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Strong FY27 Guidance Upgrade, But Drought Risk Warrants Caution Changes in Estimates post Q2FY27

FY27E/FY28E/FY29E (in %): NII: 5.3./4.2/3.8; PPOP: 7.9/4.8/2.6; PAT: 8.3/6.3/4.0

Recommendation Rationale

* Drought Conditions in Certain Maharashtra Districts; Collections and Credit Costs Under Watch: CAGrameen’s key near-term risk remains the emergence of drought-related repayment stress in certain pockets of Central Maharashtra (MH). The management indicated that select borrowers in the affected districts have started seeking additional time for repayments, including restructuring options, although the situation remains at an early stage. Accordingly, CAGrameen has recalibrated its approach in the affected pockets by prioritising existing customers over new sourcing and intensifying collection efforts. Encouragingly, CAGrameen has not observed comparable on-ground stress in any other geographies, with collections normalising in the flood-affected northern states and expectations of a normal northeast monsoon providing some comfort. However, the management has guided for an inch-up in Q3 credit costs, factoring in the potential impact of drought and seasonal factors such as festivals. Nevertheless, it remains confident of containing full-year credit costs within the guided range of 3.0-4.0%.

* Barring Droughts, Asset Quality Trends Steady: CAGrameen reported a further improvement in asset quality, its best performance in the last 10 quarters. X bucket CE stood at 99.71%, steady QoQ. The temporary deterioration in PAR accretion during Aug/Sep’26 was primarily attributable to excessive rainfall and flooding in parts of certain operational geographies, alongside seasonal festivities, rather than weakening in borrower behaviour. Encouragingly, the management indicated that collection trends in these geographies had largely normalised by Oct’26. In Q2, CAGrameen strengthened its provisioning coverage with an additional buffer of 45bps, taking ECL provisioning to 3.31%.

* Customer Acquisition to Accelerate in H2 as Write-offs Normalise: CAGrameen’s customer addition in H1 remained soft, mainly marred by accelerated write-offs as it recovered from an adverse credit cycle and the company’s endeavour to graduate quality customers to Retail Finance (RF). This resulted in customer retention improving to 88% in Sep’26 vs 85% in Mar’26. Having largely worked through the elevated write-off phase, CAGrameen expects customer additions to improve meaningfully in H2, as it targets a monthly run rate of over 1 Lc new customers vs. the current run rate of 80,000 customers.

Sector Outlook: Positive

Company Outlook & Guidance: Following a strong H1 performance, the company has revised its FY27 guidance upwards across most operational parameters. NIM guidance has been revised meaningfully upwards to 14.4-14.7% vs earlier guidance of 12.8-13.2%. C-I Ratio guidance has been revised downwards to 29-30% vs 33-35% earlier. Credit costs guidance has been retained at 3-4%, despite expectations of higher credit costs in Q3. RoA/RoE guidance has been revised upwards to 5.2-5.8%/21-24% vs 4-4.8%/16-20% earlier. CAGrameen’s improving outlook on customer addition and increasing contribution from the RF portfolio supports a healthy growth trajectory over the medium term. However, emerging drought-related concerns in certain districts pose a key near-term risk, with potentially higher credit costs weighing on profitability and possibly dampening growth. The management has levers to defend RoA (aspiration to deliver a steady-state RoA of 4.5-5%) through calibrated pricing actions; the effectiveness of the same remains to be tested if stress persists for longer. With valuations having corrected sharply to 1.5x/1.2x FY28/29E ABV for a potential RoA delivery of 4.7-4.9% over FY28-29E, the risk-reward appears favourable; however, the credit cost trajectory and its likely dent on RoA remain keenly eyed.

Current Valuation: 1.7x Sep’28E BV Earlier Valuation: 2.6x FY28E BV

Current TP: Rs 1,405/share; Earlier TP: Rs 1,900/share

Recommendation: We maintain our BUY recommendation on the stock.

Financial Performance:

* Operational Performance: CAGrameen added 2.3 Lc customers during Q2 vs 2.2/2.5 Lc customers YoY/QoQ, of which 35% are NTC. Disbursements grew by +19/4% YoY/QoQ, driving improved AUM growth of +19/2% YoY/QoQ. AUM growth was driven by strong traction in Retail Finance (RF), which grew by +151/15% YoY/QoQ. The mix of the RF portfolio improved to 23.3% vs 11.1/20.6% YoY/QoQ.

* Financial Performance: NII growth was better than our expectations and grew by 33/7% YoY/QoQ, driven by a sharp margin improvement of 70bps QoQ. NIMs stood at 15.1% vs 14.4% QoQ. Yields improved by 50bps QoQ, while CoF declined by 10bps QoQ, aiding margin expansion. Non-interest income grew by 10/48% YoY/QoQ. Opex growth was modest at 14/5% YoY/QoQ. C-I Ratio improved to 28.3% vs 29.3% QoQ. PPOP grew by 39/11% YoY/QoQ. Credit costs (calc.) stood at 3.91% vs 2.84% QoQ. PAT grew by 298/1% YoY/QoQ.

* Asset Quality is back to pre-crisis levels, best since the last 10 quarters. GNPA/NNPA improved to 1.79/0.59% vs 2.18/0.76% QoQ.

Outlook

Given strong performance on NIMs, we revise our NII estimates higher by 4-6% over FY27-29E. Controlled Opex growth and strong NIMs, though with moderation over the medium term, have resulted in earnings growth improving, leading to an upward revision of 4-8% in FY27-29E. We expect superior RoA/RoE delivery of 4.7-5.3%/19-22% to continue over the medium term, with CAGrameen delivering a strong AUM/NII/Earnings growth of 22/22/49% CAGR over FY26-29E. The impact of drought and its potential dent on credit costs and profitability remains a key monitorable

Valuation & Recommendation

We value CAGrameen at 1.7x Sep’28E BV vs. its current valuation of 1.4x Sep’28E BV, to arrive at a revised target price of Rs 1,405/share, implying an upside of 29% from the CMP. We maintain our BUY recommendation on the stock

Key Risks to Our Estimates and TP

* The key risk to our estimates remains a slowdown in overall disbursement and AUM growth, which could potentially derail our earnings estimates.

* Slowdown in growth momentum in newer geographies or inability to scale up business in new geographies.

* Continued Asset Quality concerns could impact credit costs and thereby weigh on earnings growth.

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