17 September 2019

CreditAccess Grameen Stock Analysis

The CreditAccess stock price is touching 52 week highs. We are getting a lot of requests from our blog readers to do a CreditAccess Grameen stock analysis. A rapid growth in the loan portfolio and profit after tax makes it a potential growth stock.

About

CreditAccess Grameen Ltd., formerly known as Grameen Koota, was founded by Vineetha Reddy in 1996. Today, the company’s promoter is CreditAccess Asia. In 2008, the company moved from being an NGO to being an NBFC. The company is the 2nd largest micro-finance institution in the country.
Karnataka and Maharashtra contribute ~ 60% of the gross loan portfolio. The top 10 districts make up nearly 32% of the portfolio. Also, Rural contributes 82% (vs 68% in FY15) which makes the portfolio concentrated.

Industry

Nearly 52% of the agricultural households in India are indebted. Nearly 40% of loans came from informal sources (Moneylenders accounted for 26% of overall loans). However, hardly 15% of households with marginal land holding get credit from sources such as Government, cooperatives and banks.
The NBFC-MFI accounts for ~ 36.8% of the microfinance lending followed by banks at 32.6% and small finance banks at 18.5%. Top 10 MFI’s made up ~ 74% of the gross loan portfolio. Rural India accounts for roughly half of India’s GDP but has access to just 10% of the banking credit.
Eight MFIs have converted into small finance banks, while Bandhan Bank has transitioned into a universal bank. The largest MFI, Bharat Financial Inclusion has been acquired by IndusInd Bank. As small finance banks diversify into MSME loans, housing loans, etc. their micro-finance loan growth has slowed down to single digits. Small finance banks are also expected to have lower cost of borrowing as they will be eligible to take public deposits. However, small finance banks will have to incur higher operating costs in the initial years which will give NBFC-MFIs to increase market share.

CreditAccess Grameen Stock Analysis

The company is majorly into group lending, which contributes ~ 95% of the loan portfolio. The breakup of the loan portfolio is given below.
The company has forayed into home improvement loans, family welfare loans and retail finance loans only recently. The group lending model ensures that in case of default by one member, the other members of the group can cover up. However, the group lending model can also cause higher defaults in case of unfavorable circumstances that affect the rural economy.
The company’s loan book has grown faster than the borrower base. This shows that the company is now having a higher exposure per borrower. Since the company lends to people in the lowest income bracket, a higher exposure to this segment raises the risk of the loan portfolio.
The company has a positive asset liability mismatch because of shorter tenure of average asset maturity (16 months) vs the average liability maturity (25.3 months).

Valuations

The company commands a market capitalization of ~ Rs 8,600 Crores. The price-to-book ratio of the company is ~ 3.64. IndusInd Bank acquired Bharat Financial Inclusion at a PB ratio of 3.8.
The dip in ROE in FY17 was caused by higher NPAs. Demonetization hit the industry significantly in FY17 but the industry recovered fast. The NBFC crisis in FY19 didn’t affect the borrowing for CreditAccess Grameen because the company has low exposure to NBFCs and Mutual Funds. The management has ruled out any chance of converting to a small finance bank. Moreover, they have given a guidance of 30% growth in loan book over the next 5 years.
As per our analysis, CreditAccess Grameen stock trades at premium valuations. Moreover, the business model doesn’t make it a long term portfolio stock. The company has high concentration in a single state (Karnataka). Also, the company’s lending per borrower is also increasing significantly. Any negative news can impact the credit rating, increase the cost of borrowing and also result in high rates of default. If you are looking to add the CreditAccess Grameen stock for short term (3 months to 12 months), then take positions with a strict stop loss.

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