By Rahul Rao
2024 has been a painful year for Microfinance players. In this latest episode of ‘Microfinance mayhem’, listed Microfinance companies are down by more than 40-50% over the last year. Even banks with an MFI (Microfinance Institutions) book as small as 6% of Total loans are getting punished (IDFC First Bank) by the market.
There is no doubt the beat down has been indiscriminate, which is exactly what makes for a potential investment opportunity.
The root of the current MFI issue is overleveraging combined with a slowing economy which are impacting cash flows of borrowers and consequently their repayment ability.
This is leading to elevated delinquencies and impacting the profitability of the sector. This issue stems from a few key factors:
In response, the MFI self-regulatory body (SRO) announced on 2nd November 2024 that it will be implementing 7 ‘covenants’ to tackle with the ongoing challenge. However, on January 4th the SRO announced that one of the key covenants announced earlier i.e. – capping of lenders per borrower to three has been delayed for implementation until April 1st 2025.
According to Sadaf Sayeed, CEO Muthoot Microfin, there was a “need for analysing the impact the impact of 4 lender (cap) norms before further tightening…in the meantime leverage amongst borrowers has been unwinding. MFI portfolio is down from 4.4 Lac Cr in March 24 to 4 Lac Cr in September 24”. Total MFI portfolio in December has degrown further.
Over the last week, 12 MFI players we are tracking closely were up in Intraday trade on Thursday 9th January 2025. Spandana Shpoorthy and CreditAccessGrameen shot up by more than 10% in Intraday and Spandana is up 18% over the last 1 week.
Could this be a sign that market is seeing opportunity on the horizon?
Equitas SFB in its business update dated 4th January 2025 said, “The stress in microfinance is finally showing early signs of stability, with the collection efficiencies of Q3FY25 being at the same level as Q2FY25”
However, none of the other 11 players under our watchlist have provided a statement on the matter yet. Therefore, no publicly available information points to the fact that the bad loan cycle of MFIs have bottomed out.
If anything, Q3FY25 should be more of the same. This assertion Is based on how the past Gross Nonperforming Assets have evolved during bad cycles. With loans due past 180 days at just 2.6% on an Industry level, it is nowhere close to the GNPA experience of previous cycles where GNPA were comfortably north of 7% on an Industry basis.
However, as a result of negative near term expectorations, valuations have become attractive.
Most of the 12 SFBs & NBFC-MFI which we are watching closely are either trading at close to their all-time low P/B valuation or are currently at their all-time lows. Since at least 5 of these 12 MFI players were listed in in recent history when the going was good for the sector, they’re forming fresh all-time lows. Remember, IPOs happen when the sector is usually doing great.
Therefore, we do NOT have a reference Price to book value for recently listed players (marked in yellow).
On Average, this set of 12 listed players is trading at a simple average price to book of 1.14 compared to the low of 0.99.
The bottom line is that the sector is cheap, for good reason. However, we cannot say with certainty when the crisis has “bottomed out”. What we can say with reasonable confidence is that with the sector hitting valuation lows, the probability of losing significant money from these valuations seems remote. As Q3FY25 results start pouring in during this month, the reading for the near future should become clearer.
Note: We have relied on data from www.Screener.in and www.tijorifinance.com throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.
Rahul Rao has been Investing since 2014. He has helped conduct financial literacy programs for over 1,50,000 investors. He helped start a family office for a 50-year-old conglomerate and worked at an AIF, focusing on small and mid-cap opportunities. He evaluates stocks using an evidence-based, first-principles approach as opposed to comforting narratives.
Disclosure: The writer and his dependents hold (Arman Financial), a stock discussed in this article.
The website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein. The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers/authors. Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.
India’s aviation industry is projected to face a loss of Rs 2,000 to Rs 3,000 crore in the next two fiscal years due to supply chain disruptions and engine problems. However, passenger traffic is expected to grow steadily, with domestic traffic surpassing pre-COVID levels.
Is the Microfinance Industry bottoming out? Stocks to Track… – The Financial Express
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