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Our view ‐ Significant PAR increase in Q1; sustaining collection recovery key       

The second wave had a significant impact on the portfolio quality of Spandana. PAR 0 increased from 10% as of March to ~34% as of June and PAR 60 increased from 4.8% to ~8% with collection efficiency falling to 83% during Q1 FY22 (not fully reconcilable with a non‐commensurately low abs. portfolio run‐off of Rs9.8bn). Write‐off in the quarter was negligible.

The deterioration in PAR metric called for higher provisions of Rs1.5bn (ann. 2% credit cost), which increased ECL to 7.8% of AUM (needs to be looked in the context of 12‐13% PAR 30 as of June). However, with collection efficiency significantly improving in July (93% with arrears v/s 80% in June), there was some improvement in delinquent buckets. Management assesses incremental credit cost of Rs1.8‐2bn from the second wave. Company expects AUM (declined by 9% qoq in Q1 FY22 on abysmal disbursements) to grow near Rs100bn by the year‐end with an improvement in contribution of non‐microfinance book (gold loans, LAP, non‐MFI group loan, etc.).

Basis latest PAR metric, ECL stock, collection efficiency trends, Spandana is likely to witness another year of elevated credit cost. Nonetheless, we estimate Spandana to deliver 3.5%+ RoA if there is no third wave. Normative profitability of the company is around 6% RoA and 18‐20% RoE with current capitalization levels. Retain BUY with 12m PT of Rs830.

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