MANAPPURAM GENERAL FINANCE valuations fair = downgrade to Hold- Edelweiss

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􀂃 Strong disbursements buoy earnings
Manappuram General Finance (Manappuram) reported profit of INR 602 mn,
growth of 31% Q-o-Q and 126% Y-o-Y in Q2FY11, ahead of our expectation.
Strong disbursement growth (45% Q-o-Q) aided by aggressive branch expansion
and improved productivity was partially offset by 250bps decline in margins. It
disbursed INR 45.4 bn of gold loans (more than 3x Y-o-Y) in Q2FY11 and gold
loan AUMs grew 48% Q-o-Q to INR 49 bn. Gold stock (in respect of gold loans)
increased 38% Q-o-Q to 37.2 tonnes, suggesting that 7-10% increase in AUMs
was coming from increase in average ticket size (INR 31k in Q2FY11). Average
M-o-M growth in disbursements during the quarter was ~20% and it closed with
monthly disbursements of INR 17.9 bn in September suggesting strong traction
going forward. Management indicated that at the consolidated level 10-15% of
lending will be refinancing and ~80% customers will be repeat customers.
􀂃 NIMs came off as proportion of low LTV products increased
Operating income (net of interest expenses) grew 26% Q-o-Q to INR 1.8 bn
(despite 48% AUM growth) as margins came off ~250bps Q-o-Q to 16.87%. Due
to rise in gold prices, we believe the proportion of low LTV-low yield products in
incremental disbursements is rising and lending yields came off to 25.3% in
Q2FY11 (from 27.5% in Q1FY11). While management indicated that lending
yields will be sustained at 24-25%, if gold prices continue to rise pressure on
lending yields will continue. Funding cost jumped 34bps from 8.1% in Q1FY11 to
8.44%. We are building in ~300bps compression in margins over FY10-12E.
􀂃 Outlook and valuations: RoEs vulnerable, valuations fair; downgrade to
‘HOLD’
Manappuram has surprised positively on disbursement growth and network
expansion in H1FY11 and management has set an aggressive target of
expanding to 2,500 branches and touching AUMs of INR 200 bn by FY13E. While
we are positive on its growth potential and niche business model of collateralised
lending generating RoEs of 25% plus, we believe RoEs will be vulnerable to
increased competition, margin pressure, fluctuations in gold prices, and
regulatory risk. We believe the company’s proposed equity raising (INR 10 bn via
QIP) will be RoE dilutive (7-8% points) in the immediate term, though it will be
book accretive (to the tune of INR 15-20 per share to BV). Moreover, efficient
utilisation of this capital will be a key monitorable. We believe current valuations
of 3.8x FY12E book (2.6x post equity) prices in strong fundamentals and near
term growth triggers. We, therefore, downgrade the stock to ‘HOLD/Sector
Underperformer’ from ‘BUY’.