Mannapuram Q2FY11 Result Update; Strong operating performance

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Manappuram General Finance

Strong operating performance

HOLD

CMP: Rs 150                                       Target Price: Rs 160

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n     MAGFIL reported robust numbers on expected lines for Q2FY11 with NII at Rs1.8bn and PAT at Rs602mn, up 26% and 30.4% qoq driven by 47% qoq growth in AUMs

n     Net NPAs (Gold) declined to 0.11% from 0.17% despite sharp growth in AUMs

n     We remain wary of the strong growth in AUMs of MAGFIL. Successful execution to QIP (Rs10bn) and ability to contain NPAs key to justify the recent run up in the stock price

n     Valuations at 2.4x FY12E ABV still attractive with RoEs of 25% (building in the QIP) . We downgrade the stock to REDUCE with price target of Rs160

Robust NII growth

MAGFIL’s Q2FY11 NII of Rs1.8bn was marginally ahead of estimates (Rs1.7bn), as the

same grew by 26% qoq driven by 46.7%qoq growth in AUMs albeit NIMs (reported)

declined by 250 bps qoq to 16.9% (reported).

Business growth robust

The company’s AUMs grew by a robust 46.8% qoq to Rs49.6bn in Q2FY11 led by 48%

qoq growth in gold loans. The assignments for Q2FY11also include assignment portfolio

of Rs11.9bn. In future, the assignments would remain at 25% of the total assets.

Operating profit grew by 31.1% qoq

The operating profit grew by 31.1% qoq to Rs947mn as operating expenses grew by

20.1%qoq to Rs820mn. The growth in opex was driven by 50% qoq growth in employee

expenses as the company added around 2800 employee during the quarter. Moreover

other expenses grew by 30.0%qoq as the company added 258 branches during the quarter

taking the total branch network to 1393 branches.

Provisions remain stable

As the gross NPAs increased 5-fold over preceding quarter, the provisions were up by

51.6% qoq and 164.0% yoy. Gross NPA in hypothecation segment was higher at 79.4%

(although on a very small portfolio), while gross NPA in gold loans stood healthy at 0.24%.

Capital adequacy robust

The company is comfortably placed in terms of capital requirement, as the CAR stood a

healthy 21.2% as on September 30, 2010.

Valuation and view

MAGFIL’s growth trajectory has been steep recently and we remain confident about the

growth prospects in the gold loan sector. However, the stock has seen very sharp run up

recently which we believe is in anticipation of the QIP of Rs10bn (1x current net worth)

which the board has been talking about. We believe that to bring the RoEs back to historical

levels of 30%, the CAGR in assets would have to be more than 150% over FY10-12E.

Ability to do a successful QIP, strong growth in assets and concurrent control over NPAs

can justify the current valuations. We downgrade our rating to HOLD with price target of

Rs160.