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Pinning hopes on H2FY26 recovery

Q4FY25 earnings for Credit Access Grameen (CREDAG IN) rebounded due to reduced provisions, but underlying core operations remain challenging. While Karnataka (31.1% of gross loan portfolio [GLP]) and Tamil Nadu (19%) challenges to persist in H1FY26 and caution in Bihar (4.8%) stays, growth revival in H2 is expected to be stronger. While the Portfolio at Risk (PAR) bucket roll-forward rates are nearing normal, headline NPA remains high, suggesting credit cost may take another year to normalize. We retain Accumulate with a higher price target of INR 1,365 on 2.2x FY27E P/ABV with meaningful valuation derating and most negative parameters peaking.

Rebound from losses: CREDAG reported a PAT of INR 472mn in Q4FY25, rebounding from a loss of INR 995mn in Q3FY25 (vs ~INR 3.9bn PAT in Q4FY24). NII stood at ~INR 8.8bn, up 1.6% QoQ but down 0.5% YoY. NIM improved by 20bp QoQ to 12.7%. Q4 marginal cost of borrowings was 9.6%, slightly below the average of 9.8%. The company continues to focus on a nimble, diversified liability mix, with rising foreign borrowings. District-based pricing and Expected Credit Loss (ECL) models aid in risk-aligned yield optimization. Management sets FY26 NIM target in the range of 12.6-12.8%.

H2FY26 to be better than H1: Q4 saw GLP grow 4.6%QoQ but down 2.9% YoY, partly offset by muted growth in Karnataka, due to elevated delinquency during February-March 2025. But borrower additions have sustained with ~0.3mn new addition, 43% being new-to-credit. Geography-wise: 1) Bihar (4.8% of GLP): GLP and borrower base declined due to a strategic pullback from September 2024 to January 2025, focused on portfolio protection amid overleveraging concerns, strong reversal in business since February 2025, 2) Karnataka (31.1% of GLP): caution on borrower accretion, GLP with 2% QoQ growth has kickstarted business momentum, 3) Tamil Nadu (19% of GLP): the recent bill had no impact on groundlevel operations or collections to date. We expect 14-15% loan growth during FY26-27E, fueled by easing regional headwinds, rising retail finance segment share from current 6% to ~10%, offset likely write-offs and business normalization in 2-3 quarters

Credit cost normalization likely in FY27: GNPA rose to 4.8% in Q4FY25, up 77bp QoQ, led by Karnataka stress where collection efficiency was at 91.9%. FY25 write-offs hit ~INR 11.2bn, with credit cost at ~INR 19.3bn (7.7%), ahead of guidance. Provision buffers remain strong. Management has set FY26 credit cost target in the range of 5.5-6.0%. Ex-bucket collection efficiency improved to 99.7% in May, indicating normalization outside Karnataka. No adverse impact is yet to be seen from TN ordinance, and stress there is as seasonal. Management expects H2FY26 to stabilize, with a structural credit cost reset to 3.0-3.5% and focus shifting to forward-looking risk metrics.

Retain Accumulate with a higher TP of INR 1,365: We pare down FY26E EPS by 10% and FY27E by 4.7% after factoring in sustained pressure in FY26. We introduce FY28E. Amid disbursements regaining pace followed by improvement in new borrower addition during Q4FY24-Q1FY25, we expect 15-16% YoY growth during FY26-27E. With normalization trends 2-3 quarters away, we expect credit cost to touch 4% and GNPA at 3%+ during FY25-27E translating into a ROA of 4.7-4.8% and ROE of 19% during FY27-28E. With an 18% stock rally in the past three months and healthy returns stacking up in FY28, we raise our price target to INR 1,365 from INR 1,042 on 2.2x (from 1.6x) FY27E P/ABV. We retain Accumulate with meaningful valuation derating and most negative parameters peaking.

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