By IIFL Securities
CreditAccess Grameen (CAGL) is a leading Indian microfinance institution. It has competitive edge over peers owing to (a) rural focused business model (82% rural borrower base), (b) contiguous district-based expansion strategy (in Q2FY19, 82% portfolio growth came from districts outside the top-10), (c) weekly collection model (aiding healthy asset quality & repetitive business), and (d) lowest cost/income ratio. We expect its credit cost to decline to 1.3% in FY21E (2.6% in FY18) and RoA to improve by 116bps to 4% over FY18-21E.
Considering multiple growth levers, we value the stock at 2.3x FY21E P/BV and recommend ‘buy’ with target price of Rs 514.
CAGL is likely to register a 53% earnings CAGR over FY18-21E, aided by higher loan growth, stable NIMs, falling credit costs and moderating cost ratios. In FY16, it had worked on 5x financial leverage with 20% RoE, however, due to recent fund raising through IPO, its leverage declined to 2x in Q2FY19, nonetheless it is expected to improve to 3.3x by FY21E. Thus, with earnings improvement and leverage, its RoE is estimated to increase from 11.8% in FY18 to 16.9% in FY21E.
CAGL has reported industry leading gross AUM and disbursement CAGR of 57% and 56% respectively over FY14-18. Its focus on under penetrated rural credit market, higher client retention track record and comfortable capital adequacy ratio at 40.4% (Q2FY19), will lead to 37% loan book CAGR over FY18-21E. The stock is trading at 1.8x FY21E P/BV, which is below its intrinsic value, given its rural focused model and better earnings prospects.
CreditAccess Grameen is a leading Indian microfinance institution (headquartered in Bengaluru) focused on providing micro loans to economically backward women customers (accounting for 82% of customers for Q2FY19) predominantly in Indian rural areas. Its focus customer segment is women having an annual household income of `1.6 lakh or less in urban areas and `1 lakh or less in rural areas. CreditAccess Asia NV currently holds an 80.3% stake in the company as on September 2018.