IGI Logo

Our view – ‘Second wave credit cost to be fully absorbed by Q2 FY22; valuation discounts third wave to some extent’   

As was expected, the second wave had significant impact on CREDAG’s Q1 FY22 performance. Consolidated AUM declined by 7% qoq on much lower disbursements (Rs10.7bn v/s Rs47.3bn in Q4 FY21). Interest reversal of Rs210mn and higher average liquidity carry impacted NII (11% below estimate).  

In CREDAG’s stand‐alone portfolio of Rs106bn, the PAR 60/90 rose to 8.1%/5.7% as of July after writing‐off loans worth Rs540mn (50 bps of GLP). Collection Efficiency (CE) improved significantly to 91% (excl. arrears)/ 97% (incl. arrears) in July from 81% (excl. arrears)/84% (incl. arrears) in June. Credit cost of Rs1.56bn was incurred, with ECL provisions increasing to 6.4% of loan portfolio.  

In MMFL’s book of Rs20bn, the PAR 60/90 was largely unchanged at 7.1%/4.9% as of June due to write‐off of 1% portfolio and dpd standstill for 43‐45% of loans during May‐June due to extension of collection deferment. The collection efficiency of 83% (excl. and incl. arrears) in July suggests significant deterioration in PAR metric from June. Credit cost of Rs320mn was incurred, with ECL provisions increasing to 5.8% of loan portfolio.  

There was negligible restructuring in both the portfolios. However, the management may consider doing small restructuring by September. 

Incremental provisions pertaining to the second wave impact could be lower in the stand‐alone portfolio and much higher in the MMFL portfolio considering concurrent PAR and collection trends. We believe these provisions will become due in the current quarter due to the bucket movement. Besides this, business‐as‐usual provisions will be required in remainder of the year on the new portfolio originated. We assess FY22 credit cost at Rs3.75bn‐4.25bn i.e. 3.5‐3.8% of avg. AUM (v/s 6% in FY21) in the absence of third wave.     

We see profitability bouncing back sharply in H2 FY22 and company reporting closer to 3% RoA for the year. Next year onwards the RoA should improve to 4.4‐4.5% with normalization of credit cost. The stock trades at 1.9x FY23 P/ABV without assuming a third wave. In our view, the risk of a third wave is captured in the current valuation/stock price to some extent. Stock has significantly underperformed and is not far away from its 12m low. We reiterate BUY with 12m PT of Rs800.

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