Jana Small Finance Bank Stock Research Report by ICICI Securities
Analysis dated 14 October 2024
Sector: Small Finance Bank
Price on Analysis date: Rs. 563
Target Rs. 630
(12% upside potential)
Target Period: 12 Months
Jana Small Finance Bank (Jana), over the past six years, has undergone a significant metamorphosis – post a change in guard in Aug’17 (Mr. Ajay Kanwal joining as CEO). With revamped management came renewed strategic focus. Jana has its eyes firmly set on: 1) building a diversified secured retail portfolio; 2) calibrating growth in micro-finance, and within this, focusing on rural vs. its erstwhile urban-heavy portfolio; 3) a granularised deposit base emphasising on scaling retail deposits; and 4) strengthening its tech capabilities. Jana’s efforts are bearing fruit – the initial harvest includes: 1) unsecured exposure falling to 38% as of Q1FY25, from 99% in FY18; 2) CASA + retail deposit base improving to 65% vs. 61% in FY20 and 3) CD ratio improving to 102% vs. 148% in FY19.
In parallel, a sharp turnaround in profitability has come about too with RoA improving to 2.4% in FY24 vs. an average of ~0.5% over FY20–23 and loss in FY19. Initiating coverage with ADD and TP of INR 630 based on ~1.35x FY26E ABV.\
Metamorphosis: Gravitating towards secured and diversified
Jana is among the handful of MFIs that has not only converted to an SFB, but also been able to improve its secured asset share substantially and reduce its JLG based MFI exposure to <5% over the past five years. Jana has completely revamped its asset product portfolio post facing huge losses during FY18 and FY19. From 99% unsecured share in FY18, the share of unsecured loans in AUM stands reduced to 38%, as of Q1FY25.
Maturing with customers; retail assets traction to continue
With Jana’s customers graduating from unsecured loans, the SFB has expanded its asset products to cater to such customers and attract new customers. In FY18, it launched gold loans and MSME loans with revised credit and collateral conditions. In FY19, it introduced affordable housing loans, secured business loans and loans against FD, followed by two-wheeler loans in FY21. We expect its secured portfolio to scale up to ~69% of total portfolio by FY26E vs. 62% currently.
In secured, key products include micro-LAP with 19% share, followed by affordable housing at 18% and MSE at 14%.
RoA/RoE likely to settle near 1.9%/18% for FY25–26E
With Jana’s transformation phase culminating and its greater reliance on secured assets, we expect consistent profitability metrics ahead. Near-term RoE is likely to sustain at ~18%. Loan growth of 20–25% should lead to relatively lower capital consumption. Hence, we believe, capital should not be a constraint for Jana to meet its near-term AUM growth guidance of ~20%. Further, we also note that RoA/RoE appears optically higher given tax benefit till FY27, post which RoA/RoE will likely normalise, once it becomes a fully tax paying entity by FY28. Leverage appears to be higher at ~11x, but transition towards secured and steady RoE provides comfort.
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