About the Company

CreditAccess Grameen Limited (formerly known as Grameen Koota Financial Services Pvt. Ltd.) is a microfinance institution providing a wide range of financial services to the rural poor and low-income households, particularly women. It is registered with the Reserve Bank of India under the NBFC-MFI category. The company provides loans primarily under the joint liability group (JLG) model. Its primary focus is to provide income generation loans which comprised 87.02% of its total JLG loan portfolio, as of March 31, 2019. It also provides other categories of loans such as family welfare loans, home improvement loans and emergency loans to existing customers.

CreditAccess Grameen is also an aggregator of the National Pension Scheme (NPS) of the Government of India. As of June 30, 2019, CreditAccess Grameen had 753 branches across various districts in the states of Karnataka, Maharashtra, Madhya Pradesh, Chhattisgarh, Tamil Nadu, Odisha, Kerala, Goa, and the union territory of Puducherry.

Q3 2020 Updates

Financial Results & Highlights

Consolidated Financials (In Crs)
  Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 453.56 350.76 29.31% 392.97 15.42% 1223.33 946.88 29.20%
PBT 145.92 153.71 -5.07% 127.01 14.89% 421.07 380.12 10.77%
PAT 107.99 99.74 8.27% 100.88 7.05% 304.72 245.43 24.16%

Detailed Results

    1. The company had a good quarter with more than 29% growth in YoY revenues.
    2. The profits for the company rose 8.3% YoY while PBT declined 5% due to an increase in expenses (impairment of financial instruments).
    3. The company made disbursements of Rs 2977 Cr in the current quarter which was up 68.9% YoY.
    4. The gross loan portfolio has risen to Rs 8872 Cr registering a YoY growth of 45.8%.
    5. The number of branches also expanded substantially to 928 growing 40.8% YoY.
    6. The company now boasts of an active borrower base of 2.77 million which is also up 22.5% YoY.
    7. The company announced the acquisition of Madura Microfinance which was the 11th largest MFI in India.
    8. The net interest income for the company rose 28.1% YoY showing strong growth.
    9. Operating expenses to gross loan portfolio rose to 5.1% which is a fall of 40 bps QoQ.
    10. ROE was at 16.5% from 17.7% last year.
    11. GNPAs was at 0.85% from 1.01% last year.
    12. The company maintains a provisioning of 1.61% thus ensuring NNPA of 0%.
    13. The weighted average cost of borrowing for the company remained stable at 10% in Q3.
    14. The company maintains a comfortable liquidity position by maintaining a positive static liquidity gap every month.
    15. The company has a positive ALM mismatch with an average maturity of assets at 15.5 months and an average maturity of liabilities at 26.6 months.
    16. The company boasts of collection efficiency of 98.3%.
    17. The geographic distribution of portfolio exposure is well distributed across 156 districts with only 1 district having more than 5% exposure and top 5 districts only having 21% exposure.
    18. The loan book consists of 78% income generation loans or IGL which yield 19% to 21% thus ensuring a high overall portfolio yield of 19.7% in the current quarter.
    19. The company continues to provide PAT guidance for FY20 of Rs 425 to 450 Cr.

Investor Conference Call Highlights

  1. The management has stated that the situation in Karnataka has been solved and the on-time collections in the affected districts were more than 70% and thus the provisioning for the quarter was higher as compared to Q2. The company’s exposure in these 2 districts is less than 1%.
  2. The management does not expect any big changes in the provision going forward and the company should be able to achieve its target PAT guidance by the end of the year.
  3. The management has mentioned that overall credit cost should not exceed by more than 1%.
  4. The management has stated that the infrastructure growth next year will not as high as it has been in FY20. The company will be focussing on stabilizing and consolidating at the new locations in most of next year.
  5. The company can see an increase in ticket size mainly on the back of repeat customers who come back for bigger loans. Another factor here is that the regulator has increased the limit for GLP to Rs 1.25 Lac. Thus management expects an annual increase of almost 10%.
  6. The management has stated that the company’s efforts to control risk exposure from geographical concentration has helped the company avoid major loss of operations like in the case of the recent Karnataka districts.
  7. The management has stated that Madura will continue to do business according to its established mandate and only after the acquisition is over will the management look for how to complete the merger and integrate the whole entity.
  8. The management expects the individual loans business to go slow and steady at present until the management crystalizes a definite operating mechanism and plan after which the company can push for robust growth in this segment.
  9. The management does not see any big departure in terms of growth rate and ROE once the acquisition is over. This is because Madura is in the same business and has a similar operating mechanism as the company and thus the management believes that the company will not have much problem integrating Madura.
  10. The company sees yields stabilizing at current levels as the company has increased the interest charged in November 2019.
  11. The management has mentioned that new branches can take anywhere between 12 to 18 months to turn profitable for the company.
  12. The management has explained that typically the loans granted to new customers is lower than old customers so that the company can observe and assess the customer repayment behavior and cash flows personally and thus upgrade the repaying customers in the next lending round.
  13. The individual loans are business loans to old customers with good repayment history and cash flows. The customers here have to have been associated with the company for at least 3 cycles.
  14. The company is not targeting any specific states and districts and it is only concentrated on expanding into districts or states that are contiguous to the existing territory for the company.
  15. This year 40% of customers should be first-time borrowers while 42% of customers have always borrowed from the company only.
  16. The company has 4 districts with >3% portfolio and it expects to reduce all districts to <3% portfolio in the next 2 years.
  17. The proportion of JLG to retail loans is expected to remain at current levels for the next 2-3 quarters at least.
  18. Madura brings in 11 lac customers which have only around 5-6% of overlap which means that the company will directly expand its customer base by a big margin through this acquisition.
  19. The management expects growth to taper down and stabilize at a CAGR of 25-30% for the next 5 years.

Analyst’s View

Credit Access Grameen has emerged as one of the most reliable microlenders in the country. Their revolutionary JLG model has helped bring communities of borrowers together and helped reduce overall risk from their lending to a very large extent as seen in their low NPA numbers. The company has delivered another good quarter performance with more than 45% loan book growth. The company has also been expanding rapidly in the past few quarters and the management has guided that in FY21, the company will mainly be focussing on leveraging these new branches and bringing to profitability. The company has handled the situation in Karnataka admirably and its conscious decision to reduce geographical concentration risk has worked well to prevent big loss of business in such cases. The company has also announced the pending acquisition of Madura Microfinance which should help the company gain a ready and set customer base with good data and history of repayment. It remains to be seen whether the company will be able to maintain its current growth pace of >30% next year when it has decided to cool off aggressive expansion and focus on integrating new territories. Nonetheless, given its strong market position and exemplary operating and risk management practices, Credit Access Grameen remains one of the must-watch stocks in the Microfinance sector for any interested investor.


 

Q2 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % H1FY20 H1FY19 YoY%
Sales 392.65 310.09 26.62% 376.7 4.23% 769.35 596.15 29.05%
PBT 127 114.05 11.35% 148.13 -14.26% 275.14 226.4 21.53%
PAT 100.88 73.46 37.33% 95.83 5.27% 196.71 145.68 35.03%

Detailed Results

    1. The company had a stellar quarter with more than 27% growth in YoY revenues.
    2. The profits for the company rose in line with revenues to grow more than 37% YoY despite PBT growth of only 11% due to the reduced tax expenses.
    3. The company made disbursements of Rs 2186 Cr in the current quarter which was up 39.2% YoY.
    4. The gross loan portfolio has risen to Rs 7905 Cr registering a YoY growth of 36.4%.
    5. The number of branches also expanded substantially to 887 growing 35.2% YoY.
    6. The company now boasts of an active borrower base of 2.64 million which is also up 27.1% YoY.
    7. The company entered into the states of Gujarat, Rajasthan Bihar and Uttar Pradesh in Q2FY20.
    8. The net interest income for the company rose 26.2% YoY showing strong growth.
    9. Operating expenses to gross loan portfolio rose to 5.3% which is a rise of 50 bps QoQ.
    10. ROE improved slightly to 16.1% from 15.7% last year.
    11. GNPAs declined to 0.52% from 1.01% last year.
    12. The company maintains a provisioning of 1.23% thus ensuring NNPA of 0%.
    13. The weighted average cost of borrowing for the company remained stable at 10.3% in Q2.
    14. The company maintains a comfortable liquidity position by maintaining a positive static liquidity gap every month.
    15. The company has a positive ALM mismatch with an average maturity of assets at 14.7 months and an average maturity of liabilities at 23.7 months.
    16. The company boasts of collection efficiency of 98.8% which is exemplary for a small finance organization.
    17. The geographic distribution of portfolio exposure is well distributed across 156 districts with only 1 district having more than 5% exposure and top 5 districts only having 21% exposure.
    18. The loan book consists of 78% income generation loans or IGL which yield 19% to 21% thus ensuring a high overall portfolio yield of 19.5% in the current quarter.
    19. The company continues to provide PAT guidance for FY20 of Rs 425 to 450 Cr.

Investor Conference Call Highlights

  1. The management expects the overall cost of borrowing to be around 10% going forward.
  2. The management expects to maintain an AUM CAGR of 30% in the next 5 years.
  3. The company made fresh borrowings of Rs 1472 Cr in Q2 and around Rs 100 of this has been through overseas borrowing. The company also got a long term funding of Rs 300 Cr from a financial institution.
  4. The management sees a minimal impact on MFI business from the rural slowdown.
  5. The company has seen expenses rise sharply in the quarter because of branch expansion and new hiring due to the network expansion.
  6. The management has stated that normal branches start producing business in 2-3 months since opening and take around 14 months to breakeven. Thus the company can expect some ramp-up in performance in the next 2 quarters from this expansion.
  7. The management has stated that they will continue to use the direct assignment as well as securitization for funding requirements and will be considering whichever option is best for them at any given time.
  8. The company is still the only lender to 33% of its customer base. The company continues to maintain this number despite entering new states as its focus is only on rural areas which are still underpenetrated.
  9. The company added 76000 new customers in Q2.
  10. The company has mandated all loans have to be less than Rs 1 Lac and it restricts the loan amount to Rs 80000 for most customers.
  11. The company’s overall ticket size in UP, Bihar, Jharkhand, and Orissa is between Rs 25000-35000 with an average outstanding per customer at Rs 29000.
  12. The management has stated that it has not observed any overheating in any of its operating geographies and that the business continues to stay stable.
  13. The management has maintained that the company should be able to maintain NIM of around 12-12.5% and it will go down slightly when leverage goes up in the future. The current NIM level of 9.2% should be a bottom and it should normalize from next quarter onwards.
  14. The management maintains that the main reason for the high growth guidance for almost all players in the industry is that despite the wide footprint of the industry the overall penetration is still small and thus there is a lot of room to grow.
  15. The average household income of the borrowers is between Rs 1.2 Lacs to Rs 1.6 Lacs.
  16. The management has clarified that it expects higher disbursement in Q4 because as part of the company’s business model, most of the network/ branch expansion is done in Q1 and Q2 while the performance from these new locations starts to get reflected from Q3 and Q4 onwards.
  17. Around 62% of the customers would be in the second cycle or more at present.
  18. The rejection rate is around 40%.
  19. The management wants to bring down the contribution of Karnataka down to 30% in the next 3 years.
  20. The management has stated that the ideal capital adequacy envisioned for the company is around 20% and it will strive to keep the figure near that level. The company currently has a capital adequacy ratio of 34%.
  21. The management has clarified that the company does not lend to farmers as the ticket size would have to be bigger and thus the company is not vulnerable to farm loan waivers.

Analyst’s View

Credit Access Grameen has emerged as one of the most reliable microlenders in the country. Their revolutionary JLG model has helped bring communities of borrowers together and helped reduce overall risk from their lending to a very large extent as seen in their low NPA numbers. The company has maintained its good growth momentum where profit growth has been a little stressed mainly due to the rise in expenses arising from setting up new branches and hiring new employees at these branches. These branch expansions are expected to be yielding their share from Q4 onwards which has brought up future expectations of revenues. The management maintained that despite the wide footprint of the industry and its players, there is still a lot of room for the industry to grow mainly on the back of the overall under-penetration of the industry. It remains to be seen whether the company will be able to maintain its impressive growth momentum once it has expanded to all the states in the country. Nonetheless, given the latent potential of the industry and the consistent performance history of the company, Credit Access Grameen cements its place as one of the country’s top Microfinance companies. Valuation, however, at current levels is very stretched at more than 4 times the book leaving almost no margin of safety at the current price.


 

 

Notes on Annual Report (FY2018-19)

  • In terms of the GDP per capita, for example, our National Capital Region is roughly equal to that of a country like Indonesia. States like Bihar and Uttar Pradesh are among India’s poorest.
  • It is thus imperative that in a country poised for such dramatic growth, the paradoxes must be solved, especially at the financial grassroots level.
  • This is where Microfinance Institutions (MFI) have significantly contributed to this process by empowering the rural population with easy credit access in forms of loans.
  • By uplifting the rural poor, microfinance institutions are spreading prosperity and providing opportunities to the unserved and underserved in India.
  • Nurtured as an NGO at its inception and transitioned into an NBFC in 2007-08, CA Grameen has attracted key investors and transformed itself into a mainstream NBFC-Microfinance Institution (MFI) today.
  • Going forward, we expect the Indian microfinance sector to continue the current consolidation trend and CA Grameen, which is the largest non-bank microfinance institution (excluding Bharat financial which is in a merger process with Indusind Bank) to be among the top players in the country, continuing to enhance its stature in the microfinance market.
  • Women tend to use resources more productively, so improving financial access for women may increase their participation in the family and community development. That is why CA Grameen targets women.
  • The credit rating agency, CRISIL, has assigned the industry’s top MFI grading of ‘M1C1’to CA Grameen. According to CRISIL, this signifies ‘Highest-capacity’ of the MFI to manage its operations in a sustainable manner and ‘Excellent ‘performance on the Code of Conduct dimensions.
  • Profile of NBFC-MFIs:
    • Top Ten Large MFIs’ GLP constituted 74% of the GLP of the NBFC-MFI segment. As of March 31, 2019, rural portfolio contribution stood at 74%
    • Loans for Agri-Allied activities (mainly for animal husbandry) account for 57% of the GLP. Trade/services and manufacturing loans account for 40% and household finance loans account for 3% of GLP
    • Region-wise distribution of the portfolio is as follows:
      • South: 24%
      • West: 15%
      • North: 14%
      • Central: 09%
      • East & North East: 38%
    • Karnataka, Bihar, Odisha, Maharashtra and Uttar Pradesh account for 52% of GLP. The top 10 States account for 84% of the total industry loan amount outstanding.
  • Higher Rural Penetration
Borrowers March,2015 March,2016 March,2017 March,2018 March,2019
Rural 68% 74% 78% 81% 84%
Urban 32% 26% 22% 19% 18%

 

  • As of March 31, 2019, the Company was ranked in the 2 position among the 23 large MFIs (3 Position during FY 2017-18). The Company held 11% share of total GLP of the NBFC-MFI segment (10 as of March 31, 2018).
  • Employees interact with customers at Kendra meetings which are conducted on weekly and bi-weekly basis. At these meetings, apart from completing loan related transactions, customers are provided with information on various topics of interest to them such as financial literacy, hygiene, legal rights etc.

 

Sources of Competitive Advantage

Financial Performance

 

Analyst’s View

CAGL looks like a fast-growing MFI which has all the building blocks of a very sustainable business model in place. They are trying their best to reduce their dependence on the state of Karnataka. If the momentum of growth in GLA/AUM and branches continues as it has been in the past, it has a long tailwind. However, we believe, that the valuation at around 4 times price/book (TTM) is a little too high compared to the valuation of its peers. Nonetheless, CAGL is a stock worth tracking.

 


 

Q1 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q1FY20 Q1FY19 YoY % Q4FY19 QoQ %
Sales 376.7 286 31.71% 336.44 11.97%
PBT 148.13 112.36 31.84% 117.6 25.96%
PAT 95.83 72.2 32.73% 76.3 25.60%

 

Detailed Results

    1. The company had a stellar quarter with more than 31% growth in YoY revenues.
    2. The profits for the company rose in line with revenues to grow more than 32% YoY.
    3. The company made disbursements of Rs 2310 Cr in the current quarter which was up 42.9% YoY.
    4. The gross loan portfolio also rose sharply to Rs 7619 Cr registering a YoY growth of 39.4%.
    5. The number of branches also expanded substantially to 753 growing 31.4% YoY.
    6. The company now boasts of an active borrower base of 2.56 million which is also up 32.1% YoY.
    7. The company expanded into Jharkhand in Q1 and entered into the states of Gujarat and Rajasthan in July ’19.
    8. The net interest income for the company rose 32.4% YoY showing strong growth.
    9. Operating expenses to gross loan portfolio remained stable at 4.8%.
    10. ROE saw a sharp YoY decline to 15.9% from 19.4% last year.
    11. GNPAs declined to 0.55% from 0.88% last year.
    12. The company maintains a provisioning of 1.1% thus ensuring NNPA of 0%.
    13. The weighted average cost of borrowing for the company rose slightly to 10.2% from 9.9% in the last quarter but it is still lower than the 10.5% Weighted Average COB in Q1 last year.
    14. The company maintains a comfortable liquidity position by maintaining a positive static liquidity gap every month.
    15. The company has a positive ALM mismatch with an average maturity of assets at 15.3 months and average maturity of liabilities at 23.4 months.
    16. The company also has Rs 2838 Cr of funds in the pipeline from banks and FIs.
    17. The company boasts of collection efficiency of 98.8% which is exemplary for a microfinance organization.
    18. The geographic distribution of portfolio exposure is well distributed across 146 districts with only 1 district having more than 5% exposure and top 5 districts only having 22% exposure.
    19. The loan book consists of 85% income generation loans or IGL which yield 19% to 21% thus ensuring a high overall portfolio yield of 19.7% in the current quarter.
    20. The company has provided PAT guidance for FY20 of Rs 425 to 450 Cr.

Investor Conference Call Highlights

  1. The company is targeting 35% to 40% of the funds’ requirements from foreign sources in the long term.
  2. The company will not raise any money through commercial papers to avoid changing their positive ALM mismatch.
  3. The company added 83 new branches in Q1.
  4. The company has observed that the rural market seems to be in a state of subdued consumption demand and slow growth in assets. The company is aiming to help provide timely help to rural consumers in these trying times.
  5. The company is also aiming to help shift rural borrowing from informal sources to formal ones like microfinance institutions. The company is quite successful in this initiative with more than 40% of their new customers being first-time borrowers from institutional sources.
  6. The company also hires more than 90% of its employees from the rural regions they operate in to maintain high customer engagement and high borrower retention.
  7. The company also raised Rs 945 Cr of funds for lending in Q1.
  8. The company is not expecting any big adverse impact from the ongoing auto slowdown due to different customer mix hailing for predominantly small rural markets.
  9. The company maintains that the current NIM of over 12% is at normalized levels and is expected to stay stable above these levels.
  10. The management has mentioned that they expect to grow with a CAGR of at least 30% for the next 4-5 years.
  11. The company has observed that the portfolio concentration is slightly higher in the east, contrasting it with population figures in those areas, the company’s penetration is still below normalized levels and there is a significant opportunity for growth here.
  12. The company has also observed that on new entry into any area, more than 40% of customers are first-time borrowers, thus highlighting very limited competition in new rural areas.
  13. In terms of ticket size, the average size is at Rs 28000 and more than 58% of customers have a ticket size of < Rs 30000.
  14. The company has recently implemented end to end digitalization of data entry and maintenance for increased convenience and enhanced operations and risk management.
  15. The company expects to remain at <1% GNPAs in the long term.
  16. The physical expansion plans for the company are mostly done mostly in the first 2 quarters of the financial year. Thus the cost to income ratio rises for Q1 as compared to Q4. The company expects to stay in the range of 30% – 35% for this figure.
  17. The average number of customer groups that each employee manages is limited to 4-5 groups per day in order to avoid overheating and ensure uniform service management.
  18. The company emphasizes that they do not reward their employees on disbursements but rather they incentivize the collections process and servicing of the customers. This is to remove the tendency to over lend that all types of lending organizations have suffered from.
  19. The management has mentioned that they can confidently achieve 10%-15% just on existing customers.
  20. The company does not have any set hard limits on how much they can lend as ticket size.
  21. The borrowing outstanding for the company is around Rs 5100 Cr including securitization.
  22. The attrition in the company is around 23% and no employee handles any group for more than a year to prevent any adverse effects when that employee moves away from the branch or leaves.
  23. The company does not expect much adverse impact from bad monsoons as they are mostly catering to non-agricultural customers.

Analyst’s View

Credit Access Grameen has emerged as one of the most reliable and fast-growing microlenders in the country. The JLG model has helped bring communities of borrowers together and helped reduce overall risk from their lending to a very large extent as seen in their low NPA numbers. The company is still to expand into many states in the country and thus it is fair to say that the opportunity size for them is growing bigger as they move forward. The company has yet to face any problems from the liquidity slowdown in the NBFC sector and continues to enjoy the support of borrowers and lenders alike. It remains to be seen what unique challenges they will face as they expand to new states. The valuation at current levels is a little too stretched, so waiting for correction seems prudent. Nonetheless, Credit Access Grameen is still a good stock to watch out for.

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