CreditAccess Grameen#39;s Rs 1,131-crore IPO opens: Should you subscribe?
The initial public offering of CreditAccess Grameen, which aims to raise up to Rs 1,131-crore, opens for subscription on August 8 with a price band at Rs 418-422 per share.
The public issue, which will close on August 10, comprises a fresh issue of up to Rs 630 crore and an offer for sale of up to 1,18,76,485 equity shares by the promoter, CreditAccess Asia NV.
Its promoter, CreditAccess Asia NV, which holds 98.88 percent stake in the company as of now, is a multinational company specialising in MSE financing (micro and small enterprise financing), which is backed by institutional investors and has micro-lending experience through its subsidiaries in four countries in Asia.
CreditAccess Grameen (CAG) focused on providing micro-loans to women customers, predominantly in rural areas in India. According to CRISIL Research, it was the third-largest NBFC-MFI in India in terms of gross loan portfolio as of March 2017. As of March 2018, it covered 132 districts in the eight states (Karnataka, Maharashtra, Tamil Nadu, Chhattisgarh, Madhya Pradesh, Odisha, Kerala, Goa) and one union territory (Puducherry) in India through 516 branches and 4,544 loan officers.
Also read – CreditAccess Grameen IPO to open on August 8; 10 key things to know before investing
Majority of brokerage houses do not expect huge listing gains from the microfinance lender as they feel it is highly valued at current price band.
Some research firms advise subscribing the issue with long-term perspective as there is limited upside potential in the short term and good returns expected in the longer term while some advise avoiding the issue due to inherent risk associated with the business model along with low return on equity (RoE), though the company has solid financials.
Brokerages which say subscribe for long term and not for listing gains are:
The third largest NBFC-MFI (next to Bharat Financial Inclusion), Credit Grameen Access with AUM of Rs 4,974.7 crore headquartered in Bangalore is promoted by South-east Asia focused Credit Access NV (99 percent holding) specialising in MSE financing. With thrust on providing microloans to women customers (JLG model) predominantly in rural areas, Credit Access follows district based expansion model.
We do laud the strong business momentum (55 percent last 4 years) with clear rural focus backed by higher customer retention (around 90 percent: best in the industry), 0 percent net NPA with high repayment rate (around 97 percent) and high CAR at 29 percent.
In near term, high business concentration risks and expensive valuations (at upper price band of Rs 422, valuations post issue stand expensive at 34x+ PER and 2.9x P/B FY18, 2.6x P/ABV FY19E given current high GNPA, low RoE) stand as clear deterrents.
Given this, any decline in credit costs and sustainability of high margins ahead would directly translate into stark improvement in return profile. While listing gains should stand limited, we recommend Subscribe for long term.
We believe investors can tap this IPO offer as a next long term investment idea in microfinance space. Microfinance industry has exhibited impressive business growth over the past few years and company with a clear focus on rural customers whose access to the formal banking sector is limited would witness healthy growth going forward.
Unlike other microfinance players with mix exposure to urban/rural markets, we found that CAG is a pure rural play with 82 percent of its branches catering to rural markets which act as the main catalyst for investment.
On valuation perse post-IPO equity CAG is expecting a market cap Rs 6,050 crore at higher price band, valued at 2.9x the book value, which is on the lower side of the average to its listed peers.
Given the relatively lower valuation, higher quality of the loan assets, and majority rural focused business target the IPO looks suitable and hence Subscribe the issue for long only play as there would be limited (15-18 percent) listing gain possibility.
The company is bringing the issue at price-to-book multiple of 2.94 on post issue book value at higher end of price band of Rs 418-422/share.
Although company has shown strong growth with CAGR of more than 50 percent from FY14 to FY18 in its financials added by solid fundamentals as some of the company’s ratios are one of the best in industry but low RoE which will dilute post listing is a concern . Hence, we rated issue a Subscribe one with limited upside potential.
CAGL’s demanding valuation at Rs 6,049.63 crore is valued at P/ABV of 2.9(x) to FY18 annualised adjusted BVPS (post issue) which is premium to peers (Ujjivan Financial -2.7x, Equitas – 2.8x).
At this valuation, the issue presents limited room for further upside.
Considering all these parameters, we assign Subscribe with Caution rating to the issue. However, we think that business’s fundamentals are strong and it will create value in the short to medium term. Investors are thus recommended to invest in this issue for short to medium term period.
Considering the business model, we have a ‘3-star’ rating on the issue.
The company offers loans mainly to rural women by using the joint liability group (JLG) model of lending. The company posted revenue growth of 56% CAGR in the last 5 years.
Its customer-centric business model, wide range of product offerings, as well as its well designed product delivery but Microfinance loans are unsecured and are susceptible to various operational and credit risks which may result in increased levels of NPAs, may adversely affect its business, results of operation and financial condition.
Moreover, the Company’s operations are concentrated in Karnataka and Maharashtra. Pricing of the issue looks at a premium in comparison to its listed peers of its size. Those who want to invest may opt the issue as long-term investment. We have ‘1.5-star’ rating on the issue.
Brokerages which advise avoiding the issue are:
Antique Stock Broking
Credit Access Grameen’s IPO presents an interesting dilemma – it’s well entrenched position in rural India, strong customer connect and tightly run operations makes it one of the most profitable MFI in India.
On the other hand, geographic concentration, low breath of the organization in terms of technology & people, and inability to offer beyond plain vanilla JLG loans raises questions on long term competitive positioning especially in the light of changing MFI landscape (where incumbents like Bandhan and Bharat Financial are taking host of other financial services at the rural customer’s door-step).
The near term looks great for Grameen, thanks to huge capital infusion & strong growth. However, the long term needs hard thinking – demonetisation has illustrated that even well run MFIs can lose 5 percent to 10 percent of AUMs in crisis.
Geographic diversification & well capitalised balance sheet are the two most important defences for NBFC-MFIs, who have regional niches.
This will increase operating expenses and cap RoEs. In this light, we believe that valuations at 2.3x FY20e book and 16x earnings do not leave investors with much margin of safety. Recommend Avoid.
Credit Access Grameen has priced IPO at around 2.9x P/FY18 Book (post money) & around 34.8x P/FY18 earnings with around 11.8 percent FY18 ROEs (before dilution).
Considering inherent risk associated with the business model along with low RoEs, we believe that the valuation premium is not justified.
We firmly believe that the management has duly considered low RoEs and higher adequacy while determining the price however we would Avoid the IPO even at current price considering lower probability of RoE improvement over next few quarters.
Here are some risks and concerns highlighted by these brokerage houses:
> Its operations are concentrated in Karnataka and Maharashtra and any adverse developments in these states could have an adverse effect on the business;
> Microfinance loans are unsecured and are susceptible to various operational and credit risks which may result in increased levels of NPAs;
> The company’s lending and collection operations involve handling of significant amounts of cash, including collections of instalment repayments in cash. Such large amounts of cash collection expose it to risk of loss, fraud, misappropriation or unauthorised transactions by employees responsible for dealing with such cash collections;
> Competition from banks and financial institutions may adversely affect its profitability and position in the Indian microcredit lending industry;
> Rise of digital platforms, payment solutions & fintech companies may adversely impact company’s business model;
> Industry specific concerns due to political interference;
> Risk of higher slippage in loan portfolio;
> Upcoming elections in the country can disturb the credit discipline in rural areas.