Target: ₹160

CMP: ₹124.50

Fedbank Financial Services’ (Fedfina) Q1-FY25 PAT of ₹70 crore grew by 30 per cent y-o-y and 3.8 per cent q-o-q. NIM expanded optically by 52bps q-o-q due to back-ended growth in Q4-FY24. Average daily yields were 16.1-16.2 per cent while average cost of borrowing was 8.6-8.8 per cent for the last 3 quarters.

Credit costs on AUM were higher at 111 bps, up 49 bps q-o-q due to seasonality (challenging collection environment), delinquencies in the mortgage segment and one offs (impact of 12bps). Management expects credit costs at 80 bps for FY25.

If this was a late lifecycle NBFC with a steady-state RoE of 15-16 per cent, we would have used a target multiple of 1.8x. However, we think the potential of extended 30 per cent+ AUM growth and the consequent earnings compounding dynamic renders a 10 per cent premium arguable, even when not fully building in too much of the multiple future growth boosts to BVPS.

Accordingly, our target multiple is 2x which when applied to Q4-FY26 BVPS leads to a target price of ₹160 (rounded off).

Most upside risks in this business relate to an even higher-than-estimated AUM growth trajectory. Key risks relating to the business stem from execution of the company’s ambitious growth aspirations.