IGI Logo

On-track for stronger performances ahead

CREDAG delivered an in-line PAT in Q3 FY23, that reflected stronger GLP growth, higher NII/PPOP and still elevated credit cost. The texture of disbursements remains enthusing, with accelerating pace of new borrower addition (significant new-to-credit within) mainly in newer markets and loan ticket/exposure per borrower under check. The co. delivered RoA/RoE of 4.6%/18.8% (material improvement over Q2 FY23), despite continuance of significant write-off of residual Covid-related stress. With the delivery of enhanced outcomes in Q3, CREDAG reiterated its annual consolidated performance guidance of 24-25% GLP growth and 4-4.2% RoA/16-18% RoE. The co. has taken requisite price actions to factor relatively moderate experience of collections (delinquency flow fwd.) in MMFL’s portfolio.

GLP grows 7.5% qoq/22% yoy; significant ramp-up of disbursements in Q4 FY23

Disbursement growth is being incrementally driven by new borrower additions. The company added 3.05 lac borrowers in the quarter (2.84 lacs in Q2), and the consolidated customer base grew 3.7% qoq (CA Grameen 4.4% qoq, MMFL 0.6% qoq). About 30-35% of customers acquired are new-to-microfinance/credit. About 47% of the new borrower addition has been from outside of the Top 3 states (KTK, MH and TN) in the past 12 months. Adjusted for the write-offs, the borrower growth was 17%/14% yoy in CA Grameen/MMFL. The co. in on course to deliver the required steep disbursements jump in the current quarter for achieving the full-year GLP growth guidance of 24-25%.

NIM could materially expand over the medium term

NIM was flat qoq, despite portfolio yield improvement of 50 bps qoq, on account of 40 bps increase in CoF and higher average balance sheet liquidity during the quarter. Adjusting for impact of the latter, the NIM would have been better by 20 bps. Notably, the higher increase in CoF (versus seen during Q2) was primarily on account of higher proportion (49%) of long-term borrowings (foreign ECBs & NCDs and domestic public NCD) in incremental funding that came at a higher cost. The incremental CoF from Banks & other FIs was stable on sequential basis. The incremental lending rate averaged 21.5% in Q3 FY23 versus 20.8% in the preceding quarter and reflects the upward revision in risk-based pricing. The large gap of nearly 200 bps between disbursement and portfolio pricing and predominant share of domestic bank borrowings (relatively reasonable costing) in incremental funding would underpin NIM expansion over the medium term.

Asset quality has stabilized; credit cost to fall in FY24

The write-off of the remaining Covid-related stress continued, particularly in MMFL. Overall quantum of loans written-off were Rs1.31bn v/s Rs1.63bn in Q2. The collection efficiency of 98% (w/o arrears) in the context of PAR/GNPL of 3%/2% at the start of the quarter represents full normalization and stabilization of asset quality. Adjusted for write-off, PAR 0 was stable and GNPLs (PAR 60) increased marginally due to flow fwd. from initial buckets. While some more Covid-related provisioning/write-off could come in Q4 FY23, the credit cost in FY24 is expected to completely normalize. Stage2/Stage-3 coverage is healthy at 54%/72% for CA Grameen and 36%/50% for MMFL.

RoE to be 21-22% in FY24/25; retain BUY

Growth and profitability momentum is estimated to further improve in coming quarters. RoA/RoE in FY24/25 should be much better than the current levels, due to complete normalization of credit cost and full benefit from risk-based pricing. Post recent price correction, the valuation stands at 2.5x 1-year rolling fwd. ABV. The stock has previously traded at multiples of >3.5x in a stable operating environment with 16-18% RoE delivery. This time CREDAG’s RoE delivery would be far superior at 21-22% due to scale and pricing benefits. Remains a BUY with 12m PT of Rs1270.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632

Above views are of the author and not of the website kindly read disclaimer