Manappuram Finance Research Reports By Edelweiss & Nirmal Bang Q1FY18

Research report by Edelweiss

RoA and RoE for the quarter remain a highly creditable 4.2% and 18.2% despite transient concerns

MFL Q1FY18 NII and Other Income grew 20% and 221% yoy to INR 575 cr and INR 24 cr, respectively. Operating Expenses grew at a faster pace than Total Income at 29% yoy to INR 284 cr. Provisions (excluding Tax) grew much faster at 408% yoy to INR 81 cr. Consequently, Consolidated PAT de-grew -3% to INR 155 cr.
Group AUM growth was sluggish at 3% yoy, with AUM growing to INR 13380 cr. While slow AUM growth and flattish to negative PAT growth were disappointing from a headline perspective, MFL still delivered superlative RoA and RoE of 4.2% and 18.2% for Q1FY18. We also note that the gearing for MFL is quite low and MFL can potentially expand RoE for the same RoA without unduly affecting risk profile.

Higher Provisions largely due to provisioning on MFI book but the worst is over for Asirvad Microfinance

Non-tax Provisions on MFI book were INR 72 cr as GNPA Ratio of MFI book rose to 6.9%. Internal provisioning norms for Asirvad Microfinance are much stricter than RBI requirements and this led to INR 34 cr provisions higher than mandated by RBI. The worst is over for MFI business with collection efficiency for disbursals post December close to 100%. Disbursal have picked up significantly from July month. However, there may be some residual provisions on MFI book going forward but these are not likely to be as material as in Q1FY18.

Group AUM growth held back at 3% yoy by Gold Loan AUM de-growth but recovery ahead for Gold Loans

Group AUM grew 3% yoy to INR 13380 cr due to Gold Loan book (80% of Q1FY18 Group AUM) de-growing -5% yoy. Since the customer set for MFL is at the bottom of the pyramid, Demonetisation and drought conditions in South India have led to some customers not being able to recover and ultimately, this led to high incidence of auctions in Q1FY18 at INR 531 cr. MFL had not opted for RBI dispensation for NPA recognition earlier. Importantly, management sounded confident about Gold Loan business from Q2FY18 onwards. Furthermore, new business lines grew 59% yoy and now form 20% of Group AUM. The prior guidance for new business lines forming 25% of Group AUM by the end of FY18 remains intact.

Fall in Cost of Borrowings a strong kicker for NII growth and expected to fall further going forward

Cost of Borrowings (COB) for MFL fell 97 bps yoy to 9.4% and is expected to fall further going forward. Incremental COB at 8.3% provides an indication in this regard. Furthermore, MFL has received a Long Term Credit Rating upgrade from Brickworks to AA Stable and this provides incremental fillip to COB drawdown. Furthermore, MFL’s customer set is not interest rate sensitive and there is no need for MFL to pass on COB benefit to customers, which supports the maintainence of NIM above c.15% going forward.

Valuation and Rating: Maintain ‘BUY’ with Price Target of INR 118

At the current price of INR 86, MFL trades at a P/B of 1.3x FY19E consolidated book. We maintain ‘BUY’ Rating with Price Target of INR 118, at which the stock will trade at 1.8x FY19 consolidated book.

Research report by Nirmal Bang

Valuation and outlook: With the worst-case scenario behind, regulatory environment turning favourable and stable gold prices, MFL is targeting healthy growth going forward. However, increase in loan delinquency post demonetisation needs to be managed well. MFL’s de-risking strategy has helped it to keep credit costs at a low level. Diversification into other segments will enable faster utilisation of excess capital on its balance sheet and avoid any undesirable treatment from the regulator for being a single-product company. Tier I capital of 22% ensures unhindered growth and there is no need to raise capital for the next two years. MFL has the potential to deliver RoA of ~4% and RoE of ~20% on a consistent basis, in our opinion.