Outlook Business — December 07, 2017

42

My Best Pick

22 December 2017 / Outlook BUSINESS

R

unning a non-banking fi nance com-

pany (NBFC) is not an easy task. It

is said that behind every successful

NBFC there are hundreds that fail.

Well, it’s also easy to understand as to why the failure

rate is high; to begin with, the companies are lever-

aged 8 - 10 times, hence, the margin for error is very

small and then, even if the management is prudent,

new regulations, political interference or one-off event

such as demonetisation can bring companies down on

their knees or wipe out their capital completely. We

have quite a few listed NBFCs which have faced near-

death events but yet emerged stronger, and one such

company is Manappuram Finance. Running a non-

banking fi nance company (NBFC) is not an easy task.

It is said that behind every successful NBFC there are

hundreds that fail. Well, it’s also easy to understand

as to why the failure rate is high. To begin with, the

companies are leveraged 8 - 10 times and, hence, the

margin for error is very small. Also, even if the man-

agement is prudent, new regulations, political inter-

ference or one-off event such as demonetisation can

bring companies down on their knees. We have quite a

few listed NBFCs which have faced near-death events

but yet emerged stronger, and one such company is

Manappuram Finance.

In the past fi ve years, Manappuram has faced sev-

eral headwinds, starting with tougher regulations

and non-level playing field in the gold loan busi-

ness and then the recent demonetisation. Both the

events, though negative in the short term, have actu-

ally helped the company reduce its risk through di-

versifi cation and strengthen its core business model.

With a level-playing fi eld in gold loan business and

dwindling impact of demonetisation, I expect Manap-

puram to record decent 18 - 20 % CAGR in both assets

under management (AUM) and profi tability over the

next few years.

In small and mid-cap fi rms, ideally, it’s important

for an investor, that the promoters hold reasonably

high stakes. In the case of Manappuram, the pro-

moter holds 34. 45 % stake. While we prefer promoter

holding of 50 % or more, there is comfort in this case,

as the promoter increased his stake by around 1 % in

FY 17. The CFO and one of the directors, too, increased

their stake through market purchases. We see this as

a big positive, as the ones running the company un-

derstand it better than anyone else.

STILL GLITTERING

It was during F 12 - FY 15 , the gold loan market went

through a pincer with the annual growth rate slowing

down to 4 %. During this period, the market was hit by

a series of adverse events, including stricter RBI regu-

lations, funding constraints, exit of new entrants and

declining gold prices. During this period, specialised

gold loan NBFCs lost signifi cant market share to pub-

lic sector banks and the unorganised sector. The mar-

ket share of these NBFCs fell from 36. 5 % in FY 12 to

28. 6 % in FY 14.

Amid this turbulent phase, specialised gold loan

NBFCs focused and spent their resources in consoli-

dating their operations, diversifying risks, improving

productivity from existing branch network and man-

aging/retaining employees. As a result, they regained

some lost ground with their market share back at 31 %

by FY 16. As far as Manappuram is concerned, post

the FY 12 - FY 14 period, it realigned its business mod-

el to de-risk itself from the volatility in gold prices.

The company has made an attempt at delinking the

gold business from gold prices with the introduction

Beyond the allure of gold

The focus on new businesses is showing up in the AUM

FY14 FY15 FY16 FY17

Source: Company

Share of new businesses in consolidated AUM (%)

0.1

3.9

11.8

19

Note: Market related data as on December 1, 2017; Financials

for FY17; Consolidated fi nancials considered wherever ap-

plicable

Data: Ace Equity

net sales#3 ,388cr

stock price# 101 M-CAP#8 , 537cr

ROE 24.79%