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Delivers a robust performance; outlook is strong too

CREDAG delivered NII/PPOP/PAT beat of 2%/8%/4% on our estimates underpinned by lower funding cost, higher assignment income and controlled opex. The growth while being robust remains guided by strong customer addition, prudent ticket/tenor policies, regional portfolio diversification, improving distribution productivity and strengthening asset quality. The company expects 24-25% GLP growth, 1.6-1.8% credit cost and 4.7-4.9%/20-21% RoA/RoE in FY24. We estimate a CAGR of 25% in GLP, 30% in PPOP and 35%+ in earnings over FY23-25 barring any external shocks. In our assessment, the co. would likely exceed its RoA/RoE guidance in FY24. 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 will be far superior at 21-22% due to scale and pricing benefits. Reiterate BUY with upgraded earnings (by 4-5%) and enhanced 12m PT of Rs1375 (previously Rs1270).

Strong new customer addition momentum; ticket size growth within FOIR/policy limits

Robust growth in disbursements (up 48% qoq/24% yoy) was driven by accelerating customer addition (borrower base grew 9.5% qoq /20% yoy adj. for write-offs) and material increase in average loan ticket across cycles (avg o/s per borrower grew 8-10% qoq across vintage buckets). The significant growth in avg o/s per borrower was driven by alignment of MMFL’s operations on CA Grameen’s model and substantial unique, loyal, less levered and deep rural customer base allowing for material next-cycle ticket size increases within FOIR/credit policy limits. More than 85% customers are retained by the co. for the next cycle loan. In case of 70-75% of disbursements, the FOIR has been less than 40%. Increase in contribution of 3-year loans (29% of JLG book), which are offered to high vintage borrowers and graduated customers seeking >Rs60000 loan, has also been aiding portfolio growth. The branch addition and consequently large part of the borrower addition is happening in the newer less-penetrated states of GJ, RJ, UP, BH and JH. As per the Management, the expected GLP growth of 24-26% in FY24 would likely comprise of 12-15% increase in borrower base and 8-10% in avg o/s loan per borrower. The branch base is likely to grow by 8-10%, and there will be significant customer addition in existing branches too. Over the next 4-5% years, the share of retail finance products could reach 10% of AUM. In the current year, unsecured IL, 2w, LAP and GL would be scaled-up and Affordable HL would be piloted.

NIM to further increase; opex productivity can further improve

small decline in CoF. The lending/disbursement rate witnessed further increase (21.9% v/s 21.5% qoq and 20.3% yoy), and it stands 220 bps higher than the portfolio yield. The softening of CoF was driven by significant decline in MCoB (9.4% v/s 10.2% qoq), which was caused by majority of fresh funding from more competitive domestic sources. Considering that MCoB (currently near overall CoF) may not see a significant increase (credit rating recently upgraded to AA-), and loan portfolio could re-price towards current disbursement yield, the NIM could keep improving in coming quarters. Calibrated addition of branches/resources, utilization of latent growth capacity in existing branches and material increase in average loan tickets drove an improvement in cost productivity metrics. With borrower base growth likely to exceed distribution growth and further increase in loan tickets, the cost/productivity ratios can further improve.

Benign credit cost outlook

Delinquency buckets and flows have stabilized even adjusted for the write-offs, underpinned by normalized collection efficiency (98% excl. arrears). The ECL coverage is also reasonably healthy on Stage 2/3 assets at 48%/66%. The centre meeting attendance has witnessed significant improvement over the past 9-12 months. The quantum of write-offs will substantially come down on normalized GNPLs and slippages and material recovery from the written-off pool could continue for a while.

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