Company likely to navigate crisis better than peers; ‘Buy’ maintained with TP of Rs 585.
CreditAccess Grameen’s (CAGL’s) Q4FY20 result is characterised by two key events: (a) completion of first phase of Madura acquisition (~76%) and (b) pro-active building of Covid-19-related contingency provision of ~ Rs 0.8 bn (87bps of loans). Key highlights of the quarter: (i) strong 38%/17% y-o-y growth in AuM/borrowers; (ii) ~40bps decline in cost of borrowing to 9.6% (marginal cost of borrowing is lower by ~50bps at 9.1%) even in a most challenging quarter; (iii) GNPA increase to 1.57% (0.85% in Q3FY20); and (iv) ~70% y-o-y decline in standalone PAT to Rs 228 mn due to merger-related expenses ( Rs 150 mn) and elevated credit cost due to Covid-19.
Though the merger brings in synergy, decline in consolidated CAR to 23.6% (post acquisition) and Madura’s high concentration in Tamil Nadu (most districts in red zone) poses near-term risk. However, strong execution track record, weekly collection model, customer profile (~35-40% unique and ~75% >1 year) and ability to raise funds at competitive rates, would ensure CAGL navigating the current challenging phase relatively better than peers and emerging stronger in post Covid-19 era. Maintain Buy with a target price of Rs 585.
Resumption of business operations from 1st Jun’20 is positive
Given significant relaxation of the lockdown, CAGL is geared to restart business operations from 1st June’20. With more than 80% of customers engaged in essential activities, it expects collection efficiency to remain around ~70% in Jun’20. Strong liquidity position; ability to raise funds at competitive rate
Lower marginal cost of borrowing in Q4FY20 at 9.1% would ensure margins sustaining at current level, if not improving, in FY21e. With it focusing on resuming collection and cumulative sanction/applications of ~ Rs 20 bn till Aug’20, we believe CAGL is well placed to sail through the current liquidity cycle.
AUM growth remains strong
While CAGL continues to deliver industry-leading AUM growth at 38% y-o-y, driven by 17% y-o-y growth in customer acquisition, acquisition of Madura added ~21% to total AuM as of Mar’20. Significantly lower ticket size of Madura’s customer is likely to ensure revival of AuM growth quicker than peers. Standalone retail finance book now constitutes 5% of total AUM.