Manappuram Finance Research Report By Edelweiss

Manappuram Finance’s (MGFL) Q4FY17 numbers came below trend as demonetisation and political interference impacted gold loans and MFI business. While gold loan disbursements normalised a tad (up 1.7% QoQ), higher auctions (bunched up in Q4FY17) led to AUM dip of >9% QoQ to INR111bn. MFI business reported a loss of ~INR75mn as GNPLs rose sharply to 4.7% (0.16% in Q3FY17) leading to higher provisioning of INR396mn (up > 10x YoY). Meanwhile, other businesses (home loans, CV loans) posted impressive growth. Diversification will entail lower risks of mono-line business model. Maintain ‘BUY.

Higher auctions dent AUMs; NIMs sustained

Disbursements in Q4FY17 stood at INR123bn (up ~1.7% QoQ); however, higher auctions (INR7.9bn, bunched up in Q4FY17) led to >9% QoQ dip in gold AUMs. Meanwhile, underrecoveries were minuscule due to tilt towards shorter-duration loans. Sustained yields, along with better funding cost, bolstered revenue momentum. Management expects demonetisation impact to wane in FY18 and growth to normalise. Notably, other businesses—MFI book touched INR18bn and home loans & CVs at >INR3bn each—are making good progress. MGFL aims to take proportion of new business to 25% (~19% currently) by FY18 and 50% by FY20 with overall loan CAGR target of 20%.

Asset quality: Gold loans recovering gradually, MFI under pressure

With aggressive auctions during the quarter, GNPLs in gold business dipped to 2.0% (2.3% in Q3FY17), indicating softer recovery trend. Meanwhile, GNPLs in MFI business spiked to 4.7% (0.16% in Q3FY17) with stress largely flowing from Karnataka (MGFL has limited exposure to other stressed states of UP & Maharashtra), which along with aggressive provisioning policy, took a toll on MFI earnings. QoQ growth in MFI AUM of >8.8% indicates management’s comfort that asset quality concern is waning.

Outlook and valuations: On diversification drive; maintain ‘BUY’

We see growth levers: a) stabilising gold prices; b) gap in AUM/gram (INR1,821 versus incremental lending at INR1,900-2,000); and c) stabilising auctions to aid growth. However, following lower AUM base set in FY17 and uncertainty following new rule of cash disbursements being restricted to INR20k, along with higher opex, we prune our FY18/FY19 earnings estimates by 6%/10%. Further push will come from scale up of other businesses, which will drive re-rating. The stock is trading at 1.7x FY19E P/BV (consolidated). We maintain ‘BUY/SO’ with TP of INR120.