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Precautionary provisions impacted earnings; current valuation captures near-term concerns

E CreditAccess Grameen’s (CAGL) Q4FY21 financial performance must be seen with respect to the management’s precautionary stance – writing-off loans worth Rs2.8bn, recognising the entire restructuring pool of Rs0.7bn (0.7% of loans) as stage 3 & providing ~70% on that pool and creating covid buffer of ~Rs1.1bn (0.9% of loans) to cushion earnings from the adverse impact of the second wave. Collection continued to trend well, reaching 94% by March’21 from 91% in Dec’21; however, intermittent lockdowns/restrictions on movement in various states due to resurgence of covid cases may impact collections in Q1FY22.

While we believe near term asset quality concern do persists, its precautionary measures in Q4FY21, strong capital position with CAR at 27% and adequate liquidity (~16.5% of total assets) will ensure RoA reviving to 3.4% by FY23. Maintain BUY with a revised target price of Rs765 (earlier: Rs850). Key risks – A) stress unfolding higher than anticipation due to the second wave and B) delay in growth recovery.

* Core performance in-line.

CAGL delivered 13% YoY consolidated AuM growth and RoA of 1.8% adjusted for accelerated write-offs and additional covid buffer of Rs1.1bn created for FY22e. CAGL’s disbursements in Q4FY21 were up 42% YoY driving 15% YoY AuM growth. Incremental disbursements in Q4FY21 were mostly towards IGL loans as reflected in its share increasing to 93% in March’21 from 85% in March’20. Average outstanding per borrower at ~Rs39,000 for CAGL appears higher, but considering unique borrower base at 40-43% not raising red flag. It continues to maintain higher liquidity of Rs24bn (~16.5% of assets) and declining marginal cost of borrowing reflects its ability to raise funds at competitive rates. Further, CAR at 27% will help it navigate challenging times better than peers.

* Collections and recovery remained on track in Q4FY21, but second wave to impact Q1FY22e collections.

CAGL’s collection (94% ex-arrears) as of March’21 is in-line with the management anticipation with PAR excluding Maharashtra (~4%) reaching near normalcy. Even in Maharashtra, PAR 0 fell from 19% in Dec’20 to 8.7% in March’21. Similarly, collection trend in MMFL’s portfolio is also in-line with the expectation at 90% in March’21. However, resurgence of covid cases poses risk of lower collections in Q1FY22 and taking cognisance of the same, the management accelerated write-offs and build provision buffer to cushion FY22e earnings.

* Precautionary provision in Q4FY21 to cushion FY22e earnings.

Management has conservatively up-fronted stress recognition in Q4FY21 to the extent possible as reflected in its writing-off of Rs2.8bn worth of loans, classifying restructured asset as stage 3 & providing 70% for the same and additionally creating Rs1.1bn of covid-2 buffer. Its prudent measures may help it cushion FY22e earnings to some extent. To factor in likely lower collection in Q1FY22, we increase our credit cost assumption for FY22e to 3% and accordingly cut our earnings estimates by ~35%/23% for FY22/23, respectively.

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