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Cautiously optimistic Steady margins offset provisions spike; earnings intact

With spike in credit costs getting offset largely by steady NIMs, Credit Access Grameen’s (CREDAG IN) PAT was in line with our expectations in Q4FY24 (reported INR 3.97bn versus our estimates of INR 3.94bn) based on strong core. However, both opex and credit costs stood elevated due to lumpy employee incentives and extra provision buffers, geographic risks and customer vintage. Consequently, cost-income surged 61bps to 30% and credit costs by 36bps to 2.4%. Falling in-line with the revised guidance, CREDAG recorded 5.6% RoA and 24.9% RoE for FY24. CREDAG is set to deliver a 26% AUM CAGR and a 20% EPS CAGR during FY24-26E.

Customer accretion, foray into new geographies drive growth

A 4.9mn borrower base with annual addition run-rate and improving GLP/borrower, up 9% QoQ to INR 54,300, coupled with increased expansion outside the top-three states would continue to drive a 25% AUM CAGR in FY24-26E. While the branch network strengthened in Q4, non-top three states formed 44% of incremental customer additions, offsetting concentration risks. Such superior operations continue to drive scale and growth, with CREDAG’s loan run-rate at 27% YoY, led by staggering traction in emergency loans and a 23% YoY growth in income generation loans (IGL).

High-risk geographies call for elevated credit cost

In Q4, GNPA increased 21bps QoQ to 1.2% and PAR 90 to 94bps from 80bps, partly due to the impact from flood in Tamil Nadu but steadying PAR outside Karnataka. PAR 60 rose from 1.0% in Q3 to 1.2% Q4. Collection efficiency at 98.3% was steady. CREDAG continues to provide higher for risk perceived geographies – Maharashtra, Madhya Pradesh, Rajasthan and Gujarat. CREDAG expects credit costs to remain elevated, with our expectations of 1.8% and GNPAs at ~1.2% in FY24-26E.

Valuation:

Maintain Buy, but with TP pared to INR 1,864 Steady customer addition and stable yields continue to support core. But CREDAG has created buffers and increased credit costs guidance to factor in any risks that could emanate from a foray into newer geographies. Moreover, with 60dpd spiking, we closely track industry trends in the near term. Also, an increase in credit cost guidance for the second quarter in a row prompts us to pare our target multiple and TP to 3.6x (earlier 3.8x) and INR 1,864 (earlier INR 1,986) respectively, as we build in high credit costs. While strong business momentum continues to support core profits, our EPS estimates remain largely intact. Given a rich return profile of 5% ROA and 22% ROE, we reiterate BUY. That said, we closely monitor the balancing act of CREDAG – geography-led credit expansion versus credit cost.

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