Manappuram Finance Research Report By Nirmal Bang

The Glitter Is Back In Gold Loans

Manappuram Finance (MFL) reported its 3QFY18 results with the key strategic pointers being: (1) Material reversion to growth for gold loan book at 5.3% QoQ. (2) Security expenses would revert to prior levels on technology initiatives (please see conference-call highlights). Per se, on the results front, MFL posted NII growth of 5.5% QoQ to Rs6,153mn, PPOP growth of 6.2% QoQ to Rs3,057mn and PAT growth of 8.2% to Rs1734mn. We have marginally modified our legacy estimates for FY18/FY19 and retained Buy rating on MFL, increasing our target price to Rs136 (from Rs132 earlier), valuing the stock at 2.2x FY20E P/BV.

Reversion to growth for gold loan book dispels doubts about core business:

Gold loan book growing 5.3% QoQ shows that lending against gold is a truly bottom-of-pyramid business that is now recovering from the cash-cycle disruption that had arisen because of a variety of factors (demonetisation, drought-like condition in parts of South India). Non-gold loan businesses continued their strong performance with MFI and CV growing 7.5% and 19% QoQ, respectively. CV loans seem to be benefiting from operating leverage as they are disbursed entirely from gold loans branches. Housing loans grew 4.8% with continued but transient impact of management change. Overall AUM growth was 6.8% QoQ.

Microfinance subsidiary is back in the black with significantly lower provisioning expected going forward:

Asirvad Microfinance posted a profit in 3QFY18, for the first time since 3QFY17. Rs310mn provision for Asirvad Microfinance is Rs260mn in excess of the RBI requirement and marks the last somewhat chunky bout of provisioning. Akin to leading industry peers, collection efficiency of ‘new book’ created since 1 January 2017 is a pristine 99.04%, indicating stress is contained within the legacy book. Similarly, PAR0 has diminished by ~Rs110mn-Rs120mn sequentially, indicating stress of legacy book itself is not rising but rather diminishing.

Nimble management plans to address higher security expenses with technology:

Expenses related to security have spiked to a quarterly run-rate of ~Rs450mn, but the management is confident that these expenses could revert to the earlier level of ~Rs250mn per quarter on the back of technology initiatives. The management also sounded confident about maintaining spread with sticky yield (borrower profile largely insensitive to interest rates) and with flat-to-lower cost of borrowings (NCDs to still re-price lower from higher legacy levels).

Valuation and outlook:

We have revised our legacy NII estimates by -0.3%/-3.3% for FY18/FY19, our PPOP estimates by 3.2%/2.3% and our PAT estimates by 0.4%/2.8%, respectively. We have rolled forward our valuation of MFL based on FY20E financials, valuing the stock at 2.2x FY20E P/BV and increasing our target price to Rs136 (from Rs132 earlier).