Stock should re-rate after possible 1-2 quarters of further high provisioning.
We recently visited BHAFIN’s operations in the Vidarbha region in Central India—one of the worst affected regions on collections post demonetisation, which accounts for 5% of BHAFIN’s nationwide portfolio. Our takeaway is that the peak of collections pain is behind us, with numbers improving WoW. We also conclude that news flow on loan waivers should have negligible/nil impact on the business. From our discussions, the borrowers appear to understand that the waivers being announced are for Agri-loans from banks, while MFI loans are different.
The company has not been adding any new borrowers since demonetisation (unlike elsewhere in the country). Fresh loans are disbursed only to fully current borrower groups. This seems to have helped reinforce better behaviour. Borrowers we spoke to were aware of the credit bureaus. We continue to see value in the BHAFIN stock, and retain our Outperform rating. While there could be 1-2 quarters of further high provisioning, this is well known to the markets. Looking beyond, we believe that the stock should re-rate as fresh slippages stay in check and growth/profitability improve.
Peak of demonetisation problem over: The region saw significant political interference in the aftermath of demonetisation—with local politicians eyeing a series of local elections. RBI and government/administration had to step in to quell rumours of all MFI loans being waived, etc. Collections for BHAFIN bottomed at 55% for the region around Feb-March. Since then collections have recovered swiftly—currently running at 85-90 %. New client acquisition has not yet started.
Loan waiver almost a non-issue: The borrowers we spoke to understood the distinction between farm loans that are being waived and microfinance loans. The chatter about loan waiver for MFI loans peaked during the local election phase, and is now absent. Our overall conclusion at the moment is that news flow on farm loan waivers may not have a material negative impact—at least as far as the Maharashtra portfolio is concerned.