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Credit Suisse upgraded Bharat Financial Inclusion to outperform on Thursday and raised its 12-months target price to Rs 800 from Rs 760 earlier post Q4 results.
The microfinance lender reported a net loss of Rs234.92 crore for the quarter ended March 31, 2017, mainly due to write-offs of Rs 334.56 crore.
Bharat Financial, formerly SKS Microfinance, had made a net profit of Rs84.47 crore during the corresponding January-March quarter of 2015-16.
“The company reported a steady improvement in collections. It now allows us to put a ceiling on the eventual portfolio losses at about 5 percent. With provisions in 4Q plus our modelled provisions over the next 4Q, we believe this issue is adequately factored into the earnings,” said the Credit Suisse report.
Demonetisation has hit the microfinance (MFI) industry, and recent industry data shows that Bharat Financials portfolio management has been far superior. The global investment bank attributes this to its robust operating model (including weekly collection).
The firm has been taking technology initiatives and in- house solutions, the last mile cashless transaction points to expand products and services, it said. Bharat Financial said it has completed a successful pilot project to scale up coverage.
Credit Suisse is of the view that Bharat Finance remains the most cost-efficient MFI, and there could be further operational expenditure (opex) gains from the technology adoption. This is a clear upside risk to our earnings estimate.
Given the vulnerabilities exposed by demonetisation, investors may start looking at this business with a 17 percent across-the-cycle return on equity (ROE).
However, low penetration implies growth should remain the fastest at 25 percent (long term). In this context, the global investment bank finds the stock attractive now.
A potential M&A deal provides an upside option. Credit Suisse increased its earnings per share (EPS) estimates by 1-3 percent on opex efficiency gains, and raise target price to Rs800 from Rs760.
The management has also indicated that they are open for a takeover and in the process of evaluating all the options such as share swap or all-cash deal.
IDFC Bank, IndusInd Bank and RBL Bank are in talks with the country’s first listed micro lender to this end. “Managing Director M R Rao told a business newspaper that consultant is evaluating all options including share-swap or all-cash deal,” said a report.
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