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Equity Research: CreditAccess Grameen Limited
CreditAccess Grameen Limited looks strong with growth in loan book at 23% along with stable operating expenses along with declining credit costs which should drive PAT growth of 66% over FY22-24E. Healthy growth in earnings should drive RoE to ~19% by FY24E.
CreditAccess Grameen Limited (formerly known as Grameen Koota Financial Services Pvt. Ltd.) is a microfinance institution providing a wide range of financial services to the rural poor and low-income households particularly women. It is registered with the Reserve Bank of India under the NBFC-MFI category. The company provides loans primarily under the joint liability group (JLG) model. .CreditAccess Grameen is promoted by CreditAccess Asia N.V. a multinational company specializing in MSE financing (micro and small enterprise financing).CreditAccess Grameen Limited was incorporated as a private limited company with the name 'Sanni Collection Private Limited (SCPL)' on June 12 1991 at Calcutta West Bengal India. In 1998 the company obtained NBFC registration. In February 2007 the entire shareholding of SCPL was acquired by Vinatha M. Reddy Vijitha Subbaiah and Suresh K. Krishna in their respective individual capacity. Subsequently in October 2007 the microfinance business being operated under T. Muniswamappa Trust ('TMT') a public charitable trust engaged in the business of providing micro loans in Karnataka was transferred to SCPL. The microfinance business being operated under TMT was established as a programme under the name 'Grameen Koota' in 1999.
CreditAccess Grameen (CREDAG) Looks strong with an upside potential of 25% from CMP. After witnessing a covid-induced slump for two years, the microfinance industry is poised for a cyclical upturn with new RBI norms providing further ballast to and a level playing field for NBFC MFIs. We believe that CREDAG is best placed to capitalise on this growth opportunity, with calibrated diversification and strong capital position. A high-quality promoter-management combo is a clear positive in a sector that is not only continually beleaguered but beset with top management problems in many companies. As a result, it is believed that it deserves premium valuations, buttressed also by high loan growth and return metrics.
Strong player among the peers: The MFI sector has witnessed multiple upheavals and peers (incl. small finance banks) have faced top management challenges. CREDAG stands out amongst all its MFI peers due to its strong promoter backing and stable management team. Further, CREDAG’s differentiated weekly/bi- monthly collection model along with rural focus and strong underwriting standards have enabled it to maintain asset quality better than peers. CREDAG’s contiguous branch expansion strategy has enabled it to penetrate deeper in key states of presence while simultaneously building operational efficiency. Given that CREDAG’s focus was to manage liquidity and improve asset quality, growth slowed down in FY21 (13% YoY) but accelerated in FY22 (22% YoY). Disbursements have breached pre-covid levels and growth is expected to come back in the next few years following cyclical tailwinds as also benefitting from new regulatory norms. We expect CREDAG’s consolidated loan book to grow at 23% over FY22-24E.
Improvement in the asset quality: CREDAG saw sharp rise in NPAs as the MFI sector was buffeted by covid, with credit costs increasing to 6.8% in FY21 (vs. normalised levels of 1-1.5%) as the company took aggressive write offs both in the standalone and subsidiary’s books. However, management expects credit costs to taper down to 1.8-2% (vs. 4.5% in FY22) in FY23 as collection efficiencies reach pre-covid levels. It is conservatively factored in credit costs of 220bps over FY23-24E, leaving potential upside.
Improved Asset Quality due to differentiated collection model:
CREDAG has been able to manage its asset quality better than peers largely due to its weekly/fortnightly collection model compared to monthly model followed by its peers. Given that the micro finance business is essentially collection driven, CREDAG’s strategy to follow weekly/fortnightly model has enabled it to connect with its customers regularly. Further, weekly installments also reduce the cash outflow compared to monthly EMIs and help borrowers in managing their cash flows. CREDAG reported one of the lowest NPAs amongst its peers. CREDAG has the lowest NPAs amongst peers at 4.67%.
Strong underwriting standards and rural focus also help in keeping asset quality under control. CREDAG prefers rural markets over urban as borrowers in urban markets largely consist of migrant workers having less accountability and social pressure than a rural borrower. Further, credit bureau check for existing customer is done both at the time of loan application and disbursements and rejection rate is higher at 35-40%.
Micro finance is an operationally heavy business as it involves multiple physical interactions with borrowers to understand their behavior and cash flows. Further, CREDAG’s weekly/fortnightly collection model also entails higher costs given higher number of physical meetings compared to a monthly model. However, CREDAG has managed to bring in efficiency in its operations due to its branch expansion strategy. A particular geography is selected based on its socio-economic and political background where competition is generally low. When a branch in a district gains scale, it moves to an adjoining district and penetrates deeper into that geography.
CREDAG offers multiple products across ticket sizes catering to different needs of its borrowers. It also provides flexibility in choosing repayment options i.e. weekly/bi-weekly/monthly based on their cash flows. This has resulted in borrower retention ratio of 80-85%, thus lowering the cost of new customer acquisition.
The micro finance industry has seen multiple headwinds in the past decade starting from the Andhra crisis followed by demonetization and finally covid. As highlighted earlier, what has helped CREDAG in maintaining lower NPAs across these bad cycles is its differentiated collection mechanism and strong underwriting standards.
The micro finance industry has been the most impacted by covid given the vulnerable customer segment that MFIs cater to. CREDAG too has seen severe impact on its asset quality. In the last one year, CREDAG was able to improve its collection efficiencies every quarter and lower its delinquencies as it was able to recover cash from customers before they could utilize it elsewhere due to its weekly collection model. Collection efficiencies have started inching back to pre-covid levels.
CREDAG has a policy of writing off loans which are 270+ dpd. In the quarter ending June 2021, share of non-paying customers in standalone book was at around 12.3% which has gradually come down to 2% as of March 2022 as collection efficiencies have improved. In FY22, company has written off 1.8 lakh borrowers. These write offs were largely done for borrowers who were involved in non-essential services/tourism business and hence, were unable to recover even as covid restrictions were gradually lifted. In MMFL’s book, the NPA recognition in accordance with CREDAG’s model of 60+ dpd was done from Q2FY22 onwards and hence the non-paying pool of ~3% will be written off over the next 2-3 quarters. Thus, management has guided for credit costs of 1.8-2.0% in FY23. Loan book growth will also be driven by additional branches both in its key states of operations and in other states. CREDAG used to add 150-200 branches pre covid but this expansion was stalled due to covid and it added only 35 branches in FY21. As the economy opened up, it resumed its branch expansion strategy and has added 211 branches in FY22 itself. Management has guided that it will keep adding 150-200 branches every year which should drive its loan book growth apart from borrower addition.
The new MFI regulations require NBFC MFI players to have minimum contribution from micro finance loans at 75% (vs. 85% earlier). This bodes well for CREDAG’s strategy to diversify into secured loan portfolio. Currently, 99% of its consolidated GLP consists of group loans and balance is coming from retail finance. Currently, it offers retail loans from 71 branches focusing on the top 5-6 markets. It intends to diversify into other segments like gold financing, affordable housing finance, 2 Wheeler loans, LAP. Gold loans and 2W loans will be mainly for captive customers to be used as a retention strategy. It has currently started pilots in 7-8 retail finance branches and will eventually scale it up across all the retail branches. Management intends to increase the share of secured portfolio to 10-12% in the next 2 years.
Gold loans
CREDAG’s focus in this segment is mainly on its captive customers who have availed gold loans from larger NBFC players. Around 15-20% of its existing customers already avail gold loans and CREDAG will be targeting these customers primarily. CREDAG’s diversification in this segment is mainly to retain customers and not to become a major player in the space.
2 Wheeler loans
CREDAG will be following a pre-approved loan model to its existing customers and will not be opting for the dealer sourcing model. This will enable it to lend at lower rates compared to peers.
Affordable Housing loans and LAP
These products will not be restricted to its existing customers and will be offered to borrowers with higher leverage requirement. The target market for AHF loans will be mostly given in tier 3/4/5 cities.
Financials:
Conclusion:
CreditAccess Grameen (CREDAG) looks strong with a target price of Rs.1,250. Positive stance on CREDAG is based on the premise of its superior business model that has historically generated industry-best ROE on the back of sturdy 40% CAGR in AUM and 35% CAGR in earnings in the period FY17-22. This is even as the sector has witnessed multiple external shocks across various time-cycles and seen the exit of some of the players given limited capital/huge credit losses, an outcome of weak lending model or collection mechanism. Strong growth in loan book at 23% along with stable operating expenses along with declining credit costs should drive PAT growth of 66% over FY22-24E. Healthy growth in earnings should drive RoE to ~19% by FY24E.
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