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Result Highlights CREDAG’s performance in Q4 FY21 was stronger than expectations, adjusted for:  

* Provisions related to accelerated write‐offs (3%/2% of GLP for CAGL/MMFL),  

* Management overlay created for second wave (1%/0.4% of GLP for CAGL/MMFL)

* Merger/alignment driven additional costs (employee exp. and provisioning) in MMFL. Acceleration in new borrower addition drove a robust consol. AUM growth of 10% qoq and 13% yoy (despite write‐offs), and NII and PPOP grew by 53% and 93% respectively on qoq basis.  

* Collection efficiency (excl. arrears) improved m‐o‐m and arrears collection were significant too, leading to reduction in overdue buckets (particularly in Maharashtra). Collections excl. arrears for CAGL and MMFL stood at 94% and 90% in March, which were 3‐4% higher than December.  

* For CAGL, there was a steep improvement in full installment paying customers during March. Substantial rollbacks led to significant reduction in PAR 30‐90 bucket for both CAGL and MMFL. Both the companies are carrying an ECL cover of 5% and have Gross NPLs below 5%

Our view –

Strong operating performance in Q4, but uncertainty ahead: The collection efficiency has been impacted by 5‐6% due to the recent lockdowns. Management is of the view that industry could see a credit cost of 2‐3% from the second wave, much lower than the first wave. It also believes that if customer engagement starts improving from June, then there could be sufficient scope for business recovery. In view of the second wave and surrounding uncertainty, we cut earnings estimates sharply owing to lowering of loan growth expectation (18% v/s 25% earlier) and raising of credit cost assumption (3.3% v/s 1.8% earlier) for FY22.

Consequently, our revised RoA/RoE projections stand at 3.5%/15% for the current year. The stock trades at 2.2x FY22 P/ABV, and valuation seems to factor sustained pressure on earnings for the next two quarters. CREDAG is a best‐in‐class MFI franchise, and thus a swift peaking out of the pandemic would be a strong catalyst for the stock. Retain BUY with a lowered 12m PT of Rs850.

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