Emkay Global raises CreditAccess Grameen's target price amid MFI recovery

Emkay Global has adjusted its outlook on CreditAccess Grameen Ltd (CREDAG), raising the target price by 26% from Rs 975 to Rs 1,225. This move comes as the brokerage maintains its 'ADD' rating on the company, citing CreditAccess Grameen as a significant beneficiary of the microfinance institution (MFI) segment recovery. Emkay cites CreditAccess Grameen's strong RoA and credible track record in navigating MFI challenges as pivotal to its valuation.

CreditAccess Grameen's latest financial results have shown a notable improvement, with the company returning to profitability in Q4FY25, posting a profit of Rs 47.2 crore. This turnaround comes after a loss in the previous quarter, aided by improved margins and controlled provisions. However, the asset quality within the MFI sector remains under pressure due to existing regulatory frameworks like the MFIN guardrails and adverse effects from regional ordinances, such as the one in Karnataka.

The company's Gross Non-Performing Assets (GNPAs) rose significantly by 77 basis points quarter-on-quarter to 4.8%, while PAR 0+ increased by 10 basis points to 6.9%. These figures reflect heightened stress in the MFI portfolio. To address these issues, CreditAccess Grameen has reduced its Group Loan Portfolio with three lenders to 15% from 19% in Q3FY25, while borrowers under these lending relationships decreased to 20% from 24%.

CreditAccess Grameen has implemented an accelerated write-off strategy totalling Rs 480 crore for loan accounts with 180+ Days Past Due. This approach aligns with its early risk recognition and conservative provisioning policy, aiming to normalise asset quality by September 2025. Such accelerated write-offs are expected to continue into the first half of FY26, as part of efforts to stabilise the company’s financial health.

Looking ahead, CreditAccess Grameen is seen growing its asset under management (AUM) between 14% and 18% in FY26, driven primarily by retail finance. However, MFI growth is seen subdued in the first half of the fiscal year due to ongoing write-offs, with recovery expected in the latter half. Emkay Global has adjusted CREDAG's FY26 earnings estimates down by 4.9%, considering slower growth and elevated loan loss provisions.

The firm’s strategic adjustments reflect its commitment to overcoming current challenges while capitalising on long-term opportunities within the MFI sector. Despite elevated stress anticipated in early FY26 due to full MFIN guardrails implementation and regional legislative impacts, Emkay Global remains positive about CREDAG's prospects, supported by strong capital buffers and capable management.

The brokerage values CREDAG at a premium compared to peers, including Small Finance Banks, due to its robust ability to navigate sector-specific challenges and deliver a strong Return on Assets between 3% and 5% over FY26-FY28. Emkay Global's confidence is bolstered by CREDAG’s management calibre and the firm’s substantial capital reserves.