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Election, heat wave-impact disrupt asset quality

CREDAG has reported moderation in GLP growth at 21% YoY as well as sharp rise in GNPA ratio by 28bps QoQ to 1.5% in 1Q which was mainly due to transitory impact of low rainfall during last year, followed by a severe heat wave over Apr-May ’24 and general elections-related disruption in a few states. This led to sharp jump in LLP to 280bps, which was though largely offset by higher other income/lower opex, helping it deliver in-line profit and strong RoA @5.6%. We believe a similar phenomenon is likely to be seen across MFI players in 1Q, with some normalization from 2Q onwards. Per the management, MFIN has asked MFI players to observe cap of 4 lenders + loan limit to Rs0.2mn per customer amid rising concerns on overleveraging in a few states which may have some impact on growth. Accounting for this, we cut FY25-27E earnings for CREDAG by 3%. Also, we factor-in the rising risk of the indirect impact from farm loan waivers for the sector, as also for CREDAG; hence we cut TP to Rs1,800/share (Rs2,000 earlier), based on 2.5x Jun-26E ABV vs 2.8x Mar-26E ABV earlier. We retain BUY on the stock, taking comfort from CREDAG’s strong return ratios (RoA/RoE: >4.9%/19%), management quality, and capital buffer.

Recent MFIN lending guidelines could further hurt growth CREDAG posted relatively muted GLP growth at 21% YoY/(2%) QoQ, largely on account of weaker business momentum in the MFI space, which was in turn due to the heat wave across several states, operational limitations during the general elections, and a seasonally moderate Q1. This, coupled with continued increase in CoF, led to slight contraction in NIM by 10bps QoQ. Though the company reiterates its GLP growth guidance at 23-24% in FY25 and ~20-25% over FY25-28, we believe that the recent guidelines by MFIN (SRO) to observe cap of 4 lenders + loan limit to Rs0.2mn per customer amid rising concerns around overleveraging in a few states could keep growth in check. Also, the RBI has been regularly nudging MFI players for higher lending rates which we believe is likely to accelerate pressure on sector margin, as also for CREDAG.

Heat wave/general elections-impact led to rise in overall delinquencies CREDAG’s GNPAs increased by 28bps QoQ to 1.5% and PAR 0+ by 80bps QoQ to 2.5%, mainly due to transitory increase in delinquencies on account of extended impact of low rainfall during FY24, followed by a severe heat wave during Apr-May ’24 across several regions and operational limitations due to general elections. Additionally, delinquencies outside the state of Karnataka (non-core states like Rajasthan, Kerala, Jharkhand and some pockets of TN) remain elevated. The company expects some normalization to begin from 2Q, whereas meaningful relief should be seen only from 3Q. However, we believe that risk of farm-loan waiver would be higher during Maharashtra elections (Nov-24) which could have indirect impact on the MFI sector, as also for CREDAG. Thus, we buildin higher LLP at 240bps in FY25, gradually increasing to 270bps by FY27E.

We retain BUY, but cut TP to Rs1,800/share Factoring in the potential growth moderation, we cut FY25-27E earnings by 3%. Additionally, building in the rising risk of the indirect impact from farm loan waivers for the sector, as also for CREDAG, we cut TP to Rs1,800/share (earlier Rs2,000), based on 2.5x Jun-26E ABV vs 2.8x Mar-26E ABV earlier. We retain BUY on the stock, taking comfort from CREDAG’s strong return ratios (RoA/RoE: >4.9%/19%), management quality, and capital buffer.

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