Despite a risky business, the microfinance companies have attracted investors over the years due to fast growth and high return ratios. The potential of further business growth due to under-penetration, fat spreads leading to high RoAE and cheap valuations have made microfinanciers a better investment option, analysts said.

Share Market Live

NSE

In the past two years, while broader credit growth has slowed considerably, microcredit growth has fared better. At present, active microcredit borrowers are just 4.3 percent of the population. 10 Indian states account for more than 80 percent of outstanding microcredit and the average outstanding per borrower is around Rs 39,300.

“The clichéd premise of under-penetration and increasing financial inclusion forms an essential part of the investment thesis for microfinanciers. There is potential for further geographic diversification and consequent growth in borrowers and an increase in loan sizes. While in the near term, growth is likely to be tepid, we expect it to rebound sharply in FY22E and FY23E,” HDFC Securities Institutional Equities said in a report.

Fat spreads permit microlenders to earn higher RoAEs than most other types of lenders. The brokerage expects microfinanciers such as Bandhan Bank, Ujjivan Small Finance Bank, Credit Access Gramin, among others to see a sharp fall in RoAEs to 717% in FY21E, followed by a recovery to 13.7-20% over FY22-23E.

Meanwhile, the microcredit asset quality issues have been event-based and/or associated with specific locations, rather than tied with broader economic activity, the report noted. COVID-19 poses a significant challenge on this front, as this segment saw the highest proportion of loans under moratorium (18 percent to 50 percent, last reported).

However, analysts believe that the current valuations for these companies do not fully factor in their ability to deliver superior return ratios.

Most microfinanciers saw a significant price correction post the COVID-19 outbreak. As highlighted, micro financiers’ asset quality issues tend to be event-driven. We, therefore, expect asset quality issues to peak in FY21E. Consequently, we expect microlenders within our coverage to see a significant recovery in return ratios in FY22/23E,” the brokerage said.

HDFC Securities has initiated coverage on Bandhan Bank with a Buy rating and a target price of Rs 367, Ujjivan Financial Services with a Buy call and a TP of Rs 356. It has Add rating on Ujjivan Small Finance Bank and Credit Access Gramin with a TP of Rs 40 and Rs 797, respectively.

(Disclaimer:

The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.)