Bharat Financial Stares At Writeoff As Collections Dry Up In Uttar Pradesh And Maharashtra
India’s fourth largest microfinance company by loan portfolio, Bharat Financial Inclusion Ltd. may see 4.5 percent of its loan portfolio turn into non-performing assets if collections do not recover to pre-demonetisation levels, the company said in a call with analysts on Monday. The total loan book stood at Rs 6,879 crore at the end of February 2017.
The microfinance company now has Rs 306 crore or 4.5 percent of the loan book where there have been no payments for more than eight weeks. This compares to 0.2 percent of the loan book that was overdue in the quarter-ended December 2016. The company recognises non-performing assets as those that are overdue for more than 60 days.
Religare Capital Markets expects the overdue amount to rise as Bharat Financial's portfolio ages. "Installments outstanding for more than three months are very difficult to recover," the brokerage said.
As per provisioning norms, the company must write off 50 percent of the outstanding amount of Rs 306 crore due for more than eight weeks, which translates to more than Rs 150 crore.
The company did not guide on provisioning that it would make for the January to March 2017 quarter, adding that it would take a call by the end of the quarter as recoveries continue to improve. Analysts expect credit costs to rise sharply for the January-March quarter as they factor in higher writeoffs.
“We now factor in provision charge of Rs 260 crore over Q4FY17(fourth quarter of financial year 2016-17)-FY18 versus Rs 120 crore earlier”, wrote Alpesh Mehta, analyst at Motilal Oswal Securities, who has downgraded the stock to a ‘Neutral’ rating. Mehta has trimmed his FY18 and FY19 earnings per share estimates by 18 percent and 3 percent to factor in higher credit costs and interest reversals. The stock has limited upside from current levels, he added.
Approximately 50 percent of the overdue portfolio pertained to Uttar Pradesh and Maharashtra, Bharat Financial said. Collections in these two states were impacted by hopes of farm loan waivers amid state assembly elections in Uttar Pradesh and local body elections in Maharashtra. In December last year, the Maharashtra government had told the legislative assembly that it would set up a special investigation team (SIT) to look into the alleged coercive recovery practices and harassment of women due to non-payment of dues.
"We expect Uttar Pradesh/Maharashtra to see credit cost of 3-5 percent and rest of India at 1 percent resulting in total credit cost of 2-2.5 percent by financial year 2017-18 end," Religare Capital Markets said in its report.
No Relief On Ground
Religare's channel checks suggest that situation on the ground has not improved as expected and microfinance companies have indicated higher stress compared to their initial assessment at the end of December 2016.
The stress is visible especially for unlisted players operating in north India. Such players with 35-40 percent exposure to Uttar Pradesh have increased their credit cost guidance to 3-5 percent of their total portfolio as compared to 2 percent at the end of December 2016. Collection efficiency in some parts of Maharashtra is weaker than western Uttar Pradesh, brokerage firm Religare said.
Another brokerage, Antique Institutional Equities, however said in its report that the demonetisation shock has subsided and even if Bharat Financial is unable to recover its dues, it will only bear a one-time credit cost of 4 percent.
The management has increased its guidance for assets under management (AUM) for FY17 to Rs 9,000 crore from Rs 8,500 crore earlier, and reiterated 50 percent AUM growth for FY18.
Shares of the microfinance lender have rallied 67.1 percent to Rs 803 since its December 26 low of Rs 480.15, recovering nearly all of its post-demonetisation losses of 41.9 percent in the November 8-December 26 period. Recent reports of a merger with IndusInd Bank Ltd. had turned investors bullish.
All five analysts having coverage on the stock and being tracked by Bloomberg have left their rating on the company unchanged, while adjusting their price targets by -2 percent to +1.4 percent.