Goldman Sachs highlighted significant risks to the Bengaluru-based microfinance institution’s earnings visibility, which it attributes to several factors, including a high exposure to over-leveraged borrowers and industry-wide stress.
The downgrade in rating and the cut in target price for the microfinance company is being attributed to the reduction in asset quality of the company in the second quarter of the fiscal year, which concluded in September, the brokerage noted.
Asset quality stress in the microfinance sector had forced the country’s largest non-banking finance company-micro finance institution to report a 46.4% year-on-year dip in net profit to Rs 186 crore for the September quarter and to revise the annual growth outlook downwards by more than a half.
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Facing fresh stress in the sector, the microfinance company’s asset quality also sharply deteriorated with gross non-performing assets ratio rising to 2.44% at the end of September from 0.77% a year back. It wrote off loans worth Rs 135 crore.
The Bengaluru-based NBFC-MFI had revised the annual growth projections downwards to 8-12% from earlier guidance of 23-24%, while revising the return on assets guidance to 3-3.5% from 5.4-5.5% and return on equity guidance to 12-14% from 23-23.5%.
At the end of September, the firm’s gross loan portfolio grew 11.8% year-on-year to Rs 25,133 crore while the borrower base grew by 7.2% to 49.33 lakh.
The brokerage also said that the increased tightening in the Microfinance sector, as a result of the practices and strategies used by these Microfinance Institutions, could further add to the factors leading to the decrease in the quality of assets of the Bengaluru-based company. The Reserve bank of India had recently imposed restrictions on several microfinance institutions in October.
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