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An in-line quarter; growth/profitability to pick up

Lower disbursements in Q1 were baked in the annual 24-25% GLP growth guidance

CREDAG’s Q1 FY23 performance was on the expected lines as the business growth was impacted by process transition from implementation of RBI’s recent MFI guidelines even as collections expectedly remained firm. Consolidated disbursements were much lower compared to Q4 FY22 (5% ahead of our estimate though) due to system/process changes and large-scale manpower training. While borrower addition was significantly low during April and May; the loan renewals were also limited during the quarter due to minimal disbursements in Q1 of FY21/22 owing to Covid. Customer addition has started to normalize from June, and the co. has disbursed ~Rs12bn in July (Rs2bn AUM accretion in the month). Management reiterated its annual growth guidance of 24-25% with branch addition continuing outside of the Top 3 states (KTK, MH & TN)

Credit cost to fully normalize from H2 FY23

Collection efficiency (w/o arrears) in June stood at 97% for CA Grameen and at 93% for MMFL, versus 97% and 92% respectively in April. This depicts firm collection trends through the quarter, and thus there was no increase in stress pool/non-paying clients. Collection efficiency (w/o arrears) in June excl. non-paying NPA customers was at 99% for CA Grameen and 96% for MMFL. Write-offs were lower at Rs1.9bn v/s Rs2.95bn in Q4 FY22. Overall ECL provisions in CA Grameen/MMFL stand at 2.7%/4.3% against GNPA (largely @ 60+ dpd) of 2.5%/5.8%. Coverage on Stage-3 assets (which will include the non-paying clients) was at 70%/50% in CA Grameen/MMFL. Full-year credit cost is estimated at 1.8-2%, with H1 to bear a larger burden owing to write-off of Covid stress.

CREDAG’s growth and profitability should pick-up from Q2 FY23. Much deeper benefits should accrue to the co. from the new Microfinance regulations given its deep rural distribution, high customer retention, competitive pricing and readiness to build a significant secured/non-MFI book. RoA/RoE in FY24 would be much better than FY23, due to lower credit cost and full benefit of risk-based pricing. Valuation stands at 3.4x 1-year rolling fwd. ABV, and the stock has previously traded at multiples of 4- 4.7x in a stable operating environment with 16-18% RoE delivery. This time CREDAG’s RoE delivery would be far superior at 18-22% due to scale benefits and risk-based pricing. Remains a Top Pick with 12m TP of Rs1300.

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