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Positive outlook

Management increased ROE guidance; we raise our target price to Rs1,800

CA Grameen reported a 9% beat of our net profit estimate for 2Q24 driven by c.35% AUM growth, a steady NIM and run-rate for credit costs. Optically, PAT was flat QoQ due to lower assignment income. The company continues its strong customer acquisition strategy, acquiring 300k+ new customers (gross) during the quarter. It also entered new states (AP and Telangana) as part of its expansion strategy. The company raised its FY24 guidance and now expects a c.25% ROE. Our average loan Cagr and ROE estimates over the medium term are 23% each. CA Grameen’s asset quality and return ratios are far superior to peers, and hence, we believe the stock should command a premium valuation. We lift our EPS estimates 4%-7 %, our target price from Rs1,600 to Rs1,800 and maintain our BUY rating.

New customer additions driving growth

Its loan book grew 3% QoQ/36% YoY to Rs208bn. Note 2Q is a seasonally slow quarter and growth picks up in 3Q. Over the past year, the company added 20% more customers, taking its customer count to 4.6m. Around 55% of customers have been with the company for less than three years; these customers have an average indebtedness of Rs40k vs the company-average of Rs49k. The company is also focusing on expansion outside the top three states. Note that during the analyst meeting earlier this year, management highlighted a target of growing AUM at 20%-25% Cagr over the next five years. 

Steady spreads and stable credit cost

With a 50bp sequential increase in both yield and cost of funds, spreads were stable on QoQ basis. For the full year, the company raised its guidance on margins by 70bps given strong performance in 1H. In addition, fee income improved significantly as insurance distribution commission caps were removed. Credit costs, at 1.7%, is steady state, and its GNPA improved by 12bps. In contrast, Bandhan Bank recently reported worsening asset quality (read).

Upward revision in management guidance; we raise our target price to Rs1,800

With better than expected performance in 1H24, management lifted its FY24 guidance and now expects 70bp higher ROA/4ppt higher ROE. CA Grameen has superior asset quality and return ratios to peers like Bandhan Bank and Fusion. Thus, we believe higher multiples are justified. We revise our NII estimates upwards leading to 4%-7% increases in PAT estimates over FY24-26CL. As we roll forward our valuation to Sep 25CL we arrive at a higher target price of Rs1,800 implying a 3.1x Sep 25CL PB.

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