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Dream run continues; Buy

Recalibration of lending rates; provisions spike yet earnings intact

Despite continued improvement in operating systems, the flood impact in the key Tamil Nadu State (20% of loans) and downward repricing of lending rates of 50bp cut across products, Credit Access Grameen (CREDAG IN) PAT was in line with our expectations in Q3FY24 (reported INR 3.5bn vs our estimates of INR 3.6bn) based on strong core. This was led by robust growth on borrower addition (9MFY24 at 0.4mn closer to FY23 count), controlled cost at a steady 9.8% QoQ, and lower opex (218bp QoQ dip in the cost-income to 29.5%). Consequently, Q3 delivered a revised higher guidance in Q2, with ROA rising to 5.5% and ROE at 24%. , CREDAG is set to deliver a 25% AUM CAGR and a 21% EPS CAGR during FY23-26E, with an EPS in the range of 5-8% during FY24-26E, with expansion into newer States (Andhra Pradesh & Telangana), industry-best cost metrics at a steady 31% cost-income, bolstered by improving productivity and superior asset quality (potential credit cost in the range of 1.6-1.8%) vs peers.

Strong operational metrics driving scale and growth

A 4.7mn borrower base with annual addition run-rate surpassing FY23 levels and improving GLP/borrower, up 2% QoQ to INR 49,800, coupled with increased expansion in outside the Top 3 States would lead to doubling of the book by FY26E. While the branch network strengthened in Q3, non-top three States formed 44% of incremental customer additions, offsetting concentration risks. Such superior operations continue to drive scale and growth, with CREDAG’s loan run-rate at 31% YoY, led by steady traction in income generation loans, up 28% YoY and 3% QoQ, followed by traction in home improvement and retail loans on low base.

Flood-affected portfolio stress absorbed

In Q3, GNPA increased 20bp QoQ to 1.0% and PAR 90 to 80bp from 60bp in Q2, due to seasonality, the TN flood impact and higher PAR outside Karnataka. PAR 60 also increased 30bp QoQ to 1.0% in Q3 from 0.7% in Q2. Collection efficiency slightly declined to 98.3% QoQ. After factoring in challenges on new geographies and existing high provisions at a 70% PCR, we expect industry-best NPA at a mere 1.0- 1.2% with credit costs settling in at 1.9% during FY24-26E.

Valuation: remains our Buy with higher TP of INR 1,986

We upgraded earnings estimates as CREDAG’s growth story remains well fortified, underpinned by industry-best cost controls and asset quality metrics with steady business prospects backed by healthy customer acquisition levels. Given a rich return profile of 5% ROA and 22% ROE, commanding premium valuation, we raise our multiple to 3.9x (from 3.5x) P/ABV as we roll forward to September 2025E for a higher TP of INR 1,986 from INR 1,638. This places CREDAG at the top of the NBFC heap. It remains our Buy.

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