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Why is this MNC-backed midcap getting big premium over its peers

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NEW DELHI: This past week, foreign brokerage CLSA initiated coverage of a midcap microfinance institution (MFIs), which it says has shown superior asset quality than peers, not only during the demonetisation drive, but also all through this ongoing Covid-19 crisis.

MFI is already the largest player in its domain, and looks set to increase market share in a highly fragmented industry to 5 per cent following a recent merger. Given its strong collections, asset quality and parentage, analysts says the MFI should retain its premium valuation over peers and may deliver over 20 per cent return in next 12-months.

This company is CreditAccess Grameen.

On Monday, September 7, the stock had four ‘buy’, one ‘outperform’ and nil ‘sell’ calls on the publicly available Reuters Eikon database.

Q1 results better than peers

The firm, which offers micro-loans to women customers predominantly in rural areas under the joint liability group (JLG) model, reported 22 per cent drop in consolidated net profit for June quarter at Rs 75 crore compared with a Rs 96 crore profit reported for the same quarter last year, which was better than its peers.

Net interest income (NII) for the quarter jumped 55.2 per cent to Rs 383.20 crore from Rs 246.90 crore in the year-ago quarter, surprising many. Gross non performing asset (NPA) climbed to 1.6 per cent in June quarter from 0.6 per cent in the year-ago period, but it is expected to drop gradually as normalcy returns.

The company’s gross loan portfolio rose 53.9 per cent to Rs 11,724 crore during the quarter from Rs 7,619 crore a year ago. The number of borrowers of the MFI jumped 56.4 per cent during the quarter to 40.1 lakh from 25.6 lakh in the previous quarter.

August data shows sharp recovery

The company management said collection efficiency of the Bengaluru-based firm improved to 82 per cent in August after taking a knock in April due to the nationwide lockdown. The reading stood at 74 per cent in June and 76 per cent in July. Full or partial paying customers accounted for 85 per cent of its base, against 83 per cent in June and July.

Excluding Maharashtra, where the cases are high, 89 per cent of customers are paying the dues. The company made Rs 484.60 crore disbursements in August, that too only to those borrowers who were making one-time payments.

The loan book under moratorium declined to 18 per cent of the total book in August from 24 per cent in July and 100 per cent in May. The lender said it had cash and equivalents of Rs 1,778 crore at the end of August, undrawn sanctions of Rs 424 crore and new sanctions in pipeline of Rs 2,705 crore.

History offers comfort

Investec in a note said last month that the MFI’s business model strength, risk management, conservatism and customer centricity are visible in asset quality, especially during shock events like demonetisation.

It noted that CreditAccess’ asset quality was way better than peers by 2 times during demonetisation, while collections from overdue customers were 3-5 times better than the industry average.

Drawing a comparison with the past, the brokerage said the company witnessed similar delinquencies as the industry in the initial period of demonetisation, but the MFI was able to recover delinquent accounts later even in the 90-plus buckets.

“In microfinance, the usual rule is that if a loan crosses 90-plus days, then chances of recovery become negligible. The company was able to bring down 10 per cent plus of its PAR 90+ to lower buckets versus industry experience of less than 1 per cent. This, we believe, is a strong testament of its business model, risk management and conservative processes,” it said.

CLSA 2Agencies

CLSA said the microfinance industry showed robustness during demonetisation and bounced back to normal levels within 9-10 months. “We expect the industry to repeat higher provisions (in line with the demonetisation era) and efficiently manage the stress from the current pandemic,” it said.

Market share set to rise

The market share of the NBFC is set to rise after it acquired Madura Microfinance (MMFL) in March 2020. Analysts pegged CreditAccess’ market share in the higher fragmented market to 5 per cent, with a dominant market shares in Tamil Nadu, Maharashtra and Madhya Pradesh.

“CreditAccess Grameen is uniquely positioned to capitalise on the highly underpenetrated credit in rural areas with one of the lowest lending rates and one of the best operating cost efficiencies. The company’s joint liability group (JLG)-based lending, especially to women customers in the under-served rural areas, has helped it become a leader in the industry. Its merger with Madura Microfinance will help the company diversify its portfolio and expand branches,” HDFC Securities said.

The company is promoted by CreditAccess Asia NV, a multinational company specialising in MSE financing, and is backed by institutional investors and has microlending experience through its subsidiaries in four countries in Asia.

CLSAAgencies

HDFC Securities said the company has a strong liquidity profile and adequate capital buffer, which provide an additional safety cushion. “Moreover, foreign promotor support provides access to global fundraising opportunities,” it said.

Valuations

CLSA values the stock at 2.6 times September 2022 adjusted book value to arrive at a price target of Rs 840. It feels the premium valuation of the stock is likely to sustain due to its market leadership position in one of the fastest-growing loan segments, with high growth and high return ratios despite the unsecured nature of the loan.

HDFC Securities said investors can buy CreditAccess Grameen at prevailing price and add the scrip around the Rs 586-590 band for a base case target of Rs 733 and a bull case target of Rs 801 over the next six months. The stock closed at Rs 708.30 on Friday.

“We have envisaged 26 per cent growth in NII, 33 per cent in pre- provisioning operating profit and 37 per cent in net profit over FY20-22 on the back of fast growing nature of the company and synergy benefits from merger with Madura Microfinance. Advances are likely to grow at 18.2 per cent over the same period. Asset quality might deteriorate in FY21, but we feel that the situation will start normalising from FY22. The stock currently trades at 2.5 times FY22 price to book value, which looking at the growth potential has room for decent upside,” it said.

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