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CREDAG reported strong beat on estimates with PAT at INR 3.0bn (+86% YoY; +25% vs JMFe) driven by a) strong NII growth (+34% YoY, +15% QoQ) with 30bps QoQ expansion in NIMs to 12.2%, b) continued momentum in disbursements (+24% QoQ) and customer additions (0.25mn net customer additions) resulting in a strong AUM growth (+26% YoY, +18% QoQ) and c) continued improvement in asset quality metrics (PAR0+ down 70bps QoQ to 1.5%). Management highlighted that they expect the growth momentum to sustain going ahead and expect CREDAG to grow by 24-25% in FY24E; they also expect the non MFI retail to pick up pace and expect its share to inch up to c.10% of AUM in next 4-5 years. Management guided for RoA of 4.7-4.9% in FY24E aided by steady NIMs (around current levels), controlled opex (cost to income of 35%) and low credit costs (1.6-1.8%). CREDAG has always traded at premium valuations due to its superior cross-cycle return metrics and best-in-class asset quality among MFI players. We expect valuations to be guided by strong cyclical tailwinds in the sector, strong growth momentum and strong return metrics. Given the strong NIMs performance and low credit costs, we raise our FY24E/FY25E earnings by 8- 8.5%. We expect CREDAG to deliver RoA/RoE of 5.0%/22.2% in FY25E. Despite continued improvement in fundamentals, CREDAG share price has remained largely rangebound over the past year (+9% vs ~12.5% for NIFTY/~23% for NIFTYFINSERVICES). We expect these results to act as a trigger for meaningful incremental outperformance in the name. Maintain BUY with a revised TP of INR 1,420 valuing it at 3.0x FY25E BVPS.

* Strong operating quarter: AUM growth momentum sustained at (+26% YoY, +18% QoQ driven by robust disbursements (+24% QoQ) and customer additions (0.325mn net customer additions). Management highlighted that they expect the growth momentum to sustain going ahead and expect CREDAG to grow by 24-25% (14-15% driven by customer additions) in FY24E. Further, non-MFI products are also expected to gain traction going ahead and expect its share to inch up to c.10% of AUM in next 4-5 years. NIMs improved to 12.2% (+30bps QoQ) and management expects NIMs to remain near current levels going ahead. Operating profit stood at INR 5.0 (+36% YoY, +32.5% QoQ) driven by strong NII growth of (+34% YoY, +14.5% QoQ) and controlled opex (+15.5% YoY, +1% QoQ). Management indicated that CREDAG will continue to invest in branches (c.10% branch additions per year) which should keep cost to income around 35% levels.

* Robust asset quality: GNPA/NNPA improved to 1.2%/0.4% (-50bps QoQ/-17bps QoQ) against which ECL provisions stood at 1.8%.Total write-offs for the quarter moderated to INR 1.0bn (vs avg. INR 1.5bn in last 4 qtrs). Total Par0+ declined to 1.5% (-70bps QoQ) and collection efficiency (ex- arrears) has reached normalised levels of 98%. Legacy book of Mudra now stands at INR 1.3bn which accounts for 0.6% of AUM. We expect growth to be driven in a risk calibrated manner and build in credit costs of 160bps for FY24E/25E

* Valuation and view: CREDAG has always traded at premium valuations due to its superior return profile and best-in-class asset quality among MFI players. We expect valuations to be guided by strong cyclical tailwinds in the sector, strong growth momentum and strong return metrics. Given the strong NIMs performance and low credit costs, we raise our FY24E/FY25E earnings by 8-8.5% and expect RoA/RoE of 5.0%/22.2% in FY25E. Maintain BUY with a TP of INR 1,420 valuing it at 3.0x FY25E BVPS.

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