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Manappuram Finance (MGFL IN, INR 37, Hold)
We recently organized an investor interface with Mr. I. Unnikrishnan, MD, Manappuram Finance (Manappuram), to gain management‘s perspective on changes in business dynamics (growth, expansion strategies, margins amongst others) in light of recent RBI guidelines for NBFCs lending against gold whereby it capped LTV at 60% amongst, various other measures.
Business to undergo consolidation phase
Management expects Manappuram to be in consolidation phase over the next two quarters. It expects the recent RBI guidelines to impact the growth, margin and competitive landscape, even as the company is still recovering from the deposit acceptance related issues faced by its promoter related entity Manappuram Agro.
The company continues to focus on maintaining steady state return profile of RoA/RoE of 4%/20% plus in medium to longer term. However, in the near term, AUMs growth will be flat (for H1FY13) before resuming normalcy (~20%/30% for FY13/FY14) even while yields adjust lower by ~2% from the current 22-23% contracted rate. Management believes that reduced NIMs will be made good by opex control (to reduce by 100-150bps from the current ~6%), even better asset quality and easing competition from budding gold loan NBFCs which will now find difficult to survive.
Outlook and valuations: To rejig business model; maintain ‘HOLD’
We believe the current guidelines have significant bearing on the business model in terms of return profile as NIMs will likely edge downwards by ~300-350bps over FY12-14E while operating costs will be difficult to temper down to a guided range. Along with this, threat from banks getting aggressive increases given their ability to provide higher LTV loans at lower interest rates. We draw comfort from the company’s superior asset quality profile and abatement of regulatory overhang on the stock. Building in 20% AUM CAGR with NIM decline of ~300-350bps over FY12-14E, we are revising our earnings estimate downwards by 28% for FY13E and 47% for FY14E (subject to change with better clarity emerging on how gold financiers react to these regulatory changes). After the knee jerk reaction in today’s trading, the stock is trading at 1.1x P/BV FY13E for medium term RoA/RoE profile of 2.5-3.0%/18-20%. We maintain‘HOLD/Sector Underperformer’ recommendation/rating.
Regards,
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