Buy CreditAccess Grameen Ltd For Target Rs.1,070 by Motilal Oswal Financial Services Ltd
Delinquencies moderating but normalization still some time away
Credit costs elevated due to forward flows and accelerated write-offs
* CreditAccess Grameen (CREDAG)’s 3QFY25 loss stood at INR995m (vs. MOFSLe PAT of INR1.3b). NII grew ~7% YoY to ~INR8.6b (~6% miss) and PPoP rose 4% YoY to ~INR6.2b (~6% miss). Cost-income ratio was stable at ~31% (PY: ~30% and PQ: ~31%).
* Reported yields declined ~90bp QoQ to ~20.2%, while CoF was stable QoQ at 9.8%. Reported NIM contracted ~100bp QoQ to ~12.5%, primarily because of interest income reversal of INR750m. We model NIMs of 14.0%/14.1% for FY26/FY27 (FY25E: ~14%)
* Disbursements dipped ~5% YoY; however, they grew ~15% QoQ to ~INR51b. AUM grew ~6% YoY but declined ~1% QoQ to ~INR248b (PY: ~INR234b). The borrower base declined ~3% QoQ to ~4.8m (PY: ~4.7m); CREDAG added 28 branches during the quarter to reach 2,059 branches.
* GNPA/NNPA rose ~155bp/55bp QoQ to ~4.0%/~1.3%. PCR declined ~80bp QoQ to ~68.7%. Annualized credit costs rose to ~12.3% (PQ: ~6.7% and PY: ~2.2%). Management raised its credit cost guidance to ~6.7%-6.9% (vs. ~4.5%-5.0%) for FY25, given there was a delay in delinquency trend reversals by 3-4 weeks and accelerated write-offs in 2HFY25.
* We cut our FY25/FY26E PAT estimates by ~38%/11% to factor in higher credit costs. We estimate a ~17%/13% CAGR in AUM/PAT over FY24-27, leading to an RoA/RoE of ~4.4%/19% in FY26. Management shared that peak delinquencies occurred in Oct’24/Nov’24, and there was a marked improvement in new delinquency rates in Dec’24 and Jan’25. As per the management, asset quality is expected to normalize by 1QFY26 with profitability projected to return to normal levels by 2QFY26.
* We believe that sectoral pain in microfinance will continue for 2-3 more quarters, given that the stress on the balance sheet has to be provided for and subsequently written off for some semblance of ‘normalization’. While the improvement in collections gives a glimmer of hope, we need to monitor the trends over the next 3-4 months before exuding confidence that this is indeed a trend reversal. Developments in Karnataka, while not overly concerning at this point, will need to be closely monitored, given that it is one of the core markets for CREDAG. Reiterate BUY with a revised TP of INR1,070 (based on 1.8x Sep’26E P/BV).
Highlights from the management commentary
* The company highlighted that ~84% of customers have been consistently repaying on time and are expected to deleverage in a disciplined manner. Internal assessments suggest that ~80% of customers can be retained after implementing MFIN Guardrails 2.0.
* The company has not breached any covenants, and it is comfortably below the various thresholds of GNPA/GS3 (at 90dpd).
* The collection efficiency in Karnataka was slightly higher than the national average, despite recent disruptions in a few districts of Karnataka.
Asset quality deteriorates; credit costs to remain elevated in 4QFY25
* GNPA/NNPA deteriorated ~155bp/55bp QoQ to ~4%/~1.3%. PCR declined ~80bp QoQ to ~68.7%. The company has taken accelerated write-offs of INR2.8b, which led to additional credit costs of INR730m. The accelerated writeoffs pertained to customers who were over 180 days past due (dpd) and had not repaid in the last 90 days.
* Collection efficiency in the X-bucket stood at 99.2% (vs. ~98.8% in Nov'24 and ~98.7% in Oct'24).
* Management shared that delinquency trends show clear signs of reduction, with new delinquency additions expected to normalize by 4QFY25 or 1QFY26. We model credit costs of ~6.9%/3.5%/2.5% (as % of loan assets) in FY25/FY26/FY27.
Valuation and view
* CREDAG, in our view, could likely continue to have a slightly bumpy ride in the near term because of the calibration in loan growth and continuing forward flows, which will keep the credit costs elevated over the next two quarters as well. However, management indicated that delinquency trends are showing a clear improvement, with new delinquencies expected to normalize by 1QFY26.
* With a strong capital position (Tier-1 of ~25%), it is well-equipped to navigate the near-term disruption in the MFI sector and will embark on a healthy loan growth trajectory once there is higher confidence in the reversal of this delinquency trend. Reiterate BUY with a revised TP of INR1,070 (based on 1.8x Sep’26E P/BV).
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