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Target: ₹1,184
CMP: ₹670.15
Q1 was difficult for Spandana Sphoorty, given the searing heat, General Elections and internal challenges (Project Parivartan). These factors also caused pressure on asset quality.
We believe these issues are transitory and expect collections to pick up. The management said in Q4 FY24 that credit cost would be front-loaded in H1 FY25 and expected it to normalise in H2.
In Q1, NIM improved 60 bps q-o-q to 15.2 per cent on higher yields and lower cost of funds. Healthy portfolio yields and better cost of funds would enable the company to generate over 13 per cent net interest margin on a steady-state basis in the medium term.
Strong AUM growth (of about 20 per cent), stable margins (over 13 per cent) and easing credit cost would enable the company to deliver strong profitability in the medium term.
We estimate around 4 per cent RoA and about 16 per cent RoE through FY25/26. Our target price of ₹1,184 is based on the residual income model. This implies a 1.7x P/ABV multiple on its FY26 book. Risks: Less-than-expected AUM book growth; higher slippages.
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