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We downgrade CREDAG to ADD from BUY with revised downwards TP of Rs1,100 (from Rs1,600). Company reported ~51% earning miss with PAT at Rs1.9bn/RoA at 2.7%, primarily due to sharp growth slowdown and stress flow in MFI portfolio with GNPA ratio (60DPD+) up by 98bps QoQ to 2.4% in 2Q. As per the management, bulk of the stress has come from lower vintage customers with 4+ lenders due to new MFIN guardrails, localized disruptions, and seasonal floods. We believe some stress relief should ideally be seen in 4Q as it is a heavy season for MFI loan disbursements and is also coinciding with the rate-cut cycle, which should be beneficial for MFI players including CREDAG. We cut our earnings by 44%-26% in FY25-27E factoring in slower growth/LLP and thus cut TP to Rs1,100 from Rs1,600, valuing it at 1.8x its Sep-26E ABV (earlier 2.2x Jun-26E ABV) and rating to ‘ADD’ from ‘Buy’. We believe any further sharp correction in the stock could be seen as an opportunity to accumulate, as CREDAG will be early to benefit from any relief in the MFI stress from 4Q, given its better quality portfolio (as also seen post-Covid). We also take comfort from its strong capital buffers, and management pedigree vs peers.

MFINs new guardrails and asset quality hit hurts growth

CREDAG posted a lackluster GLP growth at 12% YoY/(4.5%) QoQ, largely on account of muted MFI growth, which was due to a seasonally-weaker Q2 caused by heavy rainfall across southern states, introduction of additional MFIN guardrails, and a focus on collections over fresh disbursements/growth. However, stable interest spreads on account of unchanged CoFs (~9.8%) coupled with improvement in capital position/low-base effect, led to a 50bps uptick in NIMs to 13.5%. However, factoring in rising delinquencies in the MFI space, the company has cut down its GLP guidance aggressively to ~8-12% for FY25 (vs ~23-24% earlier). Moreover, FY25 RoA guidance has also been revised downwards to ~3-3.5 levels (vs 5.4-5.5% earlier) factoring in a rise in provisioning across PAR buckets.

NPAs surge but hopes abound for some relief from 4Q

CREDAG’s GNPAs shot up by 98bps QoQ to 2.4% and PAR 0+ by 240bps QoQ to 4.9%, mainly due to transitory increase in delinquencies driven by local repayment issues from third-party interventions, agri-income challenges due to adverse rainfall, and stricter MFIN guardrails. Management expects some stabilization in Q3 based on early trends and meaningful improvement only by Q4. As per CRIF data, PAR 1-180 is relatively better for CREDAG vs industry, especially in the top 5 states (~85% of the overall GLP) with slightly higher stress seen in the new state of Bihar (5.5% PAR 1-180 vs 5.2% for industry as of Aug-24). With PAR 30-90 DPD at 3.2% (IIB at 4%) and thus expected higher NPAs, CREDAG has increased LLP guidance to ~4.5-5% (vs 2.2-2.4% earlier). However, we factor in higher LLP at 5.5% amid some disruption likely to be seen in the state of Maharashtra, given the upcoming elections.

We cut our TP to Rs1,100 and rating to ADD from Buy

We cut our earnings by 44%-26% in FY25-27E factoring in slower growth/LLP and thus cut TP to Rs1,100 from Rs1,600, valuing the company at 1.8x its Sep-26E ABV (earlier 2.2x Jun-26E ABV) and rating to ‘ADD’ from ‘Buy’ given the limited upside to our CMP. However, we believe any sharp correction in the stock could be seen as an opportunity to accumulate, as CREDAG will be early to benefit from any relief in MFI stress given its better quality portfolio (as also seen post-Covid). We also take comfort from its strong capital buffers, and management pedigree vs peers.

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