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|Saturday, August 04, 2018||
Continues to maintain net NPAs at nil level, cost-to-income ratio lowest in microfinance industry
CreditAccess Grameen is a Bengaluru-based leading micro-finance institution, focused on providing micro-loans to women customers predominantly in rural areas in India. It is the third largest NBFC-MFI in India by gross loan portfolio end March 2017. The wide range of lending products addresses the critical needs of customers throughout their life cycle and includes income generation, family welfare, home improvement and emergency loans. The customer-centric business model, wide range of product offerings, as well as well designed product delivery and collection systems, has enabled the company to achieve high customer retention rates and low credit costs.
The company focuses on customers in rural areas in India, who largely lack access to the formal banking sector and present a latent opportunity for offering micro-loans. The products are built on a deep understanding of the requirements of customers. The flexibility of products in terms of ticket sizes, end-uses and repayment options etc and the manner of their delivery differentiates it from competitors and generates customer loyalty.
CreditAccess Asia N.V., a multinational company specializing in MSE financing (micro and small enterprise financing), is the promoter of the company which is backed by institutional investors and has micro-lending experience through its subsidiaries in four countries in Asia. Over time, the promoter company has increased the scope of operations to reach 2.2 million customers, accumulated Euro 690 million total assets and have an outstanding loan portfolio of Euro 598 million as of end December 2017. It has earned revenues of Euro 115 million and profit of Euro 15 million in financial year ended March 2017. Its RoA stood at 2.6% and RoE at 9.5% for FY2017. The promoter has provided capital funding to CreditAccess Grameen from time to time and provides with access to potential fundraising opportunities in the debt capital markets.
Udaya Kumar Hebbar is MD & CEO of the company and has over 25 years of experience in the banking industry. He has served as head Commercial and Banking Operations at Barclays Bank PLC, Mumbai, and has also been associated with Corporation Bank and ICICI Bank for over 20 years. Chief Financial Officer Diwakar B.R. has over 20 years' experience in finance. He has been associated with IFMR Capital Finance, served as Commercial Supervisor at Accion International and served as Chief Manager (Band I) at ICICI Bank.
The focus customer segment is women having an annual household income of Rs 1.6 lakh or less in urban areas and Rs 1 lakh or less in rural areas. The company provides loans primarily under the joint liability group (JLG) model. The primary focus is to provide income generation loans to customers, which comprised 87.02% of total JLG loan portfolio end March 2018. The other categories of loans such as family welfare loans, home improvement loans and emergency loans are also provided to existing customers.
In 2016, with a view to diversifying product profile, the company introduced individual retail finance loans for customers who had been customers for at least three years and fulfil certain other eligibility criteria linked primarily to their credit history with the company, income, and business position. These loans are offered to customers to establish a new enterprise or expand an existing business in their individual capacity (for instance, for the purchase of inventories, machinery or two-wheelers).
The company has followed a strategy of contiguous district-based expansion across regions and, as of March 2018, it covers 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 4544 loan officers. The operations of the company are well - diversified at the district level, with no single district contributing more than 5% to gross AUM (apart from one which contributed less than 6% to gross AUM) as of March 2018, while more than 75% of these districts individually represents less than 1% of gross AUM. The full-time employees base stood at 6,306 end March 2018.
The customer base of the company has increased from 0.50 million active customers as of March 2014 to 1.85 million active customers as of March 2018. The customer-centric approach has helped the company to maintain a high active customer retention rate of 90% (annualized) for the six months ended September 2017, as compared with the median active customer retention Rate of 15 leading micro-finance players of 78% for the same period.
The gross AUM has recorded at a CAGR of 57% to Rs 4974.66 crore end March 2018 from Rs 809.52 crore end March 2014. Disbursements across financing products have also registered a strong CAGR of 56% to Rs 6081.72 crore in FY2018 from Rs 1028.09 crore in FY2014. Over the years, the company has maintained net NPA ratio at nil level.
Revenues of the company have increased at CAGR of 57% to Rs 865.55 crore in FY2018 from Rs 142.34 crore in FY2014. Net interest income surged at CAGR of 64% to Rs 510.99 crore in FY2018 from Rs 70.08 crore in FY2014 with strong net interest margin of 12.7% for FY2018. The company has also posted strong growth in net profit at a CAGR of 65% to Rs 124.64 crore in FY2018 from Rs 16.63 crore in FY2018, despite jump in credit cost for FY2017 and FY2018.
The Offer and the Objects
The initial public offer (IPO) is to collect around Rs 1126.44 crore by issuing 2.69 crore shares at the lower band of Rs 418 per share (face value Rs 10 per share) and Rs 1131.19 crore by issuing 2.68 crore shares at the upper band of Rs 422 per share. The issue consists of a fresh issue of equity shares (1.49 - 1.51 crore shares) aggregating up to Rs 630 crore and offer for sale (OFS) of 1.19 crore equity shares aggregating up to Rs 496.4 - 501.2 crore.
The OFS comprises an offer aggregating 1.19 crore shares by promoter CreditAccess Asia NV. The issue is to be made through the book-building process and will open on 08 August 2018 and will close on 10 August 2018.
The net proceeds will be utilized to augment the capital base of the company to meet future capital requirements which are expected to arise out of growth in companys assets, primarily companys loans and advances and other investments. Further, there will be the benefits of listing of the equity shares on the stock exchanges, enhancement of the brand name and creation of a public market for equity shares in India.
Customer-centric business model resulting in high customer retention: The company considers its customers to be the most significant stakeholders at the core of operations, which allows to retain a high proportion of existing customers and to attract new customers. The active customer retention rate for company is substantially higher than the industry average. The company follows a multipronged approach to customer engagement, such as financial products catering to the entire customer life-cycle, products built with a deep understanding of customers requirements and the flexibility of products (in terms of ticket sizes, access to different disbursement and repayment options) and the manner of their delivery differentiates it from competitors and allows to maintain a high level of customer retention. The company follows a predominantly weekly collection model, which enables a high degree of customer engagement, which also supports to maintain high asset quality. As part of a continuous development process, the company has implemented several methods to obtain feedback from customers and further promote customer awareness.
Deep penetration in rural areas characterized by low competition and built through contiguous district-based expansion: Taking into account the opportunity and lower competitive intensity in rural segments, the company has increased footprint in India's rural areas unlike other industry players over the years. About 422 out of 516 branches are categorized as rural branches, while more than 75% of districts where the company operates represent less than 1% of gross AUM. A large segment of Indias rural and semi-urban population is currently unserved and underserved by formal financial institutions.
Robust customer selection and risk management policies resulting in healthy asset quality: The company follows robust customer selection and risk management policies, which have resulted in healthy asset quality and lower credit costs. A systematic methodology is followed in the selection of new geographies where branches are opened, which takes into account factors such as the historic PAR% (Portfolio at Risk%) of the proposed district, competition in the new geographies, potential for micro-lending and socio-economic risk evaluation. Further, once the company opens a branch in a new area and JLGs are formed, customer due diligence procedures encompass various layers of checks. The effective credit risk management is reflected in portfolio quality indicators such as robust repayment rates, stable PAR and low rates of gross non-performing assets (NPAs) and net NPAs.
Strong track record of financial performance and operating efficiency: The company has maintained a strong track record of financial performance and operating efficiency over the years through high rates of customer retention, geographical expansion, improved staff productivity, enhancement of individual loan portfolio, lower credit cost and growth in customer base led by branch expansion. According to CRISIL Research, the company had the lowest operating expense ratio amongst the top-eight NBFC-MFIs and SFBs for FY2017. The ratio of operating expense to annual average gross AUM ratio has consistently declined from 6.76% for FY2014 to 5.69% for FY2017 and further down to 4.96% for FY2018.
Diversified sources of borrowings and effective asset-liability management: The funding sources of the company are varied, which reduces over dependent on any one type or source for funding. The diversified sources of borrowing, stable credit history, improved credit ratings and effective asset-liability management have allowed the company to gain better access to cost-effective debt financing. The total borrowings (current and non-current) stood at Rs 3602.86 crore end March 2018. The company also relies on proceeds from loan assets assigned or securitized to scheduled commercial banks.
Operations of the company are concentrated in Karnataka and Maharashtra, with 191 of 516 branches located in Karnataka and 144 branches located in Maharashtra. About 58.1% of gross AUM is originated in Karnataka and 26.7% in Maharashtra. In the event of a regional slowdown in the economic activity in these states, or any other developments including political unrest, drought/floods and other natural calamities, or social upheaval in these states can affect its financials and prospects adversely.
Microfinance loans are unsecured and are susceptible to various operational and credit risks which may result in increased levels of NPAs, thereby adversely affecting business. Furthermore, as there is typically limited financial information available about focus customer segment and many of customers do not have any credit history supported by tax returns, bank or credit card statements, statements of previous loan exposures, or other related documents, it is difficult to consistently carry out credit risk analyses on customers.
Business is particularly vulnerable to interest rate risk, and volatility in interest rates. As per RBI regulations, the interest rates charged by the company on microfinance loans is required to be the lower of (i) 10% margin above cost of funds or (ii) 2.75 times the average base rate of the five largest commercial banks by assets (as notified every quarter by the RBI). A sustained decline in the RBI benchmark may adversely impact ability to charge interest on microfinance loans at desired rates, which may adversely affect interest income from portfolio loans.
There is significant competition from other MFIs and banks in India (including SFBs). Some commercial banks are also beginning to directly compete with for-profit MFIs for lower income segment customers in certain geographies.
The company handles cash in a high volume of transactions occurring through a dispersed network of branches; as a result, it is exposed to operational risks, including fraud, petty theft and embezzlement. Further, employees may be the target of violent crime, such as thefts and robberies, which may adversely affect business, operations and ability to recruit and retain employees.
The rise of digital platforms and payment solutions may adversely impact business model and there may be disintermediation in the loan market by fintech companies.
The company expects to get classified as a passive foreign investment company (PFIC) for U.S. federal income tax purposes, which could result in materially adverse consequences, including additional tax liability and tax filing obligations, for a US investor relative to an investment in a company that is not a PFIC.
The promoter presently holds 31.34% in the issued and paid-up equity share capital of Sahayata Microfinance, a company incorporated in Udaipur, Rajasthan, has been involved in various discrepancies and irregularities in the operation and management. Its license was cancelled by the RBI in March 2014, while Sahayata has also been identified as a defaulter by various lenders for suit-filed accounts of Rs 1 crore and above end March 2017. The nominee director of CAA on the board of directors of Sahayata since 2009, being Paolo Brichetti, resigned from the board of directors of Sahayata on 22 October 2012.
The annualized EPS on post-issue equity works out to Rs 8.69 for FY2018. At the price band of Rs 418 to Rs 422, P/E works out 48.1 to 48.5 times.
Post-issue, the book value (BV) is Rs 143.41 at the issue price of 418 and Rs 143.55 at the issue price of Rs 422. P/BV works out to 2.91 times at lower price band and 2.94 time at the upper price band.
Among peers, Bharat Financial Inclusion is trading at P/BV of 5.69 times, Satin Creditcare at P/BV of 1.55 times and Equitas Holdings at P/BV of 2.19 times.