Manappuram- Earnings growth strong; Buy for +27% upside potential :: BofA Merrill Lynch,

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Manappuram
    
Earnings growth strong; Buy
for +27% upside potential
„Cut PO to Rs170, but earnings growth still at +50% in FY12
We cut our PO to Rs170 (from Rs175) on MGFL to factor in the earnings cut of
~3% each for FY12E/13E driven by lower AUM growth and margin estimates,
post RBI ruling on securitization of gold loans. However, we still est. earnings
growth at +50/35% over FY12/13 driven by AUM growth of +65/40% in
FY12E/13E, as +65% of branches added in last 2 years drive growth. We are
building in margin contraction of ~350bps through FY11E/13E owing to lower
securitization going ahead. We believe FY12/13 earnings growth will also be
driven by operating leverage (cost-income ratio of avg. +46-47% over last 3 years
to trend down to ~40% ahead).

4Q: Earnings up 96% yoy driven by strong AUM growth
MGFL reported earnings of Rs1.0bn, a 96% yoy growth and ~28% higher than
estimates. 4Q earnings growth driven by AUM growth of ~190% yoy (15% qoq).
Disbursements growth also strong at Rs180bn in FY11 vs. Rs71bn in FY10.
Spreads, in our view, are down to <13% (~400bps yoy and ~100bps qoq). Cost
income ratio higher yoy owing to addition of branches, staff and higher ad spend
in FY11. Asset quality comfort high; gross at <20bps (gold loan at <5-6bps).
Maintain Buy on high RoAs and rising RoEs
We maintain our Buy on MGFL despite recent RBI clarification removing gold
loans as priority sector. Although this is likely to impact growth and margins of
MGFL, we believe the company can alter its funding mix (short-term borrowings
via CP. etc), which can help grow AUM at a CAGR of +50% through FY11E-13E
(vs. +140% over FY09-11). RoAs also to remain high (+4.0-4.5%) and RoEs to
improve (~22% in FY11E to +24% in FY13E), as an improvement in operational.


Price objective basis & risk
Manappuram (XMGPF)
MGFL is the second largest NBFC with market share of 7% in organized
segment. We believe stock can re-rate to +3.2-3.3x FY12E book, as 1) we
estimate earnings growth of +55% through FY10-13, 2) MGFL capitalizes on
US$11bn market opportunity growing at +30-35% yoy, with MGFL better
positioned driven by rapidly rising distribution and proven expertise and, 3) asset
quality remains manageable (net NPLs at <0.2%) driven by strong risk
management systems and sentimental value of collateral. Hence, we estimate
above average RoAs (+4.4%) and RoEs (+22-25%) to sustain. Hence, we believe
the stock trading can rerate to +3.2x FY12E book multiples (at Gordon theory
multiples assuming RoE of 23%, CoE at 14% and sustainable growth of 10%), as
growth potential for MGFL is strong. Our Rs 170 price objective implies P/E of
15.5x FY12E EPS, in-line with markets, but with higher earnings trajectory. Key
risks are rise in thefts and frauds and increase in compeitition, which can hurt
growth. In light of RBI's recent actions, while the cost of capital will go up access
to capital also could be challenging as banks may no longer find it attractive to
lend to gold finance companies. MGFL's inability to scale up in a timely manner
its risk management systems in line with expanding business could potentially
lead to asset quality issues.