Manappuram General Finance - Bank lending to gold financiers to lose the agri tag; Edelweiss

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Manappuram General Finance (MGFL IN, INR 108, Hold)

RBI issued a notification to the effect that banks lending to NBFCs for direct on-lending against gold jewellery or by way of investment in securitized assets will not be classified agri lending. We believe the regulation has been invoked due to uncertainty over the end use of gold loans, while gold financiers enjoyed lower borrowing cost under agri purposes. As far as Manappuram is concerned, out of the current AUMS of ~ INR 70 bn, slightly lower than 50% of loans fall under agri lending (including INR 12 bn being securitized); the balance being predominantly in the form of micro credit with ticket size of less than INR 50k. The notification specifically mentions only agri; the notification is silent on micro credit.

n  To adversely impact growth profile and funding cost

We believe the regulation will impact the borrowing profile and funding cost of Manappuram, and to that extent, may take a toll on growth targets as well. Our interactions with industry participants suggest that the rate differential between borrowing costs under agri and regular lending used to be 250-350bps before the base rate regime and has come off to 100-200bps since then. For Manappuram, incremental funding cost will likely rise by 100-200bps due to this notification (which will impact ~50% of its borrowing). Manappuram has INR 16 bn of rated pool of CPs and INR 45 bn of unutilized bank credit lines which will be utilized in the near term to fund incremental growth. The notification will also limit the attractiveness of securitisation due to lower spreads.

n  Outlook and valuations: Near-term headwinds; maintain ‘HOLD’

RBI’s current notification, coupled with standard asset provisioning norms (for NBFCs in general), reaffirms our perception of increased regulatory risk. While we were positive on Manappuram’s growth potential generating RoEs of 25% plus, we believed its RoEs will be vulnerable to increased competition, margin pressure, and regulatory risk. This risk coupled with rich valuations had led us to downgrade our recommendation on the stock to ‘HOLD’from ‘BUY’ in October 2010. Since then, the stock has underperformed the bankex 10%. Over the past two quarters, its NIMs have come off 5% points to 14.2% due to increased proportion of low LTV-low yield in incremental disbursements and 100bps rise in cost of funds. We were already building in 300bps compression in margins over FY11-13E sensing the regulatory risk and rising funding costs. Hence we are toning down our NIM assumption only marginally and consequently our EPS estimate is revised down 3-4% over FY12-13E. The stock is currently trading at 2x FY12E book which we believe is fair considering RoE trajectory coming off from 4.5-5.0% levels in FY10 to 3.0-3.5% by FY12E. We maintain our‘HOLD/Sector Underperformer’ recommendation/rating on the stock.