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Stable environment to drive higher RoE

Our view

CREDAG delivered a strong performance on earnings front enabled by further acceleration in growth (disbursements up 23% qoq/yoy and GLP up 13% qoq/22% yoy) and lower-than-estimated credit cost (Rs1.51bn v/s estimated Rs1.84bn). Higher writeoffs Rs2.94bn (1.8% of GLP; Rs1.9bn in Q3) and further improvement in collection efficiency (at both CA Grameen and MMFL) through the quarter caused a decline in GNPLs (largely 60+ dpd) to 3.6% and PAR 90 to 2.7%. Current ECL provisions stock at Rs5.3bn (3.4% of GLP) largely covers the GNPLs. Stage 2 & 3 ECL coverage at CA Grameen stands near pre-pandemic level (29% and 71% respectively). The non-paying portfolio stands at 2-3% in both entities despite significant write-offs over past 2 quarters; and this residual would be cleaned-up in ensuing quarters. Recovery from written-off accounts was high again at Rs260mn in Q4 FY22 (Rs290mn in Q3), and this could continue as the co. has written-off even part-paying borrowers (270 dpd being the trigger)

Management has guided for 24-25% GLP growth in FY23, which will be a combination of 10% growth in borrower base (fresh addition has picked up, and mainly from outside of TN, KTK and MH) and ticket size growth from cycle migration by existing borrowers. Avg. GLP/Borrower has increased by 10-11% qoq in past 2 quarters, but this growth should moderate on a normalized borrower addition rate. In response to new MFI regulations, management has fixed risk-based lending rate range of 18.75-21.5% in CA Grameen and 19.35-22.1% in MMFL, and this is likely to improve portfolio yield/NIM by 100-125 bps over FY23-24. Credit cost for FY23 has been guided at 1.8-2% factoring write-off of remaining non-paying clients. RoA/RoE for the year is expected at 4-4.5%/16-18%.

We see a strong possibility of RoA/RoE moving to near 5%/22% in FY24 with tailwinds of lending rate hikes fully coming through, full normalization of credit cost and some operating leverage. Reiterate that CREDAG is the best way to play the microfinance upcycle. Valuation stands at 3.3x/17x FY23 BV/EPS. Stock has traded at 4-4.5x 1-year forward P/ABV during upcycles, and this time the RoE delivery could be best-ever due to scale benefits and risk-based pricing.

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