While valuations are reasonable, growth is likely to take a pause
BHAFIN’s disclosures show impressive resilience in collections, with cumulative 89% of instalments due since demonetisation announcements being collected. This remains a key monitorable, and the next few weeks are crucial.
At the same time, growth is likely to take a pause, as the company is constrained by cash (recycling collected cash).
Overall disbursements are less than 70% of collected cash, and 30% below 2Q run rate since the announcement. In our models, we now build slowdown in disbursements lasting a couple of quarters (10% lower disbursements vs 1H17), leading to slowdown in FY17 AUM growth to sub-20%. We also factor in some delinquencies (2% GNPA).
Under these assumptions, the tax exemptions could apply for entire FY18 profits. Overall these changes lead to 17% EPS cut for FY17 and 10-11% for FY18/FY19 (TP falls to R700). While we have had a cautious view on the stock, the recent correction (25% from peak) now implies limited downside, in our view. We upgrade the stock to Neutral.
Impressive resilience in collections
BHAFIN disclosed some information on its collections since the government’s demonetisation announcement. To give a context to BHAFIN’s activity, the company continued collections using old 500/100 notes for a couple of days after the announcement, with full collection efficiency. On 11 November, upon clarification from RBI, the company discontinued collections in invalid notes, and that led to a slowdown in collection efficiency. However, the numbers disclosed by the company recently indicate that collections have improved (with borrowers paying back previous week’s missed instalments as well), and now 89% of total dues over the last couple of weeks have been collected. We got a similar feedback on improved collections from the other MFI/small banks we spoke to.
Not a disaster, but how much pain left (if at all)?
These details show that the MFIs have managed the initial couple of weeks of the demonetisation fairly well. In our models, we build slower disbursement growth in 2H FY17 (flat y-o-y, down 10% HoH) compensated by some pick-up in FY18, and a rise in GNPA to 2% over the next few quarters. Under these assumptions, company’s tax benefits could apply for the whole of FY18, leading to 10-12% earnings cuts for FY18/FY19. With roll forward, our TP falls to R700.
We highlight that every 100 bp higher GNPA could hurt target price by 4-5%.