“BUY” This Mid Cap NBFC Stock For 37% Upside Says Axis Securities

CreditAccess Grameen Limiteds stock has a target price of Rs. 715 per share with a buy rating according to Axis Securities Limited. The brokerage anticipates a 37 percent gain for the stock, which was trading at Rs. 521 at the time of the brokerages buy call, but is currently trading at a market price of Rs. 594 per share on the NSE. CreditAccess Grameen Limited, headquartered in Bengaluru, is a leading Indian microfinance firm centered on issuing microloans to women customers of rural regions of the country. Axis Securities in its research report has noted that CAGs operations in H1FY21 were severely impacted due to nationwide lockdowns and the moratorium offered by the RBI, forcing the company to adopt a cautious approach towards disbursements. However, it regained its lost momentum in H2FY22 as disbursements bounced back to near pre-COVID levels. This translated into a decent GLP growth of 13% YoY and was mainly driven by increasing ticket size as CAG focused on existing and higher ticket size customers. The companys NII growth was strong at 29% YoY despite higher-than-usual interest reversals and excess liquidity putting pressure on NIMs. Though Opex growth stood at 37% YoY, the C-I ratio remained steady at 38.1% in FY21. PPOP growth of 37% YoY was aided by an improvement in NII and a large direct assignment transaction gain. The uncertainties due to COVID-19 resulted in higher provisions, keeping credit costs elevated and de-growing PAT by 60% YoY. According to the brokerage Given the unsecured nature of business and the inherent risk of higher default in the MFI segment during disruptions, CAG witnessed asset quality stress with GNPA inching up sharply to 4.4% from 1.6% in FY20. The company wrote off loans worth ~Rs 450 Cr (CAG+MMFL). Its persistent focus on improving Collection Efficiency (CE), especially post moratorium period, resulted in the companys CE inching back to near preCOVID levels at the FY21 end. CE inc./excl. arrears stood at 97/94% for CAG and 91/90% for Madura Micro Finance Ltd. (MMFL). The company was successful in reducing the PAR0 for CAG, though PAR0 for MMFL continued to remain at alarming levels. CAG carried an ECL provision of 5% against GNPA of 4.4% in CAG and 5.1% against GNPA of 4.7% in MMFL. The restructured book remained under control at 0.7% of GLP (Rs 76 Cr) in FY21, significantly lower than most of its peers.Advertisement The brokerage has claimed that The companys focus on rural areas continued which improved its share of rural areas to 85% from 82% in FY20. Adaptation of life cycle along with a customer-centric approach enabled CAG to maintain an 87% customer retention ratio in FY21 against 85% in FY20. CAG has a granulated GLP with ~78% of districts having less than 0.5% of GLP and the Top 3 districts forming only 14% of GLP vs 15% in FY20. According to the brokerages buy call The focus on rural markets in the MFI business as well as on the retail finance book provides the company with a large addressable market to grow over the medium term. Given the rising concerns of a possible third wave with the new COVID-19 variant, we remain conservative and trim its EPS estimates by 2/5% over FY23/24E. However, we believe current valuations are attractive and provide a good entry point from a long-term perspective. We recommend a BUY on the stock and value CAG at 2.3x H1FY24E BV to arrive at a target price of Rs 715/share, implying an upside of 37% from CMP. We believe its target multiple reflects the superior return profile (~15+% ROE by FY24E with a scope of further improvement given normalization of macro-conditions), large growth opportunity in the rural markets as well as inherent risks in the MFI business. The stock has been picked from the brokerage report of Axis Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.