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AUM growth to accelerate but credit costs to remain high in 2H Asset quality improves, though monthly PAR accretion inches up due to floods

* CreditAccess (CREDAG)’s 2QFY27 PAT grew ~300% YoY (on a lower base) and 2% QoQ to INR5b (in line). NII grew 34% YoY to ~INR12.5b (in line).

* Opex grew ~14% YoY to INR3.8b (in line). Cost-income ratio declined ~110bp QoQ to ~28.2% (PQ: ~29.3% and PY: ~32.5%). PPOP grew ~40% YoY to INR9.7b (~6% beat). Total credit costs stood at INR3b in 2QFY27, which led to annualized credit costs of ~3.9% (PQ: ~2.8% and PY: ~8.1%).

* CREDAG’s lending rate strategy focuses preserving risk-adjusted NIM, with future pricing actions contingent on the trajectory of credit costs and CoB. The ~50bp rate cut implemented in 3QFY27 is expected to be fully reflected across the portfolio over the next four to six quarters, while the previously indicated cuts for 4QFY27 and 1QFY28 remain conditional. Management indicated that further reductions could be considered if credit costs stabilize around ~3%, enabling CREDAG to pass on the pricing benefits while maintaining margins.

* CREDAG is well-positioned to sustain growth and improve profitability, supported by its 20-25% AUM growth guidance, higher NIM outlook and faster expansion in retail finance. Improving customer acquisition, graduation of vintage borrowers to retail finance products and stronger retention should support business momentum over the coming quarters. Disciplined underwriting and strengthened collections are expected to keep credit costs within the guided range.

* We estimate a CAGR of 21%/73% in AUM/PAT over FY26-28E, leading to RoA/RoE of ~5.5%/21% in FY28. CREDAG trades at 1.4x FY28E P/BV, and given its superior execution, we expect CREDAG to sustain its premium valuations over its MFI peers. Maintain BUY with a TP of INR1,450 (based on 1.7x Sep’28E P/BV).

Retail finance expansion and customer graduation to support growth

* Disbursements rose ~19% YoY/4% QoQ to ~INR64b. AUM grew ~20% YoY and 2% QoQ to ~INR309b. Borrower base remained broadly flat YoY and QoQ at ~4.5m (PQ: ~4.5m) and CREDAG opened ~60 new branches during the quarter to reach 2,326 branches.

* CREDAG expects AUM growth of 20-25%, supported by faster retail finance expansion, improving group loan momentum and customer graduation. Retail finance is likely to outpace MFI, which is expected to grow at 10-12%. The company is strengthening customer retention and graduating seasoned borrowers to individual and secured business loans while expanding its branch network and streamlining acquisition processes. Monthly customer additions are targeted to exceed ~100k over the next two quarters, up from the current run rate of ~80k. We expect CREDAG to deliver an AUM CAGR of ~21% over FY26-28E.

Credit costs to remain elevated but within the guided range of 3-4%

* GNPA declined ~40bp QoQ to 1.8%, while NNPA declined ~15bp QoQ to ~0.6%. S3 PCR improved ~160bp QoQ to ~67%.

* Collection efficiency (including arrears) in 2QFY27 improved to 98.1% (PQ: 97.7%). CE (excluding arrears) increased to 97.9% (PQ: 97.4%).Monthly PAR 15+ accretion stood at 0.26% in Sep’26 vs. 0.16% in Jun’26.

* CREDAG expects credit costs to remain around 3-4%, despite weather-related disruptions in select geographies. Temporary flooding-related collection pressure and drought challenges in Maharashtra are being addressed through stronger collection efforts and a focus on existing borrowers for new disbursements. District-level exposure caps, borrower-level assessments and disciplined underwriting are expected to contain credit risk. We expect CREDAG to maintain credit costs of ~3.5%/3.1% in FY27E/FY28E.

Valuation and view

* CREDAG delivered a constructive quarter, with NIM expanding to 15.1% and an upward revision in FY27 profitability guidance reflecting improving earnings potential. The company’s focus on graduating vintaged borrowers into highervalue retail products, alongside improving retention and collection infrastructure, provides a foundation for more sustainable growth. While weather-related disruptions (particularly in districts hit by drought) warrant closer monitoring in 2H, management remains confident of containing credit costs within its guided range of 3-4%.

* We estimate a CAGR of 21%/73% in AUM/PAT over FY26-28E, leading to RoA/RoE of ~5.5%/21% in FY28. Maintain BUY with a TP of INR1,450 (based on 1.7x Sep’28E P/BV).

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