MFI stocks make a comeback in financial landscape after two-year hiatus

Ever since the Bharat Financial Inclusion’s acquisition by IndusInd Bank came through in 2018, the interest in the microfinance segment from an investment perspective waned off. While Equitas Holding and Ujjivan Financial Services were available as options, broiled in corporate structure issues, the merits in investing in microfinance (MFI) stock thinned over time.

Thanks to faster than expected recovery post the pandemic led lockdown and more importantly the rural markets heavy-lifting much of the economic comeback, MFI stocks are back in limelight after a two years hiatus. Not just that, for investors, gamut of available stocks has also increased. While CreditAccess Grameen and Spandana Sphoorthy Financial Services represent pure-play MFI stocks, options have opened up on the banking fronts too – whether small finance bank (Equitas and Ujjivan), their parent companies or a full-fledged bank (Bandhan Bank).  

Analysts at Nomura term MFI as the next decade of opportunity and a forecast 18 per cent and 16 per cent growth of assets under management (AUM) over the next 5 and 10 years respectively. What is set to drive growth will be the rural penetration, up from the current level of 38 per cent to 53 per cent in the next five years. But what makes the argument indisputably in favour of the MFIs is the size that has been accumulated over years despite multiple crisis and events that resulted in the business getting concentrated around the top seven players, accounting for 38 per cent of total MFI AUMs. At Rs 2.3 trillion book size, Nomura points out that MFI has turned out to be the second most important retail segment, first remaining the mortgages business with 13.5 trillion assets. Vehicle loans is a close third at Rs 2.2 trillion assets. More interestingly, with an annually compounded growth rate of 30 per cent between FY17 – 20, MFI loans have grown fastest in the retail segment (see table).

So how should investors approach the stocks? Nomura has ‘buy’ rating on all MFI-oriented stocks – CreditAccess Grameen, Equitas Holding, Ujjivan Financial Services and Bandhan Bank. The SFB subsidiaries of Equitas and Ujjivan also enjoy high comfort within the analyst community, and so is Spandana Sphoorthy, second largest MFI player. Therefore, from an attractiveness standpoint, stocks relatively placed the same way.

However, from a risk perspective if it’s important to bifurcate, pure-play MFIs may do better. With total focus in MFI business, their financial are susceptible only to those risks exclusive the MFI sector – disruption due to natural calamity or a sudden overheating of the lending market. Whereas with bank-led entities, the eminent need to diversify beyond MFI business would not just soften the overall yield but also make the balance sheet vulnerable risks of other businesses. Further, the holding companies of SFBs – Equitas and Ujjivan are lately gaining traction due to likelihood of collapse of holding company structure. “To that extent, it’s more a tactical bet, than business bet,” said a fund manager. Therefore, if an investor wants to capture the rural and the unbanked and underserved theme in the financial services space, pure-play MFI would be a better pick on growth perspective. “Provisioning costs may remain elevated for 2 – 4 months, there could be a churn within customers and the underwriting standards may improve,” an analyst from a domestic brokerage pointed out. In the process it could eat into the profits of CreditAccess and Spandana which may lead to some correction in coming months, which experts say should be used to accumulate the shares. 



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