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Comfortable liquidity position
We attended the business update call of CreditAccess Grameen and our key takeaways are: 1) Rural economy, so far, remains less vulnerable to COVID-19 related uncertainties especially in areas where CAGL operates, 2) comfortable liquidity position with more than 46% borrowings maturing in 2-6 years and no CP or bond borrowing from mutual funds, 3) despite the recent CAA/NRC related disturbance, AuM growth remained robust at 38% YoY in FY20 with 18% YoY growth in borrower base, 4) with 82% rural customer base, 35-40% unique customer base and ~73% customers completing one-year cycle with CAGL, management sounded confident about maintaining better asset quality than peers and 5) while all weekly centre meetings, disbursements and collections are temporarily stopped due to lockdown, employees are maintaining regular connection with customers via phone calls. Maintain BUY with TP of Rs750.
* How vulnerable is CAGL’s customer base to current lockdown? CAGL’s 70/80% customer base is into essential commodity business and so far there has been no disruption in business due to lockdown. Hence, CAGL does not expect major income loss for its customer base. In past, during challenging times like droughts, floods, cyclones, crop failures or even demonetisation, credit behaviour of its customer base has always been encouraging.
* Can migration of labour hurt income of its customer base? No. This is because other earning members of CAGL’s customer derive cashflow from same local rural economy. Initial feedback from field staff is encouraging with only few customers highlighting difficulty in cashflow or income loss because of migration of other earning members from urban areas to hometown (rural areas).
* What gives them confidence to navigate through the current uncertainties with minimal profitability impact? Experienced field team (more than five years of avg. experience with CAGL); the same team has dealt with the recent challenging events like demonitsation, floods, external political interference etc. No major income loss for CAGL’s 70/80% customer base as the customers are into essential commodity business.
* Near-term challenges and its preparedness. As per the management, near-term challenge would be effective communication of change in EMIs and revised loan tenure to customers due to option of moratorium. However, the management is well prepared for it and is in the process of formulating effective script to communicate the message in most simplified manner without disturbing customer relationship with CAGL. Necessary training will be provided to field officers before it starts conducting centre meetings and convey the message. Its strong customer connect (retention ratio at (86% vs 70-75% for MFI industry) and experienced field team would help in smoothening the transition.
* Liquidity position – Currently, cash balance/undrawn but sanctioned bank lines stand at Rs5.3bn/Rs6.6bn, respectively. More importantly, it has made a prudent decision to continue paying interest even during the moratorium period. Further, incremental cost of borrowing, for funds raised between 17th and 24th March’20 stood at an average 8.7%. The company believes it has sufficient cash to meet interest and operating cost obligation for the next 4-5 months.
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