I chose to value Equitas Small Finance Bank for the same reason I valued Federal Bank. They are the new age banks that are trying to gain market share through inorganic means by the way of tie-ups with neo banks.
Numbers and Narratives
Equitas Small Finance Bank is an up and coming bank still very much in its growth phase, it’s fueling that growth in part by tying up with neo banks (fintech companies). I expect it to grow faster than its current rate in the next 5 year and its margins will suffer because of that. I expect its margins to normalise to industry average after the first 5 years.
The core numbers that I arrive at based on the story are
- Compounded revenue growth for next 5 years = 25% (23% last year)
- EBIT margin in year 5 = 15% (14% last year)
- Initial cost of capital = 11.54%
Valuation
I’ve used the above numbers along with the financial information to compute my DCF valuation for Equitas Small Finance Bank as seen below.
As you can see, the valuation price came out to ₹71.05, about 8% higher than the current trading price of ₹65.75.