CreditAccess Grameen IPO – Should you Subscribe?

CreditAccess Grameen IPO ReviewCreditAccess Grameen IPO – Should you Subscribe?

Bangalore based CreditAccess Grameen IPO would open for subscription on 8th August, 2018. Credit Access Grameen Limited (formerly known as Grameen Koota Financial Services) is 3rd Largest Micro Financial Institution (MFI) in India. Company revenues grew by 56% CAGR in the last 5 years. It earned profits of 14% for FY2018. There are strong views of experts about the Grameen IPO. What are positive factors in this CreditAccess Grameen Limited IPO? What are the hidden factors in CreditAccess Grameen IPO? Should you invest in CreditAccess Grameen IPO? Let me provide some insights about this IPO and do the review.

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About CreditAccess Grameen Limited

They are a leading Indian micro-finance institution headquartered in Bangalore, focused on providing micro-loans to women customers predominantly in Rural Areas in India. According to CRISIL Research, they were the third largest NBFC-MFI in India in terms of gross loan portfolio as of March 31, 2017. Its wide range of lending products addresses the critical needs of its Customers throughout their life cycle and includes income generation, family welfare, home improvement and emergency loans. They believe that its customer-centric business model, wide range of product offerings, as well as its well designed product delivery and collection systems, have enabled us to achieve high customer retention rates and low credit costs.

They focus predominantly on customers in Rural Areas in India, who largely lack access to the formal banking sector and present a latent opportunity for offering micro-loans. Company products are built on a deep understanding of the requirements of Company Customers (especially Customers from Rural Areas) and the flexibility of its products (in terms of ticket sizes, end-uses and repayment options) and the manner of their delivery differentiates us from Company's competitors and generates customer loyalty. The company focus customer segment is women having an annual household income of ₹160,000 or less in Urban Areas and ₹100,000 or less in Rural Areas. They provide loans primarily under the joint liability group ("JLG") model. Company primary focus is to provide income generation loans to Company Customers, which comprised 87.02% of Company total JLG loan portfolio, as of March 31, 2018. They also provide other categories of loans such as family welfare loans, home improvement loans and emergency loans to Company existing Customers. In 2016, with a view to diversifying Company product profile, they introduced individual retail finance loans for customers who had been its Customers for at least three years and fulfil certain other eligibility criteria linked primarily to their credit history with us, income, and business position. They offer these loans to customers to establish a new enterprise or expand an existing business in their individual capacity (for instance, for the purchase of inventories, machinery or two-wheelers).

You can view the CreditAccess Grameen IPO through Video here.

CreditAccess Grameen IPO Issue details

IPO opening date: 8-Aug-2018

IPO closure date: 10-Aug-2018

Face Value: Rs 10 per share

Issue price band: Rs 418 to Rs 422 per share

Issue size: 1,131 Crores

IPO Lot size: 35 shares and 35 shares, there-off

Minimum investment: Rs 14,770 on higher price band

Leading Managers: Kotak Mahindra Capital, IIFL Holdings, ICICI Securities and Credit Suisse India

Listing: BSE / NSE

Download CreditAccess Grameen IPO RHP Prospectus at this link.

Objects of the CreditAccess Grameen IPO issue

The Objects of the issue are:

a) Offer for Sale: The Promoter Selling Shareholder shall be entitled to the proceeds of the Offer for Sale, net of its share of the Offer related expenses. The fees and expenses relating to the Offer shall be shared in the proportion mutually agreed between the Company and the Promoter Selling Shareholder in accordance with applicable law. The company will not receive any proceeds from the Offer for Sale.

b) Fresh Issue: Company proposes to utilize the Net Proceeds from the Fresh Issue towards augmenting its capital base to meet future capital requirements.

c) Further, the Company expects to receive the benefits of listing of the Equity Shares on the Stock Exchanges, enhancement of Company’s brand name and creation of a public market for the Equity Shares in India.

Company Promoters

1) The promoter of the company is CreditAccess Asia N.V. ("CAA"). It holds 98.88% of the pre-Offer issued, subscribed and paid-up equity share capital and will continue to hold a majority of the post-Offer paid-up Equity Share capital of the Company.

2) Netherlands based CAA is a company engaged in providing financial services to micro, small businesses, and self-employed people. CAA has investments in microfinance institutions in several emerging countries, including India, Vietnam, Indonesia and the Philippines.

Company Financials (reinstated)

1) The company generated revenue of Rs 147.8 Crores for the year ended Mar-14 and Rs 875.2 Crores for the year ended Mar-18.

2) The company posted a profit of Rs 16.6 Crores for the year ended Mar-14 and profit of Rs 124.6 Crores for the year ended Mar-18.

CreditAccess Grameen IPO - Revenue and profits from 2014 to 2018

What are the key strengths of CreditAccess Grameen Limited?

Here are the key strengths of the company.

1) Customer-centric business model resulting in high customer retention.

2) Deep penetration in Rural Areas characterized by low competition and built through contiguous district-based expansion.

3) Robust customer selection and risk management policies resulting in healthy asset quality.

4) Strong track record of financial performance and operating efficiency.

5) Stable management team with extensive domain experience.

6) Diversified sources of borrowings and effective asset-liability management.

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What are the Strategies of CreditAccess Grameen Ltd?

Here are the key strategies of the company.

1) Continued focus on the customers from Rural Areas.

2) Expansion of branch network.

3) Leverage existing capabilities and strengths to diversify product and service offerings.

4) Focus on optimizing operating costs and improving operational efficiencies.

Reasons to invest in CreditAccess Grameen IPO

1) The company posted strong revenue growth. It posted revenue growth of 56% CAGR in the last 5 years.

2) The company posted good profits in the last 5 years. The company posted profitability growth of 65% CAGR in the last 5 years. It earned margins of 14% on revenues in FY2018.

3) It is 3rd largest micro financial institution in India.

4) It is backed up with MNC promoters who has a strong presence in MSE financing.

Risk Factors / Reasons not to invest in a CreditAccess Grameen IPO

1) Company operations are concentrated in Karnataka and Maharashtra and any adverse developments in these states could have an adverse effect on its business, results of operations, financial condition and cash flows.

2) Microfinance loans are unsecured and are susceptible to various operational and credit risks which may result in increased levels of NPAs, thereby adversely affecting Company business, results of operation and financial condition

3) An increase in Company portfolio of non-performing assets and/ or Company provisions may materially and adversely affect Company business and results of operations.

4) If they are unable to manage Company growth effectively, its financial, accounting, administrative, operational and technology infrastructure, as well as its business and reputation could be adversely affected.

5) The past performance and growth of its business is not indicative of its future performance and growth.

6) Company business is particularly vulnerable to interest rate risk, and volatility in interest rates could have a material adverse effect on its net interest income, net interest margin and Company financial performance.

7) Any downgrade of Company credit ratings may increase Company borrowing costs and constrain Company access to capital and debt markets and, as a result, may adversely affect its net interest margin and Company results of operations.

8) Company Promoter has invested in Sahayata Microfinance Private Limited, which has been involved in various financial irregularities and discrepancies in the past.

9) Company promoter, CAA has invested in other companies engaged in similar businesses as its jurisdictions outside India, and may continue to invest in similar businesses. Further, some of Company Directors are also directors on the board of directors of companies that are in the same line of business as the company.

10) Company business is subject to seasonality, which may contribute to fluctuations in Company results of operations and financial condition.

11) As an NBFC-MFI, They are subject to periodic inspections by the RBI. non-compliance with observations made by the RBI during these inspections could expose us to penalties and restrictions.

12) There are outstanding legal proceedings involving Company and some of its Directors, and adverse outcomes in such proceedings may negatively affect its business and results of operations.

13) They had negative cash flows in the past and may continue to have negative cash flows in the future.

14) For complete internal and external risk factors, you can refer the DRP of the company.

Grameen IPO Schedule

1st Aug – Price Band to be Announced

7th Aug – Anchor List

8th Aug – Offer Opens

10th Aug – Offer Closes

16th Aug – Finalisation of Basis of Allotment

20th Aug – Unblocking of ASBA

21th Aug – Credit to Demat Accounts

233rd Aug – Listing on NSE & BSE

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CreditAccess Grameen IPO – Should you invest?

Let us look at the valuation of the company now. On FY2018 EPS of Rs 12.6 and on an upper price band of Rs 422, P/E works out to be 34.4x. On last 3 years average EPS of Rs 11.37, P/E works out to be 37x. Means company is asking for a higher price band Rs 422 where P/E would be in the range of 34x to 37x. If we take diluted nos, the P/E is approx. 48x. There are listed peers like Ujjivan Financial Services is trading at P/E of 627x (Highest) and Shriram Transport Finance is trading at P/E of 17x (Lowest) and industry average P/E is 101x. Hence Grameen IPO Issue price at Rs 422 is fully priced.

The company posted strong revenue growth at 56% CAGR in the last 5 years. It earns good profits. Its issue price is fully priced. Considering all these positive factors, investors can invest in this IPO for 4-5 years time frame. Investors may or may not get listing gains.

Disclaimer: I have an interest in investing in this IPO and above analysis is based on my personal views. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.

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CreditAccess Grameen IPO – Should you Subscribe

Suresh KP

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