CreditAccess Grameen Limited IPO - Should you subscribe?

CAGL's Background:

CreditAccess Grameen Ltd is Bangalore based NBFC - MFI, i.e. Non-Banking Finance Corporation - Micro Finance Institution which is predominantly engaged in the micro financing business. This company's major business (more than 80%) comes from Rural part of India.

The company's focus is on targeting the large chunk of customers who have no access to banks or limited access for borrowings.

The company's focused target customer is women having annual household income of Rs. 1,60,000 or less in Urban Areas and Rs. 1,00,000 or less annual household income in Rural Areas.

The company has followed a strategy of continuous district - based expansion across regions and as of March 31, 2018, it covers 132 districts in the eight states (Karnataka, Maharashtra, Tamil Nadu, Chhattisgarh, Madhya Pradesh, Odisha, Goa and Kerala) and one union territory (Ponducherry) in India through 516 branches and 4544 loan officers.

CAGL's Promoter:

CreditAccess Grameen Ltd' promoter is CAA, CreditAccess Asia N V, Amsterdam, The Netherlands. CAA is multinational company specialized 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. Its promoter has provided capital funding to it from time to time and provides it with access to potential fund raising opportunities in the debt capital markets. 

CAA is not the original promoter of the company but it has become the promoter by virtue of acquiring shares of the company under allotment, transfers and purchase agreements.

Issue Details:

The issue is opening on August 8, 2018 and closing on August 10, 2018. The tentative dates of allotment and listing are August 16, 2018 and August 20, 2018 respectively. The IPO allotment status can be checked on Karvay Computershare official website once allotment is out. Minimum lot size is 35 shares.

Object of the issue:

This IPO is mix of Offer For Sale and Fresh Issue. Overall, the issue size is Rs. 1131.19 Crore approx. at upper price band.

The company is going to issue fresh equity shares worth Rs. 630 Crore. The next proceeds of fresh issue are proposed to be utilized towards augmenting its capital base to meet future capital requirements.

The company's promoter CAA is offloading 1,18,76,485 shares under Offer For Sale arrangement. The company shall not receive any proceeds of Offer For Sale.

Pricing of the issue:

The company has set the price range between Rs. 418 - Rs. 422 per share which represents 34.52 - 34.85 times of its earnings as on March 31, 2018 and 3.76 - 3.80 times of its book value on the same date. The Industry highest, lowest and average PE is 631.31, -234.83 and 101.12 and PB is 8.24, 1.55 and 3.73.

Peers comparisons:

If we go by the peer comparisons, its peers viz. Shriram Transport Finance and Mahindra & Mahindra Finance were trading at 21.04 and 29.04 PE respectively as on August 3, 2018. You can skip this IPO and buy the shares of these two companies, if you want to have NBFC Company shares in your portfolio.

However, the pricing seems cheaper if we compare with its other peers viz. Bharat Financial, AU Small Finance, Ujjivan Financial and Equitas Holding whose shares were trading at 37.23, 64.08, 631.31, 160 PE respectively as on August 3, 2018. I have ignored Satin CreditCare for comparison.

CAGL's operations:  

CAGL's Gross AUM (Assets Under Management) grew at a CAGR of 57.45% from Rs. 809.52 Crore in Fiscal 2014 to Rs. 4974.66 Crore in Fiscal 2018.

Its disbursements across its financing  products for the Fiscal 2017 and 2018 were Rs. 3402.63 Crore and Rs. 6081.72 Crore respectively representing 78.74% growth. It was mere 0.02% in Fiscal 2017. In an BloombergQuint interview, the reason for a sudden rise in disbursement was asked to Mr Udaya Kumar the MD & CEO of the company. In response to the question Mr Udaya Kumar said, "During the year 2016-2017 especially in 3rd and 4th quarter,  the disbursements were slightly muted during the demonetization time. Otherwise if you see, actual disbursements has picked up from 1st quarter of 2017-2018, otherwise it is a natural growth. If you combine both period it is a natural growth"

                                       Revenues and PAT:

As the disbursements increase, net interest income will increase and so the revenues and profit. Profit after tax has jumped from meagre Rs. 16.63 Crore in Fiscal 2014 to Rs. 124.24 Crore in Fiscal 2018.

                                        Non - Performing Assets:

The company's Gross NPA Ratio was 0.08% as of March 31, 2017, which increased to 1.97% as of March 31, 2018. The provision for non-performing assets also increased significantly from Rs. 2.58 Crore as of March 31, 2017 to Rs. 98.09 Crore as of March 31, 2018. Its NPA Ratio which was 0.00% as of March 31, 2017 remained unchanged as of March 31, 2018.

The sudden jump in Gross NPAs was also asked in the interview, Mr Kumar said, "During demonetization that happened in the year 2016-17, rural based cash economy where customers wanted some more time to change their cash or draw their cash, so three four weeks of time they had taken of which some of them were not able to pay for sometime, so it has temporary increased but it has come down now and it is quite normal"

CAGL's competitive 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 assets quality

strong track record of financial performance and operating efficiency

stable management team with extensive domain experience

Diversified sources of borrowings and effective asset-liability management.  

Other Information:

The company has not declared any dividend in the last five years.

The company's debt-equity ratio was 2.52 as on March 31, 2018 which will reduce to some extent after infusion of fresh capital. Higher debt/equity ratio is normal in lending business. 

Conclusion:

Overall, the company is fundamentally strong. It has been registering good numbers and in terms of  AUM, disbursement, revenues and profitability. Micro financing companies outperform. Their shares are in demand.  Going forward, it has a huge potential to grow in its niche i.e. micro financing. And top of everything pricing seems quite competitive. As far as NPAs are concerned, it remains a key risk in any lending organization and CAGL is no exception

Should you subscribe or not? Well, first anchor investors list can be vouched. Then, initial two days subscription figures which represents QIBs and HNIs interest can be vouched.  Simultaneously, GMP can be followed and then decide.    

Thank you for reading…Jai Hind

(Note : I write reviews based on my knowledge and understanding. The reader of this blog should do his/her own research before taking any investment decision)