Credit Suisse
Bharat Financial
(Ourperform)
CMP: ₹729
Target: ₹800
Key takeaways: a) Steady improvement in collections for Bharat Financial Inclusion (Bhafin) now allows us to put a ceiling on the eventual portfolio losses at about 5 per cent. With provisions in 4Q plus our modelled provisions over the next 4Q, we believe this issue is adequately factored into the earnings.
b) While demonetisation has hit the microfinance (MFI) industry, recent industry data shows that Bhafin’s portfolio management has been far superior. We attribute this to its robust operating model (including weekly collection).
c) At the same time, Bhafin remains the most cost-efficient MFI, and there could be further opex gains from technology adoption. This is a clear upside risk to our earnings estimate.
d) Given the vulnerabilities exposed by demonetisation, investors may start looking at this business with a 17 per cent across-the-cycle ROE. However, low penetration implies growth should remain the fastest at around 25 per cent (long-term). In this context, we find the stock attractive now. A potential M&A deal provides an upside option.
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