Well placed on most fronts

CREDAG’s earnings were in line with estimates due to lower-than-expected provisions, even as the operating performance was worse than expected. Consolidated collection efficiency continued to improve—a trend seen across most categories of lenders this quarter. CREDAG also witnessed an uptick in disbursals and the management expects the company to register ‘low double- digit’ AUM growth in FY21E. We have increased our earnings estimates as we factor in lower provisions and the equity raise. We maintain our ADD rating with a target price of Rs 793.

* Asset quality and collection trends: Reported GNPAs came in at 1.77%, adjusted for the impact of the recent SC order. Standalone collection efficiency improved to 89% in October (vs. 88% in September and 74% in June) and MMFL registered an improvement to 85% (vs. 83% in September and 54% in June). The pace of improvement between September and October slowed due to disruptions in parts of KA and MH due to heavy unseasonal rainfall and festivities as well as intermittent lockdowns in CG. Despite the sharp improvement in collection efficiency, we conservatively factor in elevated GNPAs in FY21E at 4.4%.

* Provisioning: CREDAG’s/MMFL’s total provisions amount to ~5.4/4.3% of total gross AUM. The management expects the total credit impact of COVID-19 to be limited to 4.0%. We have reduced our LLP estimates to 5.2% in FY21E, and remain conservative.

* Funding and liquidity trends: CREDAG is well-placed on both these fronts. CRAR (standalone) at 26.4% stands to be boosted by the recent book- accretive fund-raise (Rs 8bn). Said fund-raise contributed to a 16.4% increase in our FY21E ABV estimates. On the borrowings front, too, the company is well-placed, as outstanding debt securities grew 249/59%. However, oddly, the CoF rose slightly QoQ to 9.6%. Liquid assets constitute 15.1/11.6% of CREDAG’s/MMFL’s total assets.

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