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2016 June Motilal Oswal
2016 June Motilal Oswal
We see growth levers in place viz: a) stabilising gold prices; b) lower LTV/gram 12 months 49.1 (5.1) (8.3)
(INR1,691, versus incremental potential of INR1,900-2,000); and c) lower auctions and
now expect better traction in AUM growth (upwards of 20% over FY16-18). This with
normalised auction and controlled cost will lead 15% CAGR in earnings. Diversification Kunal Shah
+91 22 4040 7579
of product profile and scale up of non-gold AUM will be added trigger. We revise our
kunal.shah@edelweissfin.com
estimates upwards by 4%/10% over FY17/FY18 and raise our target multiple to INR60
(1.5x FY18E consolidated P/BV, earlier INR40). We maintain ‘BUY/SP’. Nilesh Parikh
+91 22 4063 5470
Financials (INR mn) nilesh.parikh@edelweissfin.com
Year to March Q4FY16 Q4FY15 Growth (%) Q3FY16 Growth (%) FY16 FY17E FY18E Prakhar Agarwal
Net revenue 3,896 2,825 37.9 3,601 8.2 13,347 15,129 17,860 +91 22 6620 3076
prakhar.agarwal@edelweissfin.com
Net profit 1,248 697 79.2 973 28.3 3,372 3,698 4,499
Dil. EPS (INR) 1.5 0.8 78.3 1.2 27.6 4.0 4.4 5.3 Alok Shah
Adj. BV (INR) 31.9 33.9 36.6 +91 22 6620 3040
alok.shah@edelweissfin.com
Price/ Adj book (x) 1.6 1.5 1.4
Price/ Earnings (x) 12.5 11.4 9.4 May 13, 2016
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Banking and Financial Services
Chart 1: Strong disbursements perk up AUMs Chart 2: Proportion of bank borrowing increases
120 80
96 64
72 48
(INR bn)
(INR bn)
48 32
24 16
0 0
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q2FY16
Q3FY16
Q4FY16
AUM - gold loans Disbursements OD/WCL/STL Retail borrowings CPs Subordinated Debt
1.7
1.3
(%)
0.8
0.4
0.0
Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16
Gross NPA - Gold loan Net NPA - Gold loan
28
21
(INR mn)
14
0
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q3FY14
Q4FY15
20.0 10.0
15.0 7.5
(%)
(%)
10.0 5.0
5.0 2.5
0.0 0.0
FY13 FY14 FY15 FY16E FY17E FY18E
Yield on advances Cost of funds Net interest margins (RHS)
Source: Company, Edelweiss research
Ratios
Gross NPA - Gold loan(%) 1.0 1.2 1.1 1.0 1.2 1.4
Net NPA - Gold loan (%) 0.7 1.0 0.9 0.7 0.9 1.0
Tax rate (%) 34.4 34.8 35.4 35.0 33.5 33.5
B/V per share (INR) 32.5 34.9 37.9
Adj book value / share 31.9 33.9 36.6
Price/ Book (x) 1.5 1.4 1.3
Price/ Adj. book (x) 1.6 1.5 1.4
Price/ Earnings 12.5 11.4 9.4
Change in Estimates
FY17E FY18E
New Old % change New Old % change Comments
NII 14,625 14,642 (0.1) 17,282 16,882 2.4
PPOP 6,248 6,146 1.7 7,695 7,153 7.6
Provisions 688 802 (14.2) 929 1,002 (7.2) Rising gold prices to alleviate
concerns on auction under-
recoveries
PAT 3,698 3,554 4.0 4,499 4,091 10.0
NIMs 11.0 11.2 10.8 11.0
Growth has come in on the back of new businesses and new gold lending business
model. Management expects Non-gold loan book will form 25% by end of FY18 . Gold
loan will grow by 20% by FY18, with the technology enabled collection, auction will
come down and will drive the growth.
The growth in non-gold book will largely come from MFI book, wherein there is huge
scope to growth given huge opportunity landscape and the fact that MFIs that have
converted to SFB has gone slow during the transition phase. To put in numbers MFI will
likely reach INR40bn, Home finance - INR10bn with similar AUM for CV, and the MSME
will be around INR5bn by end of FY18.
Company has made a strategic shift to short tenure gold loans which has helped
reduce auctions and improve profitability. For MGFL, 3 month and 6 month constitute
around 90% of the book. These short term loans and are not much sensitive on
yields and thus yields are unlikely to be under pressure
LTV is around 60% for the 1 year loan and for 3 month product have 75% LTV.
Gold holdings – 59.6 tonnes (58.34 tonne in Q3FY16). At current gold holdings levels, if
prices goes up, AUM should go up and with operational leverage kicking in, this should
boost profitability.
With many of the banks exiting gold loans business and revamp of gold loan portfolio
by the company, management is confident of increasing its market share.
With the MFI business new states contribute ~22% of the AUMs
85-90% of the debt is floating rates, the management is eyeing to shift towards longer
tenure bonds so the same rate benefit may not flow through in FY17.
Currently the borrowing cost from banks are closer to base rate ( 9.5-9.7%)
Lending rates in MFI segments are coming down currently < 24% ( versus 26% earlier).
Cost of funds are around 14%
Asset quality
Gross NPAs came in at INR978mn – on 120dpd. Most of the gross NPAs relate to
accounts which are regularly paying us. Loss on account of theft, etc was only 0.12%
AUM.
Auctions have reduced since company is focusing on lower tenure loans. Going forward,
auctions would remain at the same levels.
Management is confident that asset quality within different business segments will be
maintained with sufficient collateral, manageable LTVs and strong team
Other highlights
The leverage is current 3.5x and management seems to be comfortable with 5-6x
leverage.
On the incremental basis the LTV/gms would have been higher by 10%
Plans are to strengthen existing branch network, there are lot of potential that can be
extracted from these segments.
Expect to see the declining trend in opex/AUM ratio ( start to be visible in Q4FY16)
Plan to come up with corporate debit card where customer can withdraw which will
help the growth
Asset quality
Gold NPAs was at 2.5% on 90dpd. Most of the gross NPAs relate to accounts which
are regularly paying us. Loss on account of theft, etc was only 0.1% AUM.
Company will move to 120 and 90 dpd as per RBI stated timelines only.
Auctions have reduced since company is focusing on lower tenure loans. Going forward,
auctions would remain at the same levels. Thus, NIMs should also be protected.
Other highlights
Commenced insurance broking business from January 2016; this should add fee
income going forward
Management is confident that asset quality within different business segments will
be maintained with sufficient collateral, manageable LTVs and strong team
Manapurram is adequately capitalized and its subsidiaries would easily get capital as
and when required from parent company. Subsidiaries would be able to leverage on
banking relationship of Manappuram which shall endeavour to keep cost of funds
under tab. Capital infusion is proposed in Aashirvad in next year.
RoA for microfinance business – 4.3%
Going forward microfinance business be adding 500 branches per year and gold
business will add 100 branches every year in un-penetrated geographies. New branches
would be opened in states such as Maharashtra, UP, Bihar, etc.
Ticket size in microfinance is ~INR20,000. Collection efficiency has been ~100%. Impact
of Tamil Nadu floods is minimal on asset quality of microfinance business. Microfinance
business has been expanded to various other states and hence exposure to TN has
reduced.
Total employees at 16,564; headcount declined by 1% QoQ. Employee expenses has
increased owing to INR100mn of bonus payout. Going forward, employee expenses
should continue to remain at current levels.
Dividend payout to be maintained at existing rate
Company Description
The Manapurram Group was started in 1949 by Late Mr. V. C. Padmanabhan, with focus
primarily on money lending activities. The group has come a long way in >65 years operating
five companies under its fold, strong distribution network of 3,293 branches spread across
27 states, employee base of ~16,500 and a live customer base of ~1.93million as of
March,2016.
Manappuram Finance, Manappuram Group’s flagship company, is the leading gold loan
providing NBFC based out of Kerala, with ~INR101bn assets under management. It is
present in the (collateralised) micro-finance space (average ticket size of ~INR20k), with the
main line of business being ‘lending against household jewellery’. It does not incrementally
provide loans to jewellers, banks, or against bullion as per the regulatory requirements. It
has transitioned from a hire purchase company to a gold loan company in view of the
market fallout
Investment Theme
MGFL’s earnings have been volatile due to regulatory whip, auction and accounting policy
change. With writing off of stressed pool during aggressive growth phase and conservative
policy of recognising income, NPL management should be better. Also, the RBI has reposed
importance to organised way of monetising idle gold indicating long-term sustainability of
business model. Key monitorable for the stock will be emergence of stability in key business
metrics namely, margins, growth and asset quality performance. MGFL is also focused on
diversifying its business model with MFI, CV and housing loans estimated to constitute more
than 25% in three years
Key Risks
• We believe competition intensity in gold loan financing is bound to rise in the next few
years, posing a risk to NIMs enjoyed by specialised gold loan financiers like
Manappuram.
• Like any other financial asset, demand and asset quality of gold loans is susceptible to
price fluctuations of underlying collateral (gold).
• The company runs the risk of providing easy access to liquidity for stolen jewellery. It
also runs the key man risks at the branch level and possibility of collusion between
borrowers and loan approvers
Operating ratios
Year to March FY15 FY16 FY17E FY18E
Yield on advances 22.3 22.5 22.2 21.7
Net interest margins 10.2 11.2 11.0 10.8
Cost of funds 10.7 9.8 9.6 9.4
Spread 11.7 12.6 12.5 12.3
Cost-income 60.3 58.7 58.7 56.9
Tax rate 34.4 35.0 33.5 33.5
Additional Data
Directors Data
Jagdish Capoor Chairman (Non-Executive) V P Nandakumar Managing Director & CEO
B N Raveendra Babu Executive Director Shailesh J Mehta Director
V R Ramachandran Director P Manomohanan Director
Rajiven V.R Director E A Kshirsagar Director
Pradeep Saxena Director Dr. Amla Samanta Director
Holding - Top10
Perc. Holding Perc. Holding
Baring India Investments 12.58 WF Asian Reconn Fund 4.53
Dhawan Ashish 2.91 DSP Blackrock Investment Manager 2.61
Morgan Stanley Asia/Singapore 1.74 BRIC LI Mauritius Tradings 1.54
Mousseganesh 1.20 Merrill Lynch Capital Markets 1.15
Wellington Management Group LLP 0.88 Tata Asset Management 0.64
*as per last available data
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
26 Nov 2015 Small Cap World Fund Inc Sell 8550000 22.30
11 Sep 2015 Ashish Dhawan Buy 9004871 20.20
11 Sep 2015 Small Cap World Fnd Inc Sell 14673614 20.23
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
12 Apr 2016 Nandakumar V P Buy 507922.00
06 Apr 2016 NANDAKUMAR V P Buy 600000.00
04 Apr 2016 NANDAKUMAR V P Buy 1000000.00
14 Jan 2016 NANDAKUMAR V P Buy 1100000.00
12 Jan 2016 V.R RAMACHANDRAN Buy 60000.00
*in last one year
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Sector return is market cap weighted average return for the coverage universe
within the sector
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Nirav Sheth
Head Research
nirav.sheth@edelweissfin.com
Recent Research
Rating Distribution* 156 60 12 228 Buy appreciate more than 15% over a 12-month period
* 3 stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
743
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 158 62 8
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(INR)
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