Goldman Sach has initiated a ‘buy,’ with a target price of Rs 1,788 per share. The research and broking firm has valued CreditAccess Grameen at 15x FY25E earnings per share (EPS), implying an upside potential of 25 per cent.
Despite a slight decline earlier in the year, the stock has soared by an impressive 58.19 per cent over the past year. As of 13:03 pm on Friday, shares were trading a little over 4 per cent higher at Rs 1,485.95 per share as compared to the S&P BSE Sensex that was trading nearly 700 points, or 0.9 per cent lower at 74,300 levels.
Goldman Sachs' analysis reveals that CreditAccess Grameen currently trades at attractive valuation multiples, including 2.7 times price to book (P/B) and 12 times price to earnings financial year 2025 estimate (P/E FY25E), representing a 27 per cent discount compared to similar non-banking financial companies (NBFCs) covered by the brokerage.
Here are the five key reasons driving Goldman Sachs' optimism about CreditAccess Grameen:
Expanded microfinance lending
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The microfinance sector has witnessed robust growth, especially after regulatory reforms by the Reserve Bank of India (RBI) post-COVID. Goldman Sachs estimates the total addressable market (TAM) to have expanded by around 50 per cent to $136 billion by financial year 2025 (FY25). CreditAccess Grameen is well-positioned to capitalise on this growth, with a forecasted assets under management (AUM) growth of 19 per cent over financial year 2024-2028 estimate (FY24-28E).
Broad-based Growth Levers
CreditAccess Grameen has strategically reduced its exposure to top states while focusing on expanding into non-core regions like Uttar Pradesh (UP), West Bengal, Rajasthan, and Bihar. The company’s contiguous district-based expansion strategy has enabled lower credit costs and higher operating leverage. This approach is expected to drive major growth, with a projected loan book of approximately Rs 51,900 crore by financial year 2028 estimate (FY28E).
Better managed asset quality through cycles
Despite the microfinance industry facing various crises in the past decade, CreditAccess Grameen, Goldman Sachs said, has displayed resilience in managing credit risks. With an average credit cost of around 3 per cent during financial year 2020-first nine months of financial year 2024 (FY20-9MFY24), the company's conservative underwriting practices and geographical diversification have helped maintain relatively stable asset quality compared to industry peers.
Operating leverage for superior PPOP-ROA
CreditAccess Grameen boasts a low cost-to-asset ratio, enabling it to deliver superior pre-provision operating profit (PPOP) return on assets (ROA). As the company benefits from digital investments and scales up its retail finance portfolio, further improvements in cost efficiencies are expected, driving sustained profitability.
Diversified liability mix
CreditAccess Grameen has strategically diversified its borrowing sources away from traditional bank loans, reducing dependence on bank credit. This prudent approach, coupled with a focus on broad-based funding sources, is expected to provide a long and sustainable runway for growth, particularly amid potential rises in bank loan pricing.
Additionally, the company’s strong operating metrics, including its lowest interest rates among top microfinance players and superior return metrics, further support Goldman Sachs' bullish outlook.
Despite expectations of moderating profitability, Goldman Sachs forecasts a robust 21 per cent compound annual growth rate (CAGR) in profit after tax (PAT) over FY24-26E, driven by continued loan growth and operational efficiencies.