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Robust performance; guidance upgrade inevitable

CREDAG delivered a sizeable NII/PPOP/PAT beat of 5%/4%/10% on our estimates underpinned by significant NIM expansion, operating leverage, and fully normalized credit cost. Portfolio/disbursements growth was strong at 40%/122% yoy and remains anchored on strong customer addition, prudent ticket/tenor policies, regional portfolio diversification, improving distribution productivity and strengthening asset quality. Management would review its current guidance of 24-25% GLP growth, 1.6-1.8% credit cost and 4.7-4.9%/20-21% RoA/RoE for the year in coming quarters.

Strong momentum in customer addition; ticket sizes within FOIR/policy limits

Growth in disbursements is being driven by improving customer addition (borrower base grew 4% qoq /20% yoy) and prudential increase in average loan ticket across cycles. In case of 70-75% of disbursements, the FOIR remains below 40%. The yoy growth in avg o/s per borrower in significant measure was caused by the alignment of MMFL’s operations on CA Grameen’s model and substantial unique, retained/loyal, less levered, and deep rural customer base allowing for material next-cycle ticket increases within FOIR/credit policy limits. More than 85% customers are retained by the co. for the next cycle loan. Increase in contribution of 3-years loans (29% of book), which are offered to high-vintage/graduated customers seeking >Rs75000 loan, has also aided portfolio growth.

Improvement in NIM, cost/income and asset quality

NIM improved by 80 bps qoq/180 bps yoy on the back of 100 bps qoq increase in portfolio yield and restrained movement in CoF. The lending/disbursement rate at 21.9% still is 120 bps higher than portfolio yield. Management expects 20-30 bps improvement in portfolio yield over next couple of quarters, as the portfolio generated pre-April’22 (~16 of AUM) runs down. The CoF too is expected to increase by 30-40 bps owing to residual borrowings from foreign sources, additional fresh borrowings from international sources and second tranche of public NCDs. The landed cost of international/foreign borrowings is relatively higher at 9.5-10%. NIM expansion, calibrated addition of branches/resources, utilization of latent growth capacity and increase in average o/s per borrower has underpinned much lower cost/income ratio of 30-31% in recent quarters. With collection efficiency at 98.7% excluding arrears, delinquency creation, delinquency flow, and write-offs have normalized; leading to regularization of credit cost (annualized 1.6%). ECL coverage is healthy on Stage 2/3 assets at 51%/70%. Material recovery of bad debts continued at Rs120mn.

Earnings upgraded by 7-9%; retain BUY with raised 12m PT of Rs1715

We estimate a CAGR of 26% in GLP, 34% in PPOP and 42% in earnings over FY23-25 barring any external shocks. Attributes like high customer retention/borrower vintage, lower field attrition, industry-best loan processes, policies and pricing, stronger quality control and audit mechanisms, etc. drive company’s sturdier and profitable growth. The stock has traded at 3.5-4x 1-yr fwd. P/ABV before Covid with 16-18% RoE delivery. In the current cycle, CREDAG’s RoE will be far superior at 22-24% due to scale and pricing benefits. Given higher RoE delivery, the co. would not require equity raise for next 6-7 quarters for delivering expected growth. The promoter stake sale is also largely through for the time being.

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