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Micro-credit stress playing out

At a consolidated level, CREDAG reported a net loss, on the back of a sharp rise in provisions. While disbursals saw a sharp uptick and the improvement in collection efficiency sustained (~91% excluding arrears in December), the manifestation of sticky back-book stress (implied PAR 60 of ~14% on the portfolio that is more than 6 months old) was also evident. However, at a consolidated level, CREDAG held an ECL cover of ~5.7% of loans, vs. overall GS-III of 6.1%, indicative of a fortified balance sheet. We believe current stress is not entirely unexpected, as is in fact, characteristic of the event-driven stress that micro-credit is associated with. We maintain BUY with a revised target price of INR 814. Our assigned multiple, we believe, is reflective of CREDAG’s high RoE potential, relatively conservative approach to the busines as well as inherent business risks.

* Sticky back book stress forming: Despite clocking a sustained improvement in collection efficiency (standalone) from 88% in September to 91% in December (96% including arrears), PAR 60 remained sticky at 7% and PAR 90 inched up to 5.2%, on the standalone portfolio. Further, disbursals between June and December accounted for ~49% of the standalone portfolio which had a PAR 60 of ~10bps, implying sticky stress in the back book. We now build GNPA (PAR 60) of 4.8% in FY21E.

* Jump in provisions dents earnings: Non-tax provisions surged 5x/3x YoY/QoQ to ~INR 2.8bn (9.4% annualised) and CREDAG wrote-off ~INR 1.1bn including accelerated write-offs of INR 847mn. At a consolidated level, CREDAG holds an ECL cover of 5.7% vs. PAR 60 of 6.1%. We build LLPs of 3.4% over FY21-23E, an upward revision of 25bps vs. our earlier estimates.

* Revival in disbursal growth: Consolidated disbursals grew ~38/184% YoY/QoQ to ~INR 40bn. Consequently, AUMs grew ~39/10% YoY/QoQ, reaching ~INR 123bn, led by a growth in the IGL segment. Average outstanding per borrower (group loans) grew ~13.8/10% to INR 35.4bn. We model an AUM growth of ~22.3% over FY21-23E.

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