size of microfinance
(%)
market at Rs 2.8-3.4 tn; MFIs can grow at (Rs mn) Total AUM YoY growth (RHS)
120 109 60
30-35% CAGR over FY17-20E
100 50
79
80 40
Equitas MFI AUM has grown at robust ~46% 57
60 44 30
CAGR over FY12-16 to Rs 32.8 bn. Disbursements 40 33 20
21
too have grown at ~48% CAGR over period. 20 7 11 15
10
Nonetheless, this is still ~1% of potential 0 0
market size FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E
22
Equitas Holdings
Microfinance A key growth, earnings driver BANKS & FINANCIAL SERVICES
Ticket size (calc.) are low, but expected to increase steadily AUM growth to be driven equally by new client acquisition
30 (mn) No of clients YoY growth (RHS) (%)

(Rs 000's) 25.3
25 5 40
19.7 4.3
4.0
20 3.7
15.5 4 3.4
12.9 30
15 11.4 2.9
8.8 3 2.4
10 7.9 7.8 20
5.8 1.9
2 1.4
5
10
0 1
0 0
FY12
FY13
FY15
FY16
FY14
FY17E
FY18E
FY19E
FY20E
FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E
Note: FY16 - Annualised Note: FY16 - Annualised
NIM has moderated due to regulatory changes (10% spread

Opex to AUM declining steadily, as business achieves scale cap) and rising competition
Opex to Avg AUM (%) (%)

16 14.9
15 (%)
12.5 12.3 12.2 11.8
12 12 10.4
9.5
9 7.8 7.6
6.8 8
6
4
3
0 0
FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16

Equitas Holdings
Unearthing the devil in the details Concentration, branch maturity BANKS & FINANCIAL SERVICES
Though Equitas has the highest clients / loan officer metric, it concentrated geographic operations and mature branches
does not necessarily indicate higher risk, rather have led to higher productivity vs. pan-India peers
1,200 No. of clients per loan (Nos)
(Nos) 400
officer No. of districts in which
1,000 898 329
847 they are present
800 733 300
675 633 592 227
209
600 478 183
200
148 133
400
100 74
200
0 0
Equitas LTFH BFIN * Satin Ujjivan Jana Grameen BFIN * Jana Ujjivan Satin Equitas LTFH Grameen
Credit Lakshmi Koota Lakshmi Credit Koota
Equitas has the lowest gross loan portfolio o/s per ~70% of branches are mature (265 out of 399 added before
client, indicating far lower indebtedness of its clients vs. peers FY12 )
30 (Rs '000s)
500
24
25 21 399
400 36
20 17 38
16 16 37
28 21
15 13 12 300
10 163 130
200
5
100
0
Jana Grameen BFIN * Satin Ujjivan LTFH Equitas 0
Lakshmi Koota Credit FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY16
Source: MFIN Micrometer 24

* BFIN Bharat Financial Inclusion Ltd (erst. SKS Microfinance)
Equitas Holdings
Microfinance Steadily moving from regional to pan-India BANKS & FINANCIAL SERVICES
Equitas has traditionally been a south-focused MFI with Increasing geographic diversification (share in AUM mix - %)
Tamil Nadu contributing more than 69% of its MFI
Tamil Nadu Maharashtra Karnataka Others
AUM in FY13 100
13 13 13 18
80 6 7 7
However, it has been focusing on geographically 12 7
15 16 13
diversifying its asset base and it has achieved 60
reasonable success, with Tamil Nadu contributing 40

69 65 64 61
~61% of its MFI AUM in FY16 20
0
In FY16, it added three new branches each in two new FY13 FY14 FY15 FY16
states (Haryana, Punjab), taking the count to 399
Given a large portion of Indias population has no access to formal credit, there are vast untapped opportunities
for growth
Equitas CSR spends are strategic in nature and geared towards improving the lives of its clients, which helps it
maintain regular connect (reduced risk) and build loyalty among its customer base
We believe Equitas MFI book will continue to post ~35% CAGR over FY16-20E led by increase in ticket size and
expansion into newer geographies and deeper penetration in core markets
We expect Equitas to have ~Rs 109 bn of MFI loans by FY20E, which will be a key profitability driver
25
Equitas Holdings
Used Commercial Vehicle (UCV) finance BANKS & FINANCIAL SERVICES
Equitas also caters to the UCV segment, financing purchase of pre-owned CVs to prospects who after some years of
experience as drivers aspire to own CV. ~80% of loans disbursed in the segment are to such first-time borrowers
Volume growth trend of MHCV sector in India Of late, the CV industry has posted a cyclical upswing after
several years of decline
MHCV LCV
60%
MHCV segment (~70% of the industry sales) has recorded
40% 16-30% growth in past 2 years
20%
LCVs too have recently started showing signs of an
0%
uptick, growing ~0.5% in FY16 after declining ~30% during
-20% FY14-FY15
-40%
Equitas expected UCV AUM trend
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: SIAM, Axis Capital (Rs bn) (%)
UCV YoY Growth (RHS)
50 50
42
Indias UCV finance segment is estimated at huge Rs 1.8 tn
40 40
31
19
Equitas, with UCV AUM of Rs 15.1 bn, accounts for less 30 30
22
than 1% of the total potential size of the industry. Off a 20 15.1 20
12
small base, it has posted 100%+ CAGR over FY12-16
10 10
0 0
FY15 FY16 FY17E FY18E FY19E FY20E
We expect the CV cycle upturn to be prolonged as it has followed a long downturn

We factor in ~30% growth for Equitas over FY16-20E, led by a robust CV cycle and growing market share
26
Equitas Holdings
Used Commercial Vehicle (U CV) finance BANKS & FINANCIAL SERVICES
Asset quality has been deteriorating steadily. however, it is still one of the best in the industry (Q1FY17)
120 120
dpd dpd GNPA Trend
5 (%) 150 12 (%) 150
180 dpd
10 dpd
4 GNPA Trend dpd 10.7
4.1 120 120
8 dpd
3 6.2 dpd
3.4
6
1.8 2.8 4.1
2 3.6
1.0 4
1 0.5 2
0 0
FY12 FY13 FY14 FY15 FY16 Q1FY17 MMFSL SHTF Equitas CIFC
Equitas transitioned from150-dpd recognition to 120-dpd recognition of NPAs in Q1FY17; hence, some part of asset
quality deterioration is merely optical
However, a part of deterioration in asset quality can be explained by the fact that the book is unseasoned
Our view
We expect incremental asset quality to be better off, with the book achieving maturity
Better understanding of new geographies will also begin to kick in, helping contain future slippages
However, migration to lower buckets for recognition as per RBI norms may show optical increase in GNPA in the near term
27
Equitas Holdings
Micro & Small Enterprise (MSE) BANKS & FINANCIAL SERVICES
Like MFI segment, the MSE segment also is not catered to by larger institutions like banks and established NBFCs
Lack of income proof documentation, small ticket size, cash transactions and lack of banking habits ensure banks
steer clear of this segment, leaving large unfulfilled needs an opportunity for players like Equitas
Trend in number of total working enterprises
Total working enterprises YoY growth (RHS)
60
(mn)
4.6% As per the Ministry of Micro, Small & Medium
51
47 49 Enterprises, there are about ~51.1 mn MSME
50 45 4.5%
43
38 39 41 enterprises in India (as of FY15) employing ~117mn
40 4.4% people and contributing to ~ 1/3rd of Indias GDP
30 4.3%
20 4.2%
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
New MSE registrations per annum (000s)
Source: Ministry of Micro, Small & Medium Enterprises, Axis Capital
Medium
However, RBI data suggests only ~12.9% of bank
8
credit is deployed in MSME sector
Micro
346
This has led to large unmet financing demand in Small
the sector, providing ample room for growth for 71
small, niche players like Equitas
Source: Ministry of Micro, Small & Medium Enterprises, Axis Capital
28
Equitas Holdings
Micro & Small Enterprise (MSE) BANKS & FINANCIAL SERVICES
We factor in ~40% AUM CAGR over FY16-20E Asset quality has witnessed some stress, but within comfort zone
AUM (Rs bn) YoY Growth (%)

120
1.2 (%) dpd
50 600%
41
500% 150
40 0.9 dpd 1.0
29 400%
30
20 300% 0.6
20 15 180 0.6
11 200% dpd
0.3
10 5 100%
1 - 0.2
0 0% 0.0
FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY14 FY15 FY16 Q1FY17
Equitas transitioned from 150-dpd recognition to 120-dpd recognition of NPAs in Q1FY17. This segment is also
relatively new for Equitas; hence, the book is unseasoned
Though there may be incremental deterioration going ahead as the book matures, we do not expect any large-scale
negative shocks since most of the book is built through cross sells to existing customers with good credit behavior and
repayment history
Nonetheless, migration to lower buckets for recognition of NPAs on conversion into a bank may show optical increase
in GNPAs in the near term
29
Equitas Holdings
Affordable housing finance: A large opportunity BANKS & FINANCIAL SERVICES
Housing finance and MSE finance are natural extensions of Conscious slow growth in micro housing finance segment
MFI business, as 80-90% micro-housing / MSE finance
customers were MFI customers (Rs bn) (%)
Housing YoY growth (RHS)
10 9 100
Micro-ticket size housing loan segment (for home
construction and home expansion) is virtually untapped, as 8 80
6
banks and NBFCs find it unviable 6 60
2.5 4
4 3 40
2
Equitas started its affordable housing finance business 2 20
in June 2011, but has consciously not scaled it up 0 0
materially thus far, sticking to core markets of FY15 FY16 FY17E FY18E FY19E FY20E
Tamil Nadu, Karnataka and Maharashtra through Source: Company, Axis Capital Research
14 branches
It rather chose to granulize its portfolio (incrementally
smaller ticket size: Rs 0.9 mn in FY16 vs. Rs 1.2 mn in Though management is going slow on the segment, it is a
FY15) and understand the business before scaling it up lucrative and scalable opportunity in medium to long term
given:
Higher cost of funds, a primary constraint earlier, is
unlikely to be a challenge going ahead. This would RBIs and GoIs thrust on affordable housing (lower risk
enable Equitas to tap a lucrative but earlier-unviable weightage, opportunity for PSL, Housing for All scheme),
segment in years to come Falling cost of funds (thereby rising spreads) and
However, we await he appointment of the Mortgage Secured nature of the book with reasonable ticket size
Business head and nuances of his strategy.
Given the tiny base and managements deliberate go-slow approach, we believe, our assumption of ~37%
AUM CAGR over FY16-20E is modest, and Equitas will eventually push the pedal on growth in mortgages
30
Equitas Holdings
The way ahead BANKS & FINANCIAL SERVICES
With robust growth across all product streams coupled AUM mix
with the introduction of new products like loan against
(%) MFI Housing UCV MSE Agri Others
gold, agri & corporate loans, we believe Equitas will
report ~36% AUM CAGR over the next 4 years (AUM of 100 4
21 13 18 18 19
~Rs 207 bn by FY20E) 80 32
29 25 23 21
Cash raised from the recent IPO keeps capital position 60
comfortable to fund this rapid growth (total CAR in excess 40 76
of ~22% vs. requirement of 15%) 60 53 54 53 54
20
AUM growth will come off as base increases, but still higher 0
than most peers FY13 FY14 FY15 FY16 FY17E FY18E
80 (%)
60
However, there would be two distinct phases that the
40 company would go through: (1) Transition phase and
(2) high growth phase
20
As Equitas transitions into a Small Finance Bank
0
(SFB), much of the management bandwidth would focus
FY14 FY15 FY16 FY17E FY18E FY19E FY20E
on ensuring compliance with the SFB norms and growth
would slow from ~46% CAGR over FY12-16 to ~32%
over FY16-18E
Equitas believes the opportunity is massive, and
expects to serve ~5% of Indias population by 2020 Post this stabilization period, we expect growth to revert
to higher levels (40% for FY18-20E)
(from ~1% currently)
31
Asset quality & risk mitigation
Early diversification helps seasoning of loan book
Low duration assets help detect stress early
Regulation has put checks in place against higher risk in MFI book
Benign CV cycle helping UCV finance book

Equitas Holdings
Microfinance business BANKS & FINANCIAL SERVICES
Equitas caters to populace at the bottom of income Asset quality de-risked after AP MFI crisis
pyramid, providing finance to unskilled workers, small
fleet owners and drivers and self-employed GNPA NNPA PCR (RHS)
non-professionals 150 133 100

(bps) (%)
120 80
~98% of borrowers are women 90 60
67
60 40
Ability of these sections of society to withstand any 39
23
30 20
financial shocks for an extended period is minimal; 8 3 1 10 2 8 2 6
they usually do not have banking habits or income 0 0
FY11 FY12 FY13 FY14 FY15 FY16
documentation, and operate largely through cash
Further, MFI and MSE finance businesses are largely

unsecured, whereas CV finance business is highly MFI operations have shown excellent asset quality after
cyclical in nature, adding to the risks faced by recuperating from the Andhra Pradesh MFI crisis in 2010.
the financiers Its GNPAs have measured only a few bps over FY13-
16, and stood at 23 bps as of FY16
Equitas Microfinance Recognition & provisioning policy

R egul atory requirement Equitas p rac tic e
R ec ognition Prov ision R ec ognition Prov ision
MF I 90 days Higher of the following: 30 days 1.25% of standard assets and
1% of the outstanding loan portfolio or 10% on loans overdue for 30-60 days and
50% on loans overdue for 90-180 days and 25% on loans overdue for 60-90 days and
100% on loans overdue for more than 180 days 50% on loans overdue for 90-120 days and
100% on loans overdue for more than 120 days
33
Equitas Holdings
Other segments BANKS & FINANCIAL SERVICES
Equitas MSE/UCV business has witnessed some asset quality deterioration due to unseasoned nature of the
book, and had GNPAs of ~2.5% as of FY16. However, it is still better than that of peers operating in the segment
Its housing finance portfolio saw significant asset quality deterioration in the past few years. Management has rightly
decided to go slow on the segment until it understands the ecosystem of affordable housing better
Asset quality Equitas Finance (UCV & MSE)
(bps) GNPA NNPA PCR (RHS) (%) Owing to stringent risk management checks and a benign
CV cycle, we do not factor in material deterioration in the
300 30
200 246 asset quality for the consolidated entity despite the EFL
250 25
180
businesses moving into faster stress recognition buckets.
200 164 20
144 150 Consequently, we believe, credit costs will remain modest
150 15 (1.6-1.8% over FY16-20E)
100 10
50 32 29 5
Bucket change to 90 dpd (in SFB structure) however will
0 0 show optical moves
FY13 FY14 FY15 FY16
Asset quality Equitas Housing Finance Asset quality Equitas consolidated entity
(bps) GNPA NNPA PCR (RHS) (%) (%) GNPA NNPA PCR (RHS) (%)
300 25
4.0 40
250 228
20
3.0 3.6 30
200 284
138 15 2.9 2.9
150 2.0 20
166 1.3 2.2 2.4
10
100 1.9 1.8
49 1.0 1.5 10
50 5 1.1
0.30.2 0.7 0.6 0.8 0.9
57
0 0 0.0 0
FY14 FY15 FY16 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E

Equitas Holdings
Risk mitigation measures BANKS & FINANCIAL SERVICES
After MFI crises in Andhra Pradesh in 2010, the RBI implemented stringent oversight on the operations of MFIs (refer
annexure 5 and 6), which coupled with the proliferation of credit bureau services like Equifax significantly curtailed
over-leveraging by borrowers in the MFI segment
Like banks and NBFCs, it is now mandatory for MFIs to disclose relevant data to credit bureaus regularly, giving a
true picture of borrowers overall indebtedness
However, consistent and regular connect with clients allows deeper understanding of (MFI) clients needs and
problems, and helps detect pressure early. Group-guarantee mechanism and the fact that ~98% of its borrowers are
women further reduce the risk
Equitas has also made it compulsory for the borrower and its spouse to obtain life insurance covering at least the sum
of the loan borrowed
Microfinance Used CV, MSE, affordable housing
Under SFB framework, Equitas will open savings Though there may be incremental deterioration
accounts for its customers, significantly increasing going ahead as the book matures, negative shocks
the % of direct electronic disbursements from ~19% are unlikely as most of the book is built through
currently. The bank account would not only provide cross sells to existing customers
a pseudo escrow on the monies held in it, but also
a rich pool of data, which can be mined for safer Migration to lower buckets for NPA recognition on
lending in the future conversion into a bank may show optical increase
in GNPAs
35
Equitas Holdings
Corporate governance, management strength BANKS & FINANCIAL SERVICES
N. Rangachary Chairman, Equitas Holdings V. S. Murthy Head, Equitas SFBs vehicle &
housing finance
Fellow member of ICAI and ICSI
Masters degree in Business Administration
Served as the Chairman of Central Board of
from Osmania University
Direct Taxes and Chairman of IRDAI
Has worked with Cholamandalam DBS
A member of the expert committee on
Finance and Dhandapani Finance as Head
General Anti-Avoidance Rules (GAAR)
(secured loans)
P. N. Vasudevan - MD & CEO, Equitas SFB H.K.N. Raghavan Head, Equitas SFBs
consumer finance
Bachelors degree (University of Madras) and
CS from ICSI Bachelors degree in Commerce from
Osmania University and Business
Served as Head (consumer banking group)
Management from IIM, Kolkata
at DCB Bank for more than 1.5 years; has
also worked for 20 years in Cholamandalam Has worked in various FMCG companies like
Investment and Finance Hindustan Unilever, Agro Tech Foods
Provident Fund, Henkel SPIC India,
Dabur Foods
Competence and corporate governance

A strong, professional management team with many decades of experience in banking and financial services ensures
competence and integrity, and as such a key strength of Equitas
A deep understanding of the EWS/LIG section of society enables better risk management.
With most top level management hiring done and new functional heads appointed, Equitas will be able to comfortably
transition into a Small Finance Bank
36
Corporate Social Responsibility
Organized the largest number of medical camps by any corporate in India
Equitas Holdings
CSR Maintaining client connect and ensuring loyalty BANKS & FINANCIAL SERVICES
Equitas Gyan Kendra Equitas Shiksha

At Equitas Gyan Kendra, members are provided Equitas proposes to provide quality supplementary education
skill development training in rural and semi-urban services to children of members who have availed micro
areas to help augment their household income credit. Shiksha is being piloted at 8 centres
Equitas placements Equitas health & hygiene camps

In another proactive step, Equitas conducts job fairs for Equitas conducts eye, dental, veterinary and health camps.
members relatives to make them aware of employment These camps also help improve health and solid waste
opportunities and also help them in job placement management to improve hygiene and living conditions
38
Equitas Holdings
CSR Maintaining client connect and ensuring loyalty BANKS & FINANCIAL SERVICES
Equitas matriculation schools Equitas birds nest

Gurukuls established to ensure quality education to Equitas Birds Nest is the initiative for rehabilitating
children at affordable rates pavement dwellers
All CSR activities target existing microfinance customers and other weaker members of the society
Not only does this help providing regular connect with customers, it also deepens relationship with them, ensuring
loyalty to Equitas
Provision of CASA accounts and life insurance for earning member, inculcation of financial literacy and a culture of
savings would go a long way in improving the financial condition of these customers a win-win proposition which
will reduce Equitas portfolio risk
39
Risks to investment thesis
Transition risk the key monitorable
Equitas Holdings
Risks to investment thesis BANKS & FINANCIAL SERVICES
Execution risk to SFB plans

To comply with regulations, Equitas plans to raise bulk deposits and money market borrowings to replace bank debt
Failure to raise low cost CASA deposits and retail term deposits can severely hamper operations in the long run, and
growth and profitability could come under question
Asset quality management

Equitas target market comprises FTBs (First Time Borrowers) in the CV segment and low income households in others
The ability of these sections to withstand financial shocks/economic slowdown for an extended period is minimal;
they usually do not have banking habits or income documentation, and operate largely through cash
Managing collections from such borrowers can become tricky especially if the systems lending discipline wanes
Geographic diversification
A large chunk of Equitas operations are centered in Tamil Nadu. Top three states (including Maharashtra and
Karnataka) account for a significant chunk (~80%) of its total AUM (refer annexure 2)
This exposes Equitas to natural calamities and geopolitical risks affecting the region, and could lead to a larger
disruption in operations than for a company which has more widespread operations
41
Equitas Holdings
Company financials (consolidated) BANKS & FINANCIAL SERVICES
Profit & loss (R s mn) Balance sheet (R s mn)

Y/E M arc h F Y15 F Y16 F Y17E F Y18E Y/E M arc h F Y15 F Y16 F Y17E F Y18E
Interest earned 6,868 10,137 12,891 16,773 Tot al asse t s 4 4 ,6 4 8 6 5 ,0 6 5 8 6 ,7 3 2 1 1 3 ,3 8 7
Interest expended (2,947) (4,360) (5,521) (6,511) Cash & Balances with RBI 5,574 9,470 3,458 4,788
Ne t i n t e r e st i n com e 3 ,9 2 1 5 ,7 7 7 7 ,3 7 0 1 0 ,2 6 2 Investments 1,757 121 9,341 14,486
Non interest income 691 1,012 2,531 3,428 Advances 34,646 50,702 67,661 85,930
Ne t i n com e 4 ,6 1 2 6 ,7 8 9 9 ,9 0 1 1 3 ,6 9 0 Fixed assets 440 589 855 1,177
Op e r at i n g e xp e n se s (2 ,4 7 2 ) (3 ,5 9 7 ) (5 ,9 0 8 ) (8 ,3 8 9 ) Other assets 1,975 3,775 4,927 6,398
Staff expenses (1,551) (2,338) (3,993) (5,461) Tot al l i ab i l i t i e s 4 4 ,6 4 8 6 5 ,0 6 5 8 6 ,7 3 2 1 1 3 ,3 8 7
Other operating expenses (921) (1,259) (1,915) (2,928) Equity capital 2,689 2,699 3,357 3,357
Op e r at i n g p r ofi t 2 ,1 4 0 3 ,1 9 2 3 ,9 9 3 5 ,3 0 1 Preference capital - - - -
Provisions & contingencies (508) (591) (1,199) (1,840) Reserves & surplus 9,017 10,714 18,884 20,890
P r e - t ax p r ofi t 1 ,6 3 2 2 ,6 0 1 2 ,7 9 4 3 ,4 6 1 Networth 11,707 13,414 22,241 24,247
Tax expense (566) (930) (999) (1,237) Borrowings 30,322 46,833 49,627 51,325
P r ofi t aft e r t ax 1 ,0 6 6 1 ,6 7 1 1 ,7 9 6 2 ,2 2 4 Deposits - - 8,000 28,480
Extraordinary item - - - - Other liabilities & prov. 2,619 4,819 6,864 9,335
Minority interest/Associates - - - -
A dj . P A T 1 ,0 6 6 1 ,6 7 1 1 ,7 9 6 2 ,2 2 4

Equitas Holdings
Company financials (consolidated) BANKS & FINANCIAL SERVICES
K ey rati os (% )
Y/ E M arc h F Y15 F Y16 F Y17E F Y18E
P e r sh ar e dat a
FDEPS (Rs.) 4.0 6.2 5.3 6.6
BV (Rs.) 43 50 66 72 We expect the company to start paying dividends from
Adj. BV (Rs.) 43 48 64 68 FY17E onwards
DPS (Rs.) 0 0 1 1
Dividend payout (% ) 0 0 9 10
Y i e l ds & M ar gi n s (% ) There would be some impact on NIM from SLR/CRR
Yield on advances 22.9 21.8 21.2 20.7 drag, but this will be offset somewhat by declining cost of
Cost of funds 12.1 11.3 10.6 9.5 funds
Net interest margin 11.6 11.3 10.5 11.1
A sse t qu al i t y (% ) MFI book is already on 30 dpd, HFC on 90 dpd and
Gross NPAs 1.1 1.3 2.9 3.6 UCV/MSE book would immediately shift to 90 dpd in
Net NPAs 0.8 0.9 1.9 2.2 Q2FY17 since commencing operations as an SFB
Credit cost 0.3 0.3 1.0 1.5
Provisioning coverage 25.7 29.9 36.0 38.0
E ffi ci e n cy (% )
ROA 3.0 3.0 2.4 2.2
ROE 11.1 13.3 10.1 9.6
Lower leverage impacts RoAE despite healthy ROAA
Cost to income 54 53 60 61
CASA - - 20 21
Effective tax rate 35 36 36 36
Gr owt h (% )
Net interest income 59 47 28 39
Fee income 77 44 50 40 Endowment from small base would help maintain rapid
Operating expenses 53 45 64 42 growth in AUM and fee income. Equitas expects to garner
Profit after tax 44 57 7 24 fee income from loan processing fees and distribution of
Advances 63 46 33 27 third party products (mutual funds, life insurance etc).
Deposits - - - 256
Total assets 62 46 33 31

Annexure
Equitas Holdings
Annexure 1: Company background BANKS & FINANCIAL SERVICES
Equitas commenced operations in 2007 as a regional MFI focusing on southern markets
Company Incorporated as UPDB Acquisition of Equitas

Microfinance Pvt Ltd; investments Finance (erstwhile Commencing MSE Receipt of in-principle
by Avishkar Goodwell VAP Finance ) lending business SFB license form RBI
FY08 FY10 FY11 FY12 FY14 FY15 FY16 FY17
Acquisition of Equitas Microfinance

Incorporation of Equitas (erstwhile Singhvi Investments & Conversion into a public Incorporation of Equitas
Housing Finance Finance) limited company Technologies; IPO &
Name changed to Equitas Holdings Commencement of SFB
operations; launch of gold loans
Source: Company
Business mix the story so far
(%) MFI Housing UCV MSE

100 -
11 4 Over time, it undertook the tough task of
21 13 18
80 32 diversifying its loan book, with only ~54%
29 25 of AUM coming from MFI segment in FY16.
60
Used CV loans comprise another ~25 %
88
40 76 of AUM and affordable MSE Loans (18%)
60 53 54
20 and affordable housing finance (4%)
0
comprise the remaining
FY12 FY13 FY14 FY15 FY16
45
Equitas Holdings
Annexure 2: Geographic mix BANKS & FINANCIAL SERVICES
Tamil Nadu accounts for a majority of the book in each

segment except the used CV finance book FY16
From being a south-focused player with entire (%) (% of AUM coming from T amil Nadu)
AUM coming from Tamil Nadu, Equitas has 76 73
80
been slowly expanding to other geographies 61
57
60
It will incrementally add more branches in non- 40 33

southern states, where it has achieved
20
significant reach
0
EHFL MSME MFI EQUITAS UCV
Efforts to diversify MFI business geographically have yielded

Equitas is largely a southern player (Disbursements - FY16) modest results due to Equitas steadfast approach (FY16)
Others (%) Tamil Nadu Maharashtra Karnataka Others
16%
100
13 13 13 18
MP 6 7 7
80 7
5% 12 15 16 13
60
Karnataka
Tamil Nadu 40
8% 69 65 64 61
57%
20
Maharashtra 0
15% FY13 FY14 FY15 FY16
Source: Company, Axis Capital Source: Company, MFIN, Axis Capital
46
Equitas Holdings
Annexure 3: The rise-fall -rise of microfinance BANKS & FINANCIAL SERVICES
First flutter (2005-2010)

Self Help Groups (SHGs) were the preferred structure for micro lending in India. An SHG is a voluntary but formal
group of 15-20 people from homogenous social backgrounds formed to attain common objectives. External financial
assistance by MFIs or banks augments the resources available to the group operated revolving fund. NABARD then
supported a program which entails commercial banks lending directly to SHGs than via bulk loan to MFIs.
However, the game-changer for the industry came when the RBI allowed for loans to MFIs (indirect loans to EWS) to
qualify for PSL. This led to a multifold increase in the monies disbursed by MFIs due to availability of bountiful capital
from eager banks. Thus began a secular growth trajectory in microfinance
The inevitable collapse (2010-2012)

Eventually, the gross indebtedness levels of borrowers grew to euphoric, unsustainable levels in some states and
coupled with lack of regulations, led to MFI crises in Andhra Pradesh in 2010
What followed was the Andhra Microfinance Ordinance. Several MFIs witnessed a spike in GNPAs and suffered
huge losses. Most of them ended up going bankrupt or seeking bank loan restructuring
Second wind (2012-2016)

RBI eventually stepped in and took the sector under its wing, issuing strict directives (annexure 5 and 6) and creating
a new category of NBFCs called NBFC-MFIs. With clarity on regulations and a level playing field, the sector quickly
recovered after a few years of consolidation and reorganization
47
Equitas Holdings
Annexure 4: Need for financial inclusion and small finance banks BANKS & FINANCIAL SERVICES
Considering Indias meager success with the earlier experiment of Local Area Banks and with the belief that Small
Finance Banks can play an important role in the supply of credit to micro and small enterprises, agriculture and
banking services in unbanked and under-banked regions in the country serving the lower half of Indias income
pyramid, RBI decided to licence new small finance banks in the private sector
Objectives of setting up small finance banks will be to further financial inclusion by

provision of savings vehicles and
supplying credit
to small business units; small and marginal farmers; micro and small industries; and other unorganized sector entities
Not only would small finance banks help provide the un-/under-served segments with credit significantly cheaper than
from the informal sector, it would also help them take advantage of the convenience of being in a formal banking
system, managing cash flows better, and achieving better returns on their savings
RBI then issued guidelines to accept applications for setting up a small finance bank and consequently awarded
10 small finance bank licenses. Eight of the 10 licenses awarded were to MFIs including
Equitas, Ujjivan, Janalakshmi, Utkarsh, RGVN etc.
48
Equitas Holdings
Annexure 5: NBFC-MFI regulations BANKS & FINANCIAL SERVICES
Qualifying households
Household annual income of families should not be more than Rs 160k in urban areas and Rs 100k in rural areas (raised
from Rs 100k and Rs 60k respectively, earlier)
Maximum indebtedness of the borrower

Income generation loans cannot be less than 50% of total loans given in terms of value
Not more than 2 MFIs can give loan to the same borrower
Total indebtedness of a borrower should not exceed Rs 100k (MFIN has a stricter cap of Rs 60k)
Loan amount should not exceed Rs 60k in the first cycle and Rs 100k in subsequent cycles (raised from Rs 35k and Rs 50k
earlier)
Prevention of value-leeching of borrowers

Interest spreads cannot exceed 10% (12% for small companies with less than Rs 1 bn of AUM)
Loans above Rs 30k should necessarily have a minimum tenor of 2 years (raised from Rs 15k earlier)
Capital requirements
Minimum net owned funds of Rs 50 mn
CAR of at least 15%
49
Equitas Holdings
Annexure 6: Small finance bank regulations BANKS & FINANCIAL SERVICES
All regulations applicable to existing SCBs, most notably

Maintaining Cash Reserve Ratio (CRR), Statutory Liquid Ratio (SLR) and Liquidity Coverage Ratio (LCR) from the very first day
of operations as an SFB
Inter-bank liabilities of an SFB cannot exceed 300% of its net worth
Additional restriction in capital and operations

75% of its adjusted net bank credit should be to the priority sector (vs. 40% for scheduled commercial banks)
At least 50% of its loans should constitute loans and advances of up to Rs 2.5 mn
At least 25% of its branches have to be set up in unbanked areas
Cannot act as a Business Correspondent (BC) for another bank, but can have its own set of BCs
Minimum CAR of 15% of its risk weighted assets; with Tier 1 Capital of at least 7.5%
Capital requirements
Minimum net owned funds of Rs 1 bn
Promoter's minimum initial contribution would be 40% and gradually brought down to 26% within 12 years from the date of
commencement of business
50
Disclaimer
Disclosures:
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
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Sr. No Name Designation E-mail

1 Akhand Pratap Singh Research Analyst akhand.singh@axissecurities.in
2 Sankar Narayanan Database Manager sankar.narayanan@axissecurities.in
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Earnings Review: Q3FY16
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Equitas Holdings - Axis DIrect

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Equitas Holdings - Axis DIrect

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03 OCT 2016 Company Report

No. of Shares : 335 mn

Beyond the metamorphosis

Financial summary (standalone)

What exactly will change for Equitas?

Way forward: Beyond the metamorphosis

Risks to our hypothesis

Asset quality & risk management 32

Corporate Social Responsibility 37

Risks to investment thesis 40

Captured wallet share through

AUM breakup FY16

(FY16)to a multi-asset NBFC (FY20E) ...to a pan-India SFB

Former structure Current structure

Equitas consolidated (FY16) Equitas Holdings Ltd

AUM (Rs bn) : 61.3 (Non Operating Finance

Equitas Small Finance Bank Ltd

AUM (Rs bn) : 61.3

AUM (Rs bn) : 15.1 AUM (Rs bn) : 10.9

Source: Company, Axis Capital 7

(as % o f av g assets) F Y15 F Y16 F Y17E F Y18E F Y19E F Y20E

BEFORE METAMORPHOSIS AFTER

Source: Company, Axis Capital

F Y16 Equitas Ujjiv an C IF C J anal ak shmi T yp ic al new- age Pv t. Bank

Source: Company, Axis Capital

C MP R OA (% ) R OE (% ) P/ABV (x) AUM/L o ans AUM C AGR (% ) GNPA (% )

Source: Company, Bloomberg, Axis Capital 10

WHAT -- What exactly will change

WHY -- Pros and cons of SFB structure

HOW -- The way forward

Structure Branch network Liabilities Business model Regulation

All the 3 ~400 new As a bank, Business Ability to collect

Expected diversification in funding base

Bulk deposit rates would be ~100 bps lower than the 3 0

yields of other banks Source: Company, Axis Capital

Amassing a database of rich information

Regulatory advantages in long run

Cost-to-income will rise led by spends on infra, IT, HR,

Finally, there is also a large execution risk to be borne

ROA will decline in FY17-18E as Equitas begins its transition

bank-ready. Though this would drag 12

Costs to go up during the transition

Loan growth to slow down AUM growth trend

Offering a range of liability and value-added

Continue to offer entire bouquet of existing

Addition of new sub-segments

Lower cost of funds to make housing finance scalable

AUM trend of Equitas MFI business

Source: Company, Axis Capital

30 (mn) No of clients YoY growth (RHS) (%)

NIM has moderated due to regulatory changes (10% spread

Opex to Avg AUM (%) (%)

Source: Company, Axis Capital 23

Source: MFIN Micrometer 24

reasonable success, with Tamil Nadu contributing 40

Source: Company, Axis Capital

We expect the CV cycle upturn to be prolonged as it has followed a long downturn

Total working enterprises YoY growth (RHS)

Source: Ministry of Micro, Small & Medium Enterprises, Axis Capital

AUM (Rs bn) YoY Growth (%)

Low duration assets help detect stress early

Benign CV cycle helping UCV finance book

non-professionals 150 133 100

Further, MFI and MSE finance businesses are largely