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Strong performance was on expected lines; RoE guidance upgraded to a higher normal CREDAG’s AUM and NII growth were ahead of expectations while PAT came in-line on account of marginally higher opex and credit cost. For third quarter in a row, the co. delivered RoA/RoE of 5.5%+/24%+. Key reasons behind CREDAG’s stronger-thanpeer profitability despite lower lending rates are 1) better customer retention/engagement (naturally leading to higher avg o/s per borrower), 2) deft opex/productivity management and 3) firm asset quality control (reflected in Collection Rate and PAR buckets). While maintaining AUM growth guidance of 24-25% for the year, the management has materially upgraded RoA/RoE guidance to 5.4-5.6%/24- 25% respectively (earlier 4.7-4.9%/20-21%). The increase in profitability guidance was underpinned by strong performance and outlook on NIM and Cost/Income ratio.

Steady growth momentum; building diversification with constructive changes in portfolio profile Portfolio/disbursements growth of 36%/14% remains guided by strong customer addition, prudent ticket/tenor policies, regional portfolio diversification, improving distribution productivity and strengthening asset quality. CREDAG added 3.36 lac customers (15.2 lac in past 12m) with 40% of them being outside the Top 3 states. With the acceleration in new customer addition, the vintage profile of borrower base has shifted towards <3 years vintage customers, which has also resulted in stable avg o/s per borrower. More than 85% customers are retained by the co. for the next cycle loan. There was attrition of 0.5mn customers in the past 12m on the opening base of 3.8mn. Contribution of 3-year loans remain at 29% of the book, which are offered to highvintage customers seeking >Rs75000 loan. This has been aiding portfolio growth.

Improvement in NIM and normalized asset quality NIM improved by 10 bps qoq/110 bps yoy on the back of 40 bps increase in portfolio yield which subsumed the 20-bps increase in CoF. While CoF could further moderately increase due to bank loan repricing, the lending spread can still improve further on account of incremental portfolio repricing towards the higher disbursement yield. There was a slight uptick in opex/avg AUM ratio as there was significant increase in employee base and there has been consistent addition of branches. With collection efficiency sustaining at 98.7% excluding arrears, delinquency creation, delinquency flow, and write-offs remain moderate. This has led to regularization of credit cost at annualized 1.6% in H1 FY24. ECL coverage is healthy on Stage 2/3 assets at 54%/69%. Recovery of bad debts has been consistent around Rs120mn per quarter.

Earnings upgraded by 7-9%; retain BUY with raised 12m PT of Rs1825 We upgrade earnings estimates by 7-9% for second consecutive quarter with profitability sustaining at higher levels. We estimate a CAGR of 25% in GLP, 39% in PPOP and 47% in earnings over FY23-25 barring any external shocks. Attributes like high customer retention/borrower vintage, lower field attrition, industry-best loan processes, policies and pricing, stronger quality control and audit mechanisms, etc. drive company’s sturdier growth and profitability. The stock has traded at 3.5-4x 1-yr fwd. P/ABV before Covid with 16-18% RoE delivery. In the current cycle, CREDAG’s RoE will be far superior at 24-25% due to scale and pricing benefits. With such high RoE generation, the co. would not require equity raise for 25% pa GLP growth.  

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