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Manappuram General Finance (Manappuram) reported Q4FY11 profit of INR 1.01 bn,
growth of 37% Q-o-Q (2.5x Y-o-Y), in line with our expectation. While disbursements
came in lower than expected at INR 48 bn, margins surprised positively and
registered ~150 bps sequential improvement to 16%.
Disbursements growth moderates
The strong disbursements growth reported during the first three quarters of
FY11, moderated slightly in Q4FY11 to INR 48 bn (13% Q-o-Q decline, 1.5x Y-o-
Y) which we believe was on account of the recent RBI guidelines, whereby banks
lending to gold financiers have lost the agri tag, impacting securitization of loans
generated by Manappuram. Overall, AUMs maintained healthy pace, up 13% Qo-
Q and ~2x Y-o-Y to INR 75 bn.
Outlook on growth per se is buoyant given that the company added half of the
current number of branches (2,064) in the previous fiscal itself. Currently,
disbursements per branch stand at INR 23 mn and as per management it can be
ramped up to INR 50 mn as branches mature, boosting loan book growth.
NIMs decline stabilises post rate hike
The company reported ~150bps margin expansion to 16% (after a 250bps
decline in both Q2 and Q3FY11) driven by 150-200bps lending rate increase
during the quarter. Yields are expected to stabilize in the 24-25% range, while
borrowing costs may rise further to 11.5% from the current 10% as per
management. As a result, Manappuram is expected to clock in 13% spreads over
the next 1-2 quarters. Operating income (net of interest expenses) grew 25% Qo-
Q to INR 2.9 bn. With rising funding costs, the recent hike will help stabilize
margins at the current level given the increasing proportion of low LTV-low yield
products in incremental disbursements which has been exerting downward
pressure on lending yields. However, if gold prices continue to rise, pressure on
lending yields will continue.
Outlook and valuations: RoE vulnerable, valuation fair; maintain
‘HOLD’
The current disbursement run rate and network expansion in FY11 (1,059
branches), taking the total tally to 2,064, makes us confident of the company
reporting INR 180 bn AUMs by FY13E. While we continue to be 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 most importantly to regulatory
risk given the recent regulations on agri lending and standard asset provisioning.
We believe current valuations of 2.4x FY12E book price in strong fundamentals
and near-term growth triggers. We, therefore, maintain our ‘HOLD’
recommendation and rate it ‘Sector Performer’ on relative return basis.
Services
Benefits of expansion to flow as another 270 branches added
Manappuram added 270 new branches during Q4FY11 (1,059 in FY11) and expanded its
network to 2,064 branches. The company continues to guide that 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 AUM growth as new branches reach their optimum
operational limits. It added ~2,000 employees in Q4FY11, taking the total headcount to
16,750, while employee cost jumped 32% Q-o-Q.
Opex/assets to decline as economies of scale kick in
While the outstanding gold loan per branch in Q4FY11 (INR 36 mn) remained constant,
Manappuram reported a slight increase in opex/average assets to 7.4% during the
quarter, up 60bps Q-o-Q. This, we believe, is a direct outcome of aggressive branch
expansion and headcount addition. Since the majority (INR 170 k out of INR 225 k per
month per branch) of the expense is fixed in nature, it indicates scope for further
productivity improvement which will enable it offset the margin pressure to some extent.
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 158 mn. The default rate on gold loans is low
due to strong sentimental value attached and physical custody of pledged jewellery
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 ~2000 branches, a
total business over INR 50 bn, an employee base over 17,000, and a live customer base
of over 1,190 k.
Manappuram General Finance, Manappuram Group’s flagship company, is the leading
gold loan providing NBFC based out of Kerala, with INR 75 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 ~15% 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 (Manappuram) reported Q4FY11 profit of INR 1.01 bn,
growth of 37% Q-o-Q (2.5x Y-o-Y), in line with our expectation. While disbursements
came in lower than expected at INR 48 bn, margins surprised positively and
registered ~150 bps sequential improvement to 16%.
Disbursements growth moderates
The strong disbursements growth reported during the first three quarters of
FY11, moderated slightly in Q4FY11 to INR 48 bn (13% Q-o-Q decline, 1.5x Y-o-
Y) which we believe was on account of the recent RBI guidelines, whereby banks
lending to gold financiers have lost the agri tag, impacting securitization of loans
generated by Manappuram. Overall, AUMs maintained healthy pace, up 13% Qo-
Q and ~2x Y-o-Y to INR 75 bn.
Outlook on growth per se is buoyant given that the company added half of the
current number of branches (2,064) in the previous fiscal itself. Currently,
disbursements per branch stand at INR 23 mn and as per management it can be
ramped up to INR 50 mn as branches mature, boosting loan book growth.
NIMs decline stabilises post rate hike
The company reported ~150bps margin expansion to 16% (after a 250bps
decline in both Q2 and Q3FY11) driven by 150-200bps lending rate increase
during the quarter. Yields are expected to stabilize in the 24-25% range, while
borrowing costs may rise further to 11.5% from the current 10% as per
management. As a result, Manappuram is expected to clock in 13% spreads over
the next 1-2 quarters. Operating income (net of interest expenses) grew 25% Qo-
Q to INR 2.9 bn. With rising funding costs, the recent hike will help stabilize
margins at the current level given the increasing proportion of low LTV-low yield
products in incremental disbursements which has been exerting downward
pressure on lending yields. However, if gold prices continue to rise, pressure on
lending yields will continue.
Outlook and valuations: RoE vulnerable, valuation fair; maintain
‘HOLD’
The current disbursement run rate and network expansion in FY11 (1,059
branches), taking the total tally to 2,064, makes us confident of the company
reporting INR 180 bn AUMs by FY13E. While we continue to be 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 most importantly to regulatory
risk given the recent regulations on agri lending and standard asset provisioning.
We believe current valuations of 2.4x FY12E book price in strong fundamentals
and near-term growth triggers. We, therefore, maintain our ‘HOLD’
recommendation and rate it ‘Sector Performer’ on relative return basis.
Services
Benefits of expansion to flow as another 270 branches added
Manappuram added 270 new branches during Q4FY11 (1,059 in FY11) and expanded its
network to 2,064 branches. The company continues to guide that 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 AUM growth as new branches reach their optimum
operational limits. It added ~2,000 employees in Q4FY11, taking the total headcount to
16,750, while employee cost jumped 32% Q-o-Q.
Opex/assets to decline as economies of scale kick in
While the outstanding gold loan per branch in Q4FY11 (INR 36 mn) remained constant,
Manappuram reported a slight increase in opex/average assets to 7.4% during the
quarter, up 60bps Q-o-Q. This, we believe, is a direct outcome of aggressive branch
expansion and headcount addition. Since the majority (INR 170 k out of INR 225 k per
month per branch) of the expense is fixed in nature, it indicates scope for further
productivity improvement which will enable it offset the margin pressure to some extent.
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 158 mn. The default rate on gold loans is low
due to strong sentimental value attached and physical custody of pledged jewellery
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 ~2000 branches, a
total business over INR 50 bn, an employee base over 17,000, and a live customer base
of over 1,190 k.
Manappuram General Finance, Manappuram Group’s flagship company, is the leading
gold loan providing NBFC based out of Kerala, with INR 75 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 ~15% 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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