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Sustaining Growth & RoE

A steady and strong performance

CREDAG delivered a 3%/2% NII/PPOP beat on stronger than expected disbursements (4% above estimate) and AUM growth (up 14% qoq/27% yoy). The PPOP beat was after adjusting for the Rs260mn provisions made towards long-term incentives and one-time special bonus for employees celebrating 25th year of operations. Portfolio spread was stable at 11.2% despite reduction in lending rates by 50 bps from Dec. The funding cost stabilized with marginal cost coming down. While write-off was modest at Rs0.6bn (1% of AUM) in the quarter, there was further increase in credit cost (2.4% v/s 2.2% in Q3 and 1.7% in Q2) driven by marginal increase in PAR 30 and stronger AUM growth. The 50-bps increase in PAR 30 over the past two quarters was mainly driven by newer markets and floods in TN. Notwithstanding the increase in credit cost and the one-time employee bonus/incentive provisions, the co. delivered 5.7% RoA and 25% RoE in Q4 FY24.

Prudent growth; increase in PAR/credit cost on account of diversification

AUM growth continues to be anchored on 1) strong customer addition (added 1.4mn in FY24 with the base growing 15% yoy), 2) high customer retention (~88% migrate to subsequent cycles and 32% of AUM represents 3-yr loan to most vintage borrowers), 3) prudent ticket/tenor policies (8-9% yoy increase in GLP/Borrower), 4) regional portfolio diversification (share of Top 3 states down ~200 bps yoy and 44% of new borrower addition in FY24 was outside these states), 5) improving distribution productivity (GLP per Branch/LO up 10%+ yoy) and sturdy asset quality (collection efficiency ex-arrears at 98.5% in FY24). Bulk of the branch addition has been happening outside the Top 3 states (KTK, MH and TN) to diversify AUM and improve long-term growth. The PAR creation in the newer markets while being normal is slightly higher than a vintage state like Karnataka. The co. has relatively higher ECL provisioning policy for the newer markets/districts, and the portfolio growth in these geographies has been much faster. However, the higher BAU credit cost in newer markets/districts is adequately priced in the lending rate (due to risk-based pricing) and hence the profitability is well insulated.

Healthy guidance for FY25

Management has guided for 23-24% GLP growth in FY25 which will be essentially led by customer addition and portfolio diversification. Credit cost has been guided at 2.2- 2.4%, which is in-line with the trends witnessed in H2 FY24. RoA/RoE is expected to be steady at 5.4-5.5%/23-23.5%. Co. does not expect funding cost to further increase.

Retain BUY with unchanged 12m PT of Rs1950

We continue to expect 23-25% AUM/Earnings growth over FY24-26 with avg. RoE delivery of 23.5% (no change in BS leverage). In the absence of any risk built-up on asset quality, we see room for material valuation re-rating. CREDAG is delivering far superior RoE than the industry and relative to its own history, and the lowest lending rates make it more sustainable in a stable operating environment.

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