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Earnings outlook uncertain

As PAR increases materially, Management cuts Growth and RoE guidance significantly

CREDAG’s PAT for Q2 FY25 was substantially below expectations on account of significant spike in the credit cost (6.5% v/s estimate of 3.4%). Due to meaningful dip in collection efficiency (excl arrears at 96.3% v/s 97.8% in preceding quarter), the overall PAR and 0-60 dpd bucket increased by 240 bps and 140 bps on sequential basis, leading to higher provisions (early recognition/provisioning policy). Management has downgraded its annual guidance of growth to 8-12%, increased credit cost guidance to 4.5-5% and significantly cut RoA/RoE guidance to 3-3.5/12-14%. This is assuming further stabilization of collections in Nov (Oct was stable over Sept) and a gradual improvement Dec onwards. The short-term nature of microfinance loans and timely calibration by company/industry underpins management’s assessment.

Data shows PAR can increase in near-term

Representative data (10% sample of active borrower base of August) shared by CREDAG revealed 1) 15.5% portfolio share of borrowers having CREDAG + 3 or more lenders and with relationship vintage of up to 4 years, 2) 14% of borrowers with indebtedness of Rs1.5 lac or above and with relationship vintage of up to 4 years, and 3) 8% of borrowers having CREDAG + 3 or more lenders, indebtedness of Rs1.5 lac or above and with relationship vintage of up to 4 years. Delinquencies are much higher in above categories of borrowers, and hence there is likelihood of further fresh PAR addition from these customer segments.

Achieving 8-12% portfolio growth can be a challenge in current year

CREDAG’s GLP has degrown by 6% in H1 FY25 and to achieve even the lower end of growth guidance it needs to grow portfolio by 15% in H2 FY25. This would require a significant stepping-up of disbursements from Nov-Dec onwards. Management did highlight in the earnings call that about 70% of centers and 50-60% of branches have benign delinquency levels and disbursement acceleration could be driven thro

Uncertainty over near-term financial performance to continue to weigh on the stock

We have cut CREDAG’s FY25/26 earnings estimates by 43%/32% with significant adverse adjustments in growth and credit cost. Q3 FY25 is likely to be another quarter with high credit cost. Signs of recovery in collection efficiency are a must to preclude further earnings cut and de-rating of valuation. We downgrade the stock to ADD with a lowered 12m PT of Rs1175.

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