Buy This Multibagger NBFC Stock For Robust Gains, Stock Likely To Give Up To 45% Returns: ICICI Securities

Leading brokerage firm ICICI Securities in its latest report on CreditAccess Grameen Limited (CA Grameen) recommends "BUY" the stock of the company with a target price of Rs. 1,300 per share. According to the given target price, if the stock is purchased at the current market price (CMS) it would likely surge up to 45%. CA Grameen is a mid cap Non-Banking Finance Company (NBFC) company having a market cap of Rs 14,018 crore.

CMP, 52-Week Low & High, and Returns

The Current Market Price (CMP) of CA Grameen is Rs 904 per share on NSE, gaining 0.38%. The stock touched its 52 week high in June 2022 at Rs 1,154, while the 52-week low-level stock hit in January 2022 at Rs 560.25. It made its debut on the stock market on 23 August 2018.

Since its listing, it has given multibagger returns of 113.73%. However, in the last 1 and 3 months, it has given 8.91% and 12.04% negative returns. In a year, it has given 36.45% positive returns in the last 1 year. In the last 3 years, it has given 11.33% positive returns.

Poised to maintain leadership in MFI space; commands incremental market share of >8% as of Sep’22 in MFI credit

A two-decade experience in handling various credit cycles in the MFI space has helped CA Grameen to build a sustainable, scalable and resilient business model. Strong recovery in credit demand post pandemic and steady improvement in asset quality reinforces our view that the MFI space is in for a strong upcycle over the next couple of years. While CA Grameen remained cautious during the covid phase, it accelerated growth Jun'21 onwards. AUM growth remained robust at 24% YoY in Sep'22 and management remains confident of delivering >25% growth for full-year FY23. The target seems realistic given its incremental credit AUM market share at >8% vs outstanding market share of 6% as of Sep'22.

Vision 2025: Harmonised MFI regulation to ensure successful execution

CA Grameen, post its >2 decades in the microfinance space, laid down its aspiration to become the preferred financial partner for 10mn low-income households lacking access to credit, by 2025. Company is piloting various new innovative products (e.g. payment products, saving & investment products via partnerships, insurance, etc.) designed on the evolving needs of its core target customer base.

Improved visibility on delivering >4% RoA in FY24E; margin expansion and normalisation of credit cost to drive profitabilit

Post the removal of pricing cap, CA Grameen implemented risk-based pricing, which would likely lead to asset yield expansion in the coming quarters. Further, recent credit rating upgrade may result in lower cost of borrowing going ahead. Management expects 60-70bps margin expansion in FY23 and a further 50-60bps in FY24. Considering that the bulk of stress recognition and provision requirement was already absorbed during FY21-FY22, and that the stress book is negligible with PAR 0 at 3%, we expect credit cost to settle at <2% in FY24E.

Expanded target market and leadership in MFI space to ensure industry leading growth going ahead

CA Grameen (on standalone basis) delivered a robust 35% AUM CAGR between FY17-FY22, driven by 15% CAGR in customer base during the same period. Considering the expanded target market post MFI regulation harmonisation and the company's deep distribution network (~1,675 branches), we expect CAGL to deliver a robust 23% CAGR over FY22- FY24E.

Focus on new customer acquisition

In the past 2 years, net borrower base declined to 3.8mn from 4.1mn pre-covid as management was cautious in acquiring new customers given pandemic-led disruption. Higher write-offs during the past 6 quarters also resulted in decline in the borrower base. However, with collections reaching near-normal levels and completion of process migration as per the revised regulations, management resumed customer acquisition in Q2FY23. It acquired 0.76mn new customers on standalone basis and added 0.15mn on net basis. On a consolidated basis, net customer base expanded by 3% QoQ - highest QoQ growth in past 8 quarters. Further, bulk of the new customer acquisition was outside CA Grameen's top-3 states (Maharashtra, Tamil Nadu, Karnataka). Company expects Rajasthan, Jharkhand, Uttar Pradesh, Bihar and Gujarat to be its new key growth drivers.

 

Risk-based pricing approach to improve profitability

Under the earlier pricing regime, lending yield was determined on the basis of 10% spread over borrowing cost, hence pricing was not appropriately capturing the structural upmove in normalised credit cost over a period. As a result, NBFC-MFIs like CA Grameen were following formula-based pricing instead of risk-based pricing. Considering the structural upmove in normalised credit cost from 20-25bps pre-demonetisation to 60-70bps pre-covid, CA Grameen has hiked its lending rate by 130bps during past six months. This would drive higher profitability than the historical average given flexibly in determining lending rates based on the prevailing credit cycle.

Geographical diversification to remain key strategic goal

CA Grameen has adopted contiguous expansion rather than quickly building a pan-India network. Hence, its top-3 states' (MH, TN & KTK) contribution still remains higher at ~80% in FY21. But the company intends to reduce it to 60-65% by 2025 as a part of its 2025 Vision. CA Grameen has already identified new growth states, which include inter alia Madhya Pradesh, Chhattisgarh and Rajasthan.

Stressed pool continues to subside at an accelerated pace

PAR portfolio continues to improve - PAR 0 / 30 / 60 / 90 for CAGL fell to 2.4% / 1.9% / 1.6% / 1.4% by Sep'22 from 3.6% / 3.0% / 2.6% / 2.3% in Mar'22. Similarly, for MMFL it fell to 6.8% / 4.8% / 3.9% / 3.3% by Sep'22 from 11.1% / 7.5% / 5.9% / 4.9% in Mar'22, respectively. The improvement was driven by steady collections at ~97% (ex-arrears) throughout Q2FY23 for CA Grameen, while collections for MMFL remained lower at ~94%. Collections, ex-NPL customers, remained at ~99% for CAGL and ~96% for MMFL. The restructured pool too remained lower at only 0.5% for CAGL. Total stressed pool stands at 3% (PAR 0 2.4% + restructured book at 0.5%) for CA Grameen against which it carries ECL provision of 2.5%.

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Valuation

The brokerage said, "We reiterate our BUY rating on CreditAccess Grameen (CA Grameen) and believe the sharp correction (>10%) in stock price over past 15 days is unwarranted considering the strong H1FY23 performance and sector tailwinds. Company is well positioned to maintain its leadership in the MFI space as reflected in its incremental share in MFI lending at >8% vs outstanding market share of 6% as of Sep'22. Further, it has laid down its goal to become the preferred financial partner for 10mn low-income households lacking access to credit, by 2025."

it added, "We believe CA Grameen is well placed to deliver >4% RoA driven by credit cost moderation in H2FY23E (2.7% in Q2FY23), NIM expansion and continued growth momentum. Post migrating to risk-based pricing method in Apr'22, it has increased lending rate by ~130bps and this has started reflecting in its blended asset yields. Portfolio yield expanded by a sharp 70bps QoQ to 19.1% in Q2FY23 vs 18.4% in Q1FY23. Considering that the bulk of stress recognition and provision requirement was already absorbed during FY21-FY22, and that the stress book is negligible with PAR 0 at 3% (PAR 90 at 1.8%), we expect credit cost to settle at <2% in FY24E."

Key risks: i) Stress unfolding higher than expected, and ii) lower-than-expected AUM growth.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.