Microfinance sector set for new growth wave: Fusion Micro Finance, CreditAccess Grameen, among stocks to buy

The microfinance sector is primed to ride the new growth wave going ahead, with focus on portfolio resilience amid a structural transformation, analysts said.

The microfinance institutions (MFI) grew at a slower CAGR of 15% over FY20-23 as compared to its 29% growth over FY14-20, largely due to major political and asset-quality headwinds.

However, analysts believe these asset quality woes are largely behind and new regulations for the sector offer a level playing field for NBFC-MFIs. Coupled with higher HH limits, the sector is already riding the new growth wave of 22% in FY23, albeit with an eye on building portfolio resiliency, Emkay Global Financial Services said in a report.

The brokerage house expects overall MFI gross loan portfolio (GLP) CAGR of 21% over FY23-26, and reach ₹6.2 lakh crore. However, despite such strong growth, household penetration will only increase, from 29% to 38%, while GLP/opportunity share would improve from 29% to 36% by 2025-26, offering a long growth run-way and allaying concerns around saturation. 

The NBFC-MFIs are also expected to claw-back some market share from banks in the near term. After a long time, banks have lost market share to NBFCs. Their market share has come down to 51% from 60% in FY21.

“This is likely to persist in the near term, as such players including CreditAccess Grameen, Fusion Micro Finance, Spandana Sphoorthy Financial, Satin Creditcare Network, etc, look for accelerated growth of over 25% versus calibrated around 18-20% growth for a few large universal banks including Bandhan Bank, IndusInd Bank and RBL Bank, given their strategy to limit share of unsecured loans or diversify portfolio,” Emkay Global said.

That said, the MFI sector, given its high growth of more than 20% and RoA potential of over 2%, will continue to attract new banks and thus even look for inorganic acquisitions, the brokerage believes.

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“On the other hand, NBFC-MFIs (e.g. Spandana) would ultimately converge with banks given their scale, cost advantage or regulatory cover, thereby consolidating the bank’s dominance in the long run. We believe the ensuing strong growth phase could also possibly open up the listing gates for long-time aspirants like ESAF SFB, Utkarsh SFB, Fincare SFB and Arohan (NBFC), thereby infusing fresh growth capital into the sector,” the brokerage said.

Among such unlisted players, Fincare looks to be relatively better, given its lower geographic concentration and better liability/returns profile, it added.

Additionally, the MFI sector has recovered from back-to-back asset quality shocks. The overall credit cost is expected to moderate over FY24-26E at 1.5-2.1%, thereby protecting long-term profitability and RoAs.

Most MFI players are positively focused on building portfolio resilience/provision buffers, which should help them withstand frequent disruptions and address the growth/earnings volatility concerns among investors, the brokerage house said.

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It initiates coverage on Fusion Micro Finance with a Buy rating and a target price of ₹725 per share and CreditAccess Grameen with a Buy call and a target of ₹1,650 per share, given superior growth, RoA trajectory and management credibility.

Among small finance banks, Emkay Global is positive on Ujjivan Small Finance Bank and has Buy rating with a TP of ₹50. It also has a Buy rating on Equitas Small Finance Bank and increased its target price to ₹102 from ₹90 earlier, given its diversified asset portfolio, better liability/return profile and ensuing transition into a ‘universal bank’. 

The brokerage retains Buy on Bandhan Bank, with a target of ₹300, given its strong liability profile and expected NPA recovery, but believes that product, geographic diversification and building provision buffers will be key for long-term profitability and re-rating.

Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.