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Performance better than expectations; PAR/credit cost increase largely on expected lines

Notwithstanding softer-than-estimated disbursements/growth, CREDAG’s NII/PPOP/PAT were 2%/3%/5% ahead of our expectations aided by stable spreads, higher insurance income and lesser-than-forecasted credit cost. Asset quality movement was largely on expected lines with 50 bps decline in collection efficiency, 120 bps of PAR accretion and 20 bps increase in PAR 90 (after usual write-off of 40 bps). Credit cost was expectedly elevated at 2.7% on PAR increase, and coverage across loan stages was maintained. Post absorbing a higher credit cost, CREDAG delivered RoA/RoE of 5.4%/23.5%.

Maintains growth, credit cost and profitability guidance for FY25

Notably, despite the trends witnessed in PAR and credit cost in Q1 FY25, the management has retained GLP growth (23-24%), Credit Cost (2.2-2.4%) and RoE (23- 23.5%) guidance for the year. Factors beneath such expectations are 1) stabilization of new PAR addition in June and July, and expectations of gradual improvement in coming months, 2) structural challenges with regards to customer leverage, customer migration, rejections increase, etc. only confined to few pockets/districts of some states, 3) customer addition and GLP growth to substantially pick-up in H2 (like seen in FY24/23) and 4) stability of funding cost and implementation of district and customer level pricing likely supporting portfolio spread.

Co. has taken measures to control fresh PAR accretion and mitigate delinquency flow rates such as a) tightening filters while onboarding new customers and while extending new loans to existing customers and b) deploying senior field staff and business support teams to stem the PAR increase. The recently announced MFIN guardrails would have an impact on ~8% of CREDAG’s customer base, but co. is confident of mitigating this by stronger customer addition.

Trim estimates/target to factor potential industry risks; retain BUY on reasonable valuation and profitability resilience

We tweak estimates for growth and credit cost and hence revise earnings lower by 3- 4%, factoring the possibility of further PAR increase amidst current chaos and uncertainty. We are just taking a conservative stance even though CREDAG remains reasonably confident about delivering on its growth and profitability guidance. On the positive side, the risk of a deeper/longer credit cost cycle looks remote if one goes by Q1 FY25 performance and commentary of the management. We estimate 23%/21% CAGR in GLP/PAT over FY24-26 with an average RoE delivery of 23%. We retain BUY on CREDAG with 12m PT marginally lowered to Rs1800. Current valuation is attractive if the PAR cycle plays out as per expectations of the management. Key monitorable would be collection trends in the current quarter.

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