Microfinance stocks shine through the NBFC gloom

Despite the pressure on nonbanking finance companies (NBFCs) due to liquidity issues and dwindling asset quality, listed microfinance companies including CreditAccess Grameen, Satin Creditcare Network, and Spandana Sphoorty Financial are back on investor’s radar clocking 26-95% gains in one month. Healthy capital base, provisioning towards the pandemic losses, strong customer network, and attractive valuations based on forward multiples are the key factors that are supporting their stock performance.

The nationwide lockdown that began on March 24 to curb the spread of COVID-19 pandemic and gradually eased since May 31, has severely affected the metro and urban areas thereby impacting the credit disbursal. The bank credit growth halved to 6.4% in the March 2020 quarter from 13.2% in the year-ago quarter. However, the rural regions of the country are relatively less affected given the good Rabi crop harvesting and the government’s financial support through rural employment program. This augurs well for the listed microfinance companies which majorly lend to these regions.

In the case of Spandana and CreditAccess, 95% and 86% borrowers are from the rural areas. For Satin Credit, 76% borrowers are from the rural areas while 78% are involved in agricultural and animal husbandry segments, which have shown lesser disruption due to the virus outbreak. Therefore, the repayment capability of these borrowers is intact.

Another positive factor is the rising collection efficiency due to a strong staff network. After a pause to all the commercial activities during the initial days of the lockdown, the microfinance companies have opened majority of their branches and have trained their staff to operate from remote locations with the help of technology. This is likely to improve collection efficiency. For instance, Spandana expects principal and interest collections to jump to Rs 300 crore in June 2020 compared with Rs 132 crore in May and Rs 14 crore in April.

As a part of the regulatory framework, each of the three companies has made a provision towards the possible credit loss due to the pandemic, which should contain the proportion of net nonperforming assets in the coming quarters. These companies are well capitalised and need not raise fresh funds in the near term. The capital adequacy ratios at the end of March 2020 were 23.6%, 30.5%, and 52.9% for CreditAccess, Satin Credit, and Spandana respectively.

On the valuation front, stocks of Spandana and Satin Credit are available at a trailing price-book (P/B) multiple of 1.3 and 1.8. According to analysts’ estimates, their FY22 forward P/Bs work out to be around one and 0.5 in that order. CreditAccess commands a P/B of three and its two-year expected multiple is 1.6.