CreditAccess Grameen IPO opens today. Should you subscribe?

IPO
Focused on providing micro-loans to women customers mostly in rural India, CreditAccess Grameen Limited (CAGL), according to CRISIL Research, is the third largest NBFC-MFI in the country in terms of gross loan portfolio as of March 31, 2017. It has a network of 516 branches spread across 132 districts in eight states. Karnataka and Maharashtra contribute to around 86% of its overall loan book. As on Mar18, it has a loan book of Rs 50 billion spread across 2.2 million clients.

The company is now tapping the market with its initial public offer that opens today. The offer comprises 14.9 million shares as a fresh issue and 11.9 million shares as offer for sale (OFS). Post issue, the promoter and promoter group’s holding will reduce to 80.3% and non-promoter shareholding will increase to 19.7% from 1.1%, reports suggest. The issue closes on August 10.

Should you subscribe? Here's what leading brokerages suggest.

PRABHUDAS LILLADHER

We do laud the strong business momentum (55% last 4 years) with clear rural focus backed by higher customer retention (~90%: best in the industry), 0% net NPA with high repayment rate (~97%) and high CAR at 29%. 

In the near-term, high business concentration risks and expensive valuations (at upper price band of Rs 422, valuations post issue stand expensive at over 34x price earnings ratio (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 in our view should stand limited, we recommend SUBSCRIBE for LONG TERM.

ANTIQUE STOCK BROKING

The near term looks great for Grameen, thanks to huge capital infusion and strong growth. However, the long term needs hard thinking – demonetisation has illustrated that even well run MFIs can lose 5% to 10% of AUMs in crisis. 

Geographic diversification & well capitalized balance sheet are the two most important defenses for NBFC-MFIs, who have regional niches. This will increase opex 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.

CHOICE RESEARCH

The company has managed average interest spread at 9.3% during FY14-FY18, the period mainly characteristics by the low interest rate scenario. Going forward, yield in the economy is likely to increase and thus it would remain difficult for CAGL to maintain same kind of margin going forward.

The company is valued at price/adjusted book value (P/ABV) of 2.9(x) to FY18 annualised adjusted book value per share (BVPS), which is a 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.

HEM SECURITIES

The company is bringing the issue at p/b multiple of 2.94 on post issue book value at higher end of price band of Rs 418-422/share. 

Although co has shown strong growth with CAGR of more than 50% from FY14 to FY18 in its financials added by solid fundamentals as some of the ratios are one of the best in industry but low return on equity (ROE), which will dilute post listing is a concern. Hence, we suggest “Subscribe” one with limited upside potential.

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