43
(^) Outlook BUSINESS / (^) 22 December 2017
of shorter tenure ( 3 - 6 months) products against the
earlier 12 -month product and recalibration of loan to
value (LTV) to link it to the product tenure. In short,
lower LTV for a higher tenure product and vice-ver-
sa. Thus, with the above two changes, if the customer
does not pay or close the loan, there is ample margin
of safety for the company to recover the principal as
well as the interest cost.
To prevent the over-concentration on gold loans,
the company since FY 15 also ventured into three new
business segments – microfi nance, housing loans and
commercial vehicle loans. This new businesses have
since done well with their contribution increasing
from a dismal 0. 1 %, as percentage of AUM, in FY 14
to 19 % by the end of FY 17 and 21. 6 % as of September
2017. With the launch of the new products, the consol-
idated AUM saw 18. 7 % CAGR, while net profi t showed
49 % CAGR by FY 17. Higher growth in net profi t was on
account of positive operating leverage and expansion
in net interest margin as the cost of borrowing fell.
The company’s asset profi le had also started improv-
ing with GNPA reducing to 1 % at the end of FY 16 from
- 2 % in FY 14 and NNPA reducing to 0. 7 % from 1 %. De-
monetisation impacted the asset profi le with GNPA in-
creasing to 2. 3 % at the end of Q 3 FY 17 but has since
fallen to 1. 2 % as of Q 2 FY 18. Hopefully, there should
be a continuous improvement going forward as cash
availability improves. The fi rst two quarters of FY 18
have been not so good for the company (higher provi-
sions for bad debt and lower loan book on account of
demonetisation). However, sequential improvement in
profi tability is likely on account of expected growth
in loan book, lower provisioning and lower security
charges. The company’s capital adequacy ratio contin-
ues to be high at 25 %-plus against the regulatory re-
quirement of 15 % and with very low leverage of about
3 x, there’s ample scope for the company to increase
its asset base without going in for an equity dilution.
THE SHEEN IS SHOWING
Given a stable regulatory regime and steps taken by
the company, the gold loan business of Manappuram
is again on the growth path with 10. 9 % CAGR expect-
ed in the AUM over FY 14 - FY 17 against a decline of
29 % over FY 12 - FY 14. The general expectation is that
growth in AUM will stabilise at around 13 %- 15 % over
the next couple of years.
As far as valuations are concerned, we find the
stock reasonable with a price to book of 2. 28 x, trail-
ing twelve-month P/E of 11. 32 x and a dividend yield
of around 2 %. Against such a backdrop, we believe
Manappuram is ripe for a rerating. b
Disclosure: The writer has a holding in Manappuram Finance and the
stock has been recommended to clients as well.
Short and sweet
To mitigate the risk of volatility in gold prices, Manappuram has also introduced short-tenure products
3 months
Scenario
6 months
Scenario
9 months
Scenario
12 months
Scenario
Gold value (~)^100100100100
If the customer does not
pay or close the loan,
there is ample margin of
safety to recover principal
as well as interest. Also,
linkage to gold prices is
negligible
LTV (%) 75 70 65 60
Gold Loan (~)^75706560
Interest Rate (%) 24 24 24 24
Interest cost (~) 7.5 11.2 14.3 16.8
Principal + Interest (~) 82.5 81.2 79.3 76.8
- Includes interest outgo during 2 months of auctioning period Source: Company
CY17 RETURN 51%
net profit# 758 cr
ttm p/b (x)2. 5
roa 5.44%