CreditAccess Grameen IPO Note (Avoid)

VALUATION

CreditAccess Grameen is an Indian microfinance institution focused on providing micro loans to women, predominantly in rural areas, who largely lack access to the formal banking sector and present a latent opportunity for offering micro-loans. 

Moreover, the Basic nature of company business is risky. Microfinance loans are unsecured and are susceptible to various credit risks which may result in increased levels of NPAs in the company.

On the upper price band of Rs 422 with adjusted EPS of Rs 9.7 for FY18, P/E works out at 43.5xs.

Based on the above aspects, we recommend to 'AVOID' the issue.

THE OFFER

• Issue Open: 08 Aug 2018 to 10 Aug 2018
• Issue Type: Book Built Issue IPO
• Issue Size: 26,805,394Equity Shares @ 10 aggregating up toRs 1,131.19 cr
• Face Value: Rs 10 per Equity Share
• Issue Price: Rs 418 - Rs 422 per Equity Share
• Market Lot: 35 Shares
• Minimum Order Quantity: 35 Shares
• Listing At: NSE, BSE

CAPITAL STRUCTURE

The share capital of Company, is set forth below (Amount in Rs except share data)

• Authorized Share Capital: 160,000,000 Equity Shares @10 Aggregate value 1,600,000,000
• Issued, subscribed and paid up capital before the Issue: 128,427,337 Equity Shares @10 Aggregate value 1,284,273,370
• Present Issue: Fresh Issue of Equity Shares @ 10 aggregating up to Rs 630.00 Cr 
• Offer for Sale of 11,876,485 Equity Shares @ 10

OBJECT OF THE OFFER

Fresh Issue

The net Proceeds from the Fresh Issue will be utilized towards augmenting the capital base to meet future capital requirements of the company.

Offer for Sale

The Company will not receive any proceeds from the Offer for Sale

COMPANY OVERVIEW

CAGL is a leading Indian micro-finance institution headquartered in Bangalore, focused on providing micro-loans to women customers predominantly in Rural Areas in India. It is the third largest NBFC-MFI in India in terms of gross loan portfolio as of March 31, 2017.

It focuses predominantly 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. Company’s focus customer segment is women having an annual household income of Rs. 160,000 or less in Urban Areas and Rs. 100,000 or less in Rural Areas. It provides loans primarily under the joint liability group ('JLG') model.

CAGL’s primary focus is to provide income generation loans to Customers, which comprised 87.02% of its total JLG loan portfolio, as of March 31, 2018. Company also provides other categories of loans such as family welfare loans, home improvement loans and emergency loans to existing Customers. Company has followed a strategy of contiguous district-based expansion across regions and, as of March 31, 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. 

CAGL’s operations are well –diversified at the district level, with no single district contributing more than 5% to its Gross AUM (apart from one which contributed less than 6% to Gross AUM) as of March 31, 2018. Further, out of a total of 132 districts where it had branches as of March 31, 2018, more than 75% of each of these districts individually represents less than 1% of gross AUM. Company’s customer base increased from 0.50 million Active Customers as of March 31, 2014 to 1.85 million Active Customers as of March 31, 2018.

ROAD MAP AHEAD

Company objectives are to expand their market share and aim to accomplish this through the following strategies:

• Continued focus on the customers from Rural Areas
•  Expansion of branch network
•  Leverage existing capabilities and strengths to diversify product and service offerings
•  Focus on optimizing operating costs and improving operational efficiencies

STRENGTHS

•  Customer-centric business model resulting in high customer retention.
•  Deep penetration in Rural Areas characterized by low competition and built through contiguous district-based expansion.
•  Robust customer selection and risk management policies resulting in healthy asset quality.
•  Diversified sources of borrowings and effective asset-liability management

FINANCIAL HIGHLIGHTS

• Company’s Gross AUM grew at a CAGR of 57.45% from Rs 809.5cr as of March 31, 2014 to Rs 4974.6cr as of March 31, 2018.
• Net interest income for the financial years ended March 31, 2016, 2017 and 2018 was Rs 248.7cr, Rs 385.2cr and Rs 510.9cr, respectively.
• Disbursements across financing products for the financial years ended March 31, 2016, 2017 and 2018 were Rs 3348.8cr, Rs 3402.6cr and Rs 6081.7cr, respectively.
• Net interest margin, which is net interest income divided by Annual Average Gross AUM, for the financial years ended March 31, 2016, 2017 and 2018 was 48%, 13.72% and 12.70%, respectively.
• Net worth as of March 31, 2018 was Rs 1427.0cr.
• PAT for the financial years ended March 31, 2016, 2017 and 2018 was Rs 83.2cr, Rs80.2cr and Rs 1,24.6 cr, respectively.

RISK FOR THE BUSINESS

• Operations are concentrated in Karnataka and Maharashtra and any adverse developments in these states could have an adverse effect on business.
• 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.
• An increase in portfolio of non-performing assets may adversely affect business.
• Business is particularly vulnerable to interest rate risk, and volatility in interest rates could have a material adverse effect on net interest income, net interest margin and financial performance
• Companies Promoter has invested in Sahayata Microfinance Private Limited, which has been involved in various financial irregularities and discrepancies in the past.
• Company requires regulatory approvals, licenses, and permissions to conduct business and an inability to obtain in a timely manner, may adversely affect operations.