CreditAccess Grameen

 Verdict: Does not get our credit

IPO Snapshot:

CreditAccess Grameen Limited is entering the primary market on Wednesday 8^th August 2018, to raise upto Rs. 630 crore via fresh issue of equity shares of Rs. 10 each and an offer for sale (OFS) of upto 1.19 crore equity shares by promoter, both in the price band of Rs. 418 to Rs. 422 per share. Representing 18.70% of the post issue paid-up share capital, total issue size is Rs. 1,131 crore at the upper end of the price band, of which 44% is the OFS portion. The issue closes on Friday 10^th August and listing is likely on 23^rd August.

Company Overview:

CreditAccess Grameen is India’s 3^rd largest micro finance institution (MFI) providing unsecured loans to women with annual household income upto Rs.1.6 lakh (urban area) and Rs. 1 lakh (rural area), of average ticket size of Rs. 20,000. With asset under management (AUM) of Rs. 4,975 crore (31-3-18) and a deep rural focus (81% customers in rural), 86% of loans provided is for income generating activities, 10% for home improvement and balance for emergency and family welfare. Despite widespread network of 516 branches across 132 districts in 9 Indian States and Union territory, company’s AUM is concentrated in Karnataka (58% of total) and Maharashtra (27%). While other MFIs have converted to banks (Bandhan, Equitas, Ujjivan, Bharat Financial on the verge of merger with Indusind), CreditAccess does not plan to tap the banking route and is comfortable being a standalone MFI.

Financial Performance:

Company’s historical growth has been good, though on low base, with AUMs rising at 51% CAGR for last 3 years, from Rs.1,447 crore in FY15 to Rs. 4,975 crore in FY18, while revenue growth stood at 48% CAGR, jumping from FY15’s Rs. 268 crore to FY18’s Rs. 866 crore. Demonetisation slowed FY17 performance with AUM growth of 21% YoY (76% in FY16) and EPS declining to Rs.9.88 vis-à-vis Rs. 11.23 in FY16. However, company covered lost ground in FY18, when net interest income (NII) grew at 33% YoY and 54% 3 year CAGR, to touch Rs. 511 crore in FY18. FY18 PAT stood at Rs. 125 crore and EPS at Rs.12, on an equity of Rs.128 crore. Given steep lending rates of 22%+, company’s net interest margins (NIMs) are very strong at 12.70% (FY18). Return on assets (RoA) of 3.1% is also healthy (although down from FY16’s 4.2%). Due to fund infusion by promoter to fuel growth, return on average net worth (RoNW) has been on a decline, with FY18 RoNW coming at just 12%, having nearly halved from FY16’s 20%. Although net NPAs are nil, gross NPA shot up to 1.97% (31-3-18) from 0.08% (31-3-17 and 31-3-16) as an aftermath to demonetization. Current net worth of the company stands at Rs. 1,428 crore with BVPS of Rs. 111. Post IPO, BVPS will increase to Rs. 144 per share, on equity of Rs. 143 crore. 

Objects of Issue and Shareholding Pattern:

Parent Netherland-headquartered Credit Access Asia, backed by Asian Development Bank and other investors, is an MNC specializing in MSE loans in South East Asia, with exposure to similar business in Thailand, Vietnam, Indonesia and Philippines. Promoter shareholding, currently at 99%, will shrink to 80% post lPO. Fresh issue proceeds of Rs. 630 crore will augment capital base, lifeline for any lending business.

Company’s historic growth has been fuelled by strong financial backing of the promoter. In Dec 2017, promoter infused Rs 200 crore into the company via preferential allotment of equity shares at Rs. 154 a piece. The current offer price is 174% premium to this price, which is quite steep. While some premium is justified for the performance of FY18 and allotment to promoter, nearly 3x the number for such short time duration is clearly on the higher side.

Valuation:

At Rs. 422 per share, company’s market cap will be Rs. 6,050 crore, which is 122% of the AUM. PE multiple stands at 35x and 37x, based on FY18 and FY19E respectively, while PBV multiples are 2.9x and 2.7x respectively, based on post IPO and FY19E BVPS.

Below is the peer comparison table:

^at Rs.422 per share

Comparison of CreditAccess with Bharat Financial, India’s largest MFI, is inappropriate as the latter’s share price movement mirrors that of acquiring entity Indusind Bank (merger of which is at advanced stage). Also, Bharat Financial’s loan book and profitability are over 2.5x and 3x CreditAccess’ for the matching equity value as a percentage of AUM of ~120%. Moreover, Bharat Financial’s lending is broad-based with not a single state accounting for more than 16% of the loan book (versus Karnataka alone comprising of 58% of CreditAccess’ book). 

For other peers with exposure to low ticket loans, Equitas is still coping-up with initial challenges of conversion to small finance banks. Ujjivan is faring better with double-digit RoE and lower valuation (PE 21x, PBV 2.4x and 62% of AUM) as compared to CreditAccess.

Indostar Capital, which is not engaged in micro loans but does have SME lending, got listed just 3 months back. Besides a lukewarm response to its IPO, share price performance has been dull, with current price also ruling 16% below IPO price, indicating low market appetite for lending businesses in growth stages, despite reasonable valuations and marque PE backing at promoter level.

India’s 2^nd largest MFI Satin Creditcare, with a bigger loan book and comparable NII as CreditAccess, is ruling at PBV multiple of just 1.7x. CreditAccess’s PBV of 2.7x is quite high, given this is a primary market offering where the unwritten rule is to leave atleast 10-15% on the table for prospective investors. Larger NBFCs, with diversified presence and established track record, such as L&T Finance, Shriram Transport, M&M Financial, Shriram City Union, Capital First are ruling at much attractive levels (PBV of below 2.6x). Thus, issue pricing of CreditAccess Grameen is not very attractive.

Conclusion:

Geographically concentrated portfolio, low fancy for mid-caps in secondary markets currently and regulatory uncertainties surrounding MFI business weigh negatively on the issue. Issue pricing doesn’t help either. While the company has delivered financially in the past, one may skip the IPO for now and review it post listing.

Disclosure: No interest.