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MANAPPURAM GENERAL FINANCE
Growth intact while NIMs decline
Robust disbursements momentum continues
Manappuram General Finance (Manappuram) reported Q3FY11 profit of INR 745
mn, growth of 24% Q-o-Q (more than double Y-o-Y), in line with our
expectation. Disbursements continued robust momentum (23% Q-o-Q growth)
aided by aggressive branch expansion (660 branches added in last six months).
However, growth in AUMs (31% Q-o-Q to INR 65 bn) on the back of INR 57.75
bn of gold loan disbursements (more than 2x Y-o-Y) during the quarter was
dampened by further margin compression of 250bps to 14.2% post a similar
decline in Q2FY11. Outlook on growth per se is buoyant as we step into the
fourth quarter given that the company added another 400 branches in the
quarter. Management indicated that at the consolidated level, 10-15% of lending
will be refinancing and ~80% will be repeat customers, thereby reaping benefits
of an expanded network base.
NIMs slide further due to both yield and cost side pressures
The company reported another 250bps margin compression to 14.2% (similar
decline in Q2FY11) reporting cumulative 5 percentage points contraction in
margin, as anticipated. Yields came in at 23.5%, down from 25.3% in Q2FY11,
whereas borrowing costs rose 70bps to 9.3%. Operating income (net of interest
expenses) grew 30% Q-o-Q to INR 2.3 bn. With increasing funding costs, the
proportion of low LTV-low yield products in incremental disbursements is rising
and exerting downward pressure on lending yields. Management indicated that
margins will be maintained at 14-15%. However, if gold prices continue to rise,
pressure on lending yields will continue.
Outlook and valuations: RoE vulnerable, valuation fair; maintain ‘HOLD’
Manappuram maintained disbursement growth and network expansion in Q3FY11
(400 branches), taking the total tally to ~1800 branches, which makes us
confident of the managements’ target of expanding to 2,500 branches and
touching AUMs of INR 200 bn by FY13E. We have marginally reduced our PAT
estimates going forward to factor in recently issued RBI’s guidelines pertaining to
general provisioning on standard assets @ 0.25%. While we are positive on its
niche business model of collateralised lending generating RoEs of 20% plus (predilution
25% plus), we believe RoEs will be vulnerable to increased competition,
margin pressure, fluctuations in gold prices, and regulatory risk. We believe
current valuations of 2.4x FY12E book price in strong fundamentals and nearterm
growth triggers. We, therefore, maintain our ‘HOLD’ recommendation and
rate it ‘Sector Underperformer’ on relative return basis.
Reaping benefits of branch expansion; another 400 branches added
Manappuram added 400 new branches during Q3FY11 (388 in H1FY11) and expanded its
network to 1,795 branches. The company has indicated it may moderate the pace of
branch addition going into FY12 after the aggressive expansion in FY11. Also, since
average loans outstanding/branch stands at INR 35 mn-40 mn, branch addition makes
us confident of continued pace of disbursements growth as new branches reach their
optimum operational limits. The branch additions are happening keeping geographical
diversification in mind, south region which contributed to 91% of the business in Q1FY11
now stands at 81%. Further, we expect the bank to scale up its branch network to 2,500
plus by FY12E. It added ~3,200 employees in Q3FY11, taking the total headcount to
14,670, while employee cost jumped 28% Q-o-Q.
Opex/assets declining as economies of scale kick in
Along with increase in outstanding gold loan per branch in Q3FY11 (INR 36 mn vis-à-vis
INR 26 mn in the beginning of the fiscal), Manappuram reported improved metrics on the
operational efficiency front as well. Its opex/average assets declined 120bps to 6.8% in
Q3FY11 Q-o-Q inspite of adding 400 branches during the quarter which are yet to
become fully operational. The outstanding gold loan per branch for newly commissioned
branches stands at just INR 9 mn. Also the management has indicated that INR 170 k
out of INR 225 k per month per branch expenditure is fixed in nature. This indicates
scope for further productivity improvement which will enable it offset the margin
pressure to some extent.
INR 10 bn raised via QIP to support growth momentum and maintain CAR
Given the aggressive growth target of expanding to 2,500 branches by FY12E and
touching gold loan AUMs of INR 200 bn by FY13E, Manappuram raised INR 10 bn via QIP
in November 2010. Capital adequacy currently stands at 32.5% post dilution of around
14%. We believe the equity raising is RoE dilutive (8-10% points) in the immediate
term, while it is book accretive. Going forward, effective utilisation of this money will be
a key monitorable.
Asset quality maintained; standard provisioning norms met
NPLs in gold loans were maintained at 0.3% while the company fully provided for the
general provisioning norms on standard assets as mandated by RBI at 0.25%. The
amount on this provisioning stood at INR 125 mn. Also we have marginally reduced our
PAT estimates going forward to factor in the general provisioning guidelines. The default
rate on gold loans is low due to strong sentimental value attached and physical custody
of pledged jewellery. Due to aggressive growth, we are building in gross NPL in gold
loans of 0.6% by FY12E.
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 a come a long way in 60 years
operating five companies under its fold, spread over 15 states with ~1400 branches, a
total business over INR 50 bn, an employee base over 14,000, and a live customer base
of over 1,028 k.
Manappuram General Finance, Manappuram Group’s flagship company, is the leading
gold loan providing NBFC based out of Kerala, with INR 65 bn (market share estimated
at ~5%) assets under management. It is present in the (collateralised) micro-finance
space (average ticket size of INR 70 k), with the main line of business being ‘lending
against household jewellery’. It does not provide loans to jewellers, banks, or against
bullion. It has transitioned from a hire purchase company to a gold loan company in view
of the market fallout.
Investment Theme
Manappuram has created a niche by providing quick liquidity to low/irregular income
households to meet their urgent personal/business needs, by offering loans against
jewellery. Growth potential is huge, considering the significantly untapped organised gold
loan market in India (~0.12% of gold stock value). The organized market is expected to
grow exponentially, owing to: (1) changing psychology; (2) shift from unorganised
lenders; (3) and growing presence beyond South. Despite increasing competition,
specialised financiers may continue to hold their own, given scale, expertise, brand
equity, and niche servicing. We like Manappuram for its niche business model of
collateralised ‘lending against jewellery’. It generates NIMs of ~13% plus, RoEs of 20%
plus (25% plus pre dilution via QIP in November, 2010), with huge growth potential and
low default risk. Highly experienced and quality management provides comfort on the
ability to lever on emerging gold loan opportunity to build a scalable and profitable
business. While we are positive on its growth potential, we believe RoEs will be
vulnerable to increased competition, margin pressure, fluctuations in gold prices, and
regulatory risk.
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.
• Scalability of business will be limited beyond a particular level of productivity and
growth in AUMs will have to be driven by rapid expansion in branches. Any slowdown
in targeted expansion of branch network may lead to downward revision in growth
and earnings estimates.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
MANAPPURAM GENERAL FINANCE
Growth intact while NIMs decline
Robust disbursements momentum continues
Manappuram General Finance (Manappuram) reported Q3FY11 profit of INR 745
mn, growth of 24% Q-o-Q (more than double Y-o-Y), in line with our
expectation. Disbursements continued robust momentum (23% Q-o-Q growth)
aided by aggressive branch expansion (660 branches added in last six months).
However, growth in AUMs (31% Q-o-Q to INR 65 bn) on the back of INR 57.75
bn of gold loan disbursements (more than 2x Y-o-Y) during the quarter was
dampened by further margin compression of 250bps to 14.2% post a similar
decline in Q2FY11. Outlook on growth per se is buoyant as we step into the
fourth quarter given that the company added another 400 branches in the
quarter. Management indicated that at the consolidated level, 10-15% of lending
will be refinancing and ~80% will be repeat customers, thereby reaping benefits
of an expanded network base.
NIMs slide further due to both yield and cost side pressures
The company reported another 250bps margin compression to 14.2% (similar
decline in Q2FY11) reporting cumulative 5 percentage points contraction in
margin, as anticipated. Yields came in at 23.5%, down from 25.3% in Q2FY11,
whereas borrowing costs rose 70bps to 9.3%. Operating income (net of interest
expenses) grew 30% Q-o-Q to INR 2.3 bn. With increasing funding costs, the
proportion of low LTV-low yield products in incremental disbursements is rising
and exerting downward pressure on lending yields. Management indicated that
margins will be maintained at 14-15%. However, if gold prices continue to rise,
pressure on lending yields will continue.
Outlook and valuations: RoE vulnerable, valuation fair; maintain ‘HOLD’
Manappuram maintained disbursement growth and network expansion in Q3FY11
(400 branches), taking the total tally to ~1800 branches, which makes us
confident of the managements’ target of expanding to 2,500 branches and
touching AUMs of INR 200 bn by FY13E. We have marginally reduced our PAT
estimates going forward to factor in recently issued RBI’s guidelines pertaining to
general provisioning on standard assets @ 0.25%. While we are positive on its
niche business model of collateralised lending generating RoEs of 20% plus (predilution
25% plus), we believe RoEs will be vulnerable to increased competition,
margin pressure, fluctuations in gold prices, and regulatory risk. We believe
current valuations of 2.4x FY12E book price in strong fundamentals and nearterm
growth triggers. We, therefore, maintain our ‘HOLD’ recommendation and
rate it ‘Sector Underperformer’ on relative return basis.
Reaping benefits of branch expansion; another 400 branches added
Manappuram added 400 new branches during Q3FY11 (388 in H1FY11) and expanded its
network to 1,795 branches. The company has indicated it may moderate the pace of
branch addition going into FY12 after the aggressive expansion in FY11. Also, since
average loans outstanding/branch stands at INR 35 mn-40 mn, branch addition makes
us confident of continued pace of disbursements growth as new branches reach their
optimum operational limits. The branch additions are happening keeping geographical
diversification in mind, south region which contributed to 91% of the business in Q1FY11
now stands at 81%. Further, we expect the bank to scale up its branch network to 2,500
plus by FY12E. It added ~3,200 employees in Q3FY11, taking the total headcount to
14,670, while employee cost jumped 28% Q-o-Q.
Opex/assets declining as economies of scale kick in
Along with increase in outstanding gold loan per branch in Q3FY11 (INR 36 mn vis-à-vis
INR 26 mn in the beginning of the fiscal), Manappuram reported improved metrics on the
operational efficiency front as well. Its opex/average assets declined 120bps to 6.8% in
Q3FY11 Q-o-Q inspite of adding 400 branches during the quarter which are yet to
become fully operational. The outstanding gold loan per branch for newly commissioned
branches stands at just INR 9 mn. Also the management has indicated that INR 170 k
out of INR 225 k per month per branch expenditure is fixed in nature. This indicates
scope for further productivity improvement which will enable it offset the margin
pressure to some extent.
INR 10 bn raised via QIP to support growth momentum and maintain CAR
Given the aggressive growth target of expanding to 2,500 branches by FY12E and
touching gold loan AUMs of INR 200 bn by FY13E, Manappuram raised INR 10 bn via QIP
in November 2010. Capital adequacy currently stands at 32.5% post dilution of around
14%. We believe the equity raising is RoE dilutive (8-10% points) in the immediate
term, while it is book accretive. Going forward, effective utilisation of this money will be
a key monitorable.
Asset quality maintained; standard provisioning norms met
NPLs in gold loans were maintained at 0.3% while the company fully provided for the
general provisioning norms on standard assets as mandated by RBI at 0.25%. The
amount on this provisioning stood at INR 125 mn. Also we have marginally reduced our
PAT estimates going forward to factor in the general provisioning guidelines. The default
rate on gold loans is low due to strong sentimental value attached and physical custody
of pledged jewellery. Due to aggressive growth, we are building in gross NPL in gold
loans of 0.6% by FY12E.
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 a come a long way in 60 years
operating five companies under its fold, spread over 15 states with ~1400 branches, a
total business over INR 50 bn, an employee base over 14,000, and a live customer base
of over 1,028 k.
Manappuram General Finance, Manappuram Group’s flagship company, is the leading
gold loan providing NBFC based out of Kerala, with INR 65 bn (market share estimated
at ~5%) assets under management. It is present in the (collateralised) micro-finance
space (average ticket size of INR 70 k), with the main line of business being ‘lending
against household jewellery’. It does not provide loans to jewellers, banks, or against
bullion. It has transitioned from a hire purchase company to a gold loan company in view
of the market fallout.
Investment Theme
Manappuram has created a niche by providing quick liquidity to low/irregular income
households to meet their urgent personal/business needs, by offering loans against
jewellery. Growth potential is huge, considering the significantly untapped organised gold
loan market in India (~0.12% of gold stock value). The organized market is expected to
grow exponentially, owing to: (1) changing psychology; (2) shift from unorganised
lenders; (3) and growing presence beyond South. Despite increasing competition,
specialised financiers may continue to hold their own, given scale, expertise, brand
equity, and niche servicing. We like Manappuram for its niche business model of
collateralised ‘lending against jewellery’. It generates NIMs of ~13% plus, RoEs of 20%
plus (25% plus pre dilution via QIP in November, 2010), with huge growth potential and
low default risk. Highly experienced and quality management provides comfort on the
ability to lever on emerging gold loan opportunity to build a scalable and profitable
business. While we are positive on its growth potential, we believe RoEs will be
vulnerable to increased competition, margin pressure, fluctuations in gold prices, and
regulatory risk.
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.
• Scalability of business will be limited beyond a particular level of productivity and
growth in AUMs will have to be driven by rapid expansion in branches. Any slowdown
in targeted expansion of branch network may lead to downward revision in growth
and earnings estimates.
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