Steady improvement in collections for BHAFIN now allows us to put a ceiling on the eventual portfolio losses—at ~5%. With provisions in Q4 plus our modelled provisions over the next Q4, we believe this issue is adequately factored into the earnings.
While demonetisation has hit the microfinance (MFI) industry, recent industry data shows that BHAFIN’s portfolio management has been far superior. We attribute this to its robust operating model including weekly collection. At the same time, BHAFIN remains the most cost-efficient MFI, and there could be further opex gains from technology adoption. This is a clear upside risk to our earnings estimate.
Given the vulnerabilities exposed by demonetisation, investors may start looking at this business with a 17% across-the-cycle ROE. However, low penetration implies growth should remain the fastest at ~25% (long term). In this context, we find the stock attractive now. A potential M&A deal provides an upside option. We increase our EPS estimates by 1-3% on opex efficiency gains, and raise TP to Rs800 (from Rs760). We upgrade the stock to Outperform.
Demonetisation brings into focus the political vulnerabilities of this business model. As against the optimism before this event (when the model was seen to be immune to such risks), we believe going forward investors need to factor in such events once in 5-6 years. In our analysis, the company should be able to deliver ~17% ROE across the cycle the numbers for FY17/18 are coloured by tax benefits. With low penetration giving good growth runway, there is visibility of 24-25% growth for multiple years.
Despite staying true to the weekly collections model, BHAFIN reports among the best opex efficiencies in the industry. While we build in small improvements going forward, bigger jumps could accrue if technology adoption accelerates. Separately, the board has decided to explore strategic options (including sale to a bank).
BHAFIN being the only surviving NBFC-MFI with an established nationwide franchise and a proven execution track record as seen from superior opex and demonetisation loss rates and three prospective suitors, we believe that M&A is unlikely to happen at a discount.