Ashika Research - Equities

Manappuram Finance Ltd.

March 01, 2017
Company Profile
Recommendation Buy
Established in 1992, Manappuram Finance Ltd. (MFL) is a Closing price Rs. 95
nonbanking finance company promoted by Manappuram Group Target price Rs. 120
with a total AUM of Rs. 145,544 million. MFL is the second largest Potential upside 26%
player in the gold loan segment with an AUM of Rs 122,672
Company Information
million as of Dec 2016. It has a strong pan-India presence through
BSE Code 531213
its strong branch network, spread across 23 states and 4 union
NSE Code MANAPPURAM
territories, serving a customer base of ~2.25 million.
Bloomberg Code MGFL IN
The company has, since the past two years, diversified into non- ISIN INE522D01027
gold loans segments. It acquired a majority stake (85%) in Market Cap (Rs. Cr) 8,052
Asirvad Microfinance Private Ltd, (one of the leading Outstanding shares(Cr) 84.16
microfinance institutions in Tamil Nadu) in Feb 2015. It also 52-wk Hi/Lo (Rs.) 106.75/29.40
acquired Milestone Home Finance Company Pvt. Ltd. (later Avg. daily volume (1yr. on NSE) 51,75,717
renamed as Manappuram Home Finance Pvt. Ltd) and started Face Value(Rs.) 2
commercial operations in January 2015. The company also Book Value 32.76
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started lending for purchase of commercial vehicles and forayed

Relative performance chart (one year)
into MSME financing/ LAP.
Manappuram Finance vs Nifty
30000 400
27000
Investment Rationale 24000
350

21000 300
Robust Gold demand 18000 250
15000
As per World Gold Council, India holds 22,000 tonnes of gold. 12000 200
India accounts for 27.1% of world's jewellery demand and 19.2% 9000 150
6000
of global demand for gold bars and coins. Part of the large 100
3000
appetite for jewellery in India is driven by the cultural role that 0 50
gold plays in India. Limited access to financial assets means gold
Apr-16

Jun-16

Dec-16
Feb-16

Aug-16

Oct-16

has an important parallel status as a store of value. Gold loans in

India have been largely concentrated in South India, which holds
Total Volume ('000)LHS
the largest proportion of India's gold portfolio and is typically
Manappuram Finance
more open to borrowing against gold as compared to consumers Nifty 50

Share holding pattern as on Dec 2016 (%)

Particulars (in Rs Cr) FY15 FY16 FY17E FY18E
Net Interest Income 1,109.2 1,412.8 2,030.3 2,449.9
Promoters
NIM (%) 12.1% 13.7% 34.5
Pre Provision Profit 434.8 577.1 1,129.4 1,323.0
PAT 271.3 353.4 633.3 771.6 Others
18.3
EPS 3.22 4.01 7.53 9.18
ROA (%) 2.4% 3.0% 4.4% 4.3%
FII
BV (Rs.) 31.3 32.8 37.4 43.5 35.9
DII
GNPA (%) 1.2% 1.0%
11.3
NNPA (%) 1.0% 0.7%
Source: Ashika Research & Bloomberg

1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 6611 1700, Extn. - 704 www.ashikagroup.com 1
 Ashika Research - Equities

Investment Rationale Cont

in northern and western regions of India. Demand is further concentrated in rural

areas. Rural India is estimated to hold around 65% of total gold stock as this section
of the population views gold as a secure and easily accessible savings vehicle along
with its consumption purpose. Despite import-related curbs and earlier slide in gold
prices, demand for gold continues to remain strong.

De-risking of gold loan portfolio

MFL changed its strategy by introducing shorter tenure products of 3-9 months which
constitute 90% of its portfolio now, as against its entire portfolio being of 12 months
tenure earlier, with a maximum LTV of 75%, thus protecting itself from the fluctuation
in gold prices. Interest accrued on loans eased to 3% of loans as against an average of
7% over the past five years. Auction losses have thus declined significantly.

MFL diversified into microfinance, home loan, commercial vehicle (CV) financing and
loan against property (LAP). Nongold portfolio forms 16% of AUM as on Dec 2016
(12% of AUM in Mar 2016) against 4% in FY15.

Asirvad Microfinance - The focus here is on low income borrowers including

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women self-help groups. Favorable regulatory changes like capping the

borrowing limit per person, restricting the no. of MFI's from which a person can
borrow and mandatory regulation for MFIs to submit data to credit information
bureau, steady availability of funds from banks and other sources would help
in improving its profitability, asset quality and thus growth prospects of micro
finance players including Asirvad Microfinance. Current Loan Portfolio stood at
Rs 1,650,4 cr as on Dec 31, 2016.

Home Finance - The focus here is on affordable housing for mid to low income
group. The company has 24 branches in 4 states. It plans to add more branches
in urban and semi-urban locations in South and West of India. The loan book
stood at Rs 268.3 cr as on Dec 31, 2016.

Commercial Vehicle MFL at parent level offers CV loans, selectively in

Southern and Western India through 36 branches which are co-located with
gold loan branches. The focus here is mainly on unbanked population. The
company plans to open more branches in rural and semi-urban locations. Its
current CV portfolio stands at Rs 250.5 cr.

Other / Future Businesses - Besides the above businesses, MFL has entered
depository services, money transfer and foreign exchange business which are
expected to give increased contribution to fee income in future. Its insurance
broking business will commence operations this year and add to the fee
income. The company has introduced online gold loan products recently and is
in talks with banks to launch a co-branded debit card to offer gold loans to
customers without a bank account. In future, MFL is considering an entry into
two-wheeler finance.

1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 6611 1700, Extn. - 704 www.ashikagroup.com 2
 Ashika Research - Equities

Investment Rationale Cont

Particulars (As of Dec 2016) Microfinance Housing Finance CV

AUM (Rs cr) 1,650.4 263 250.5
Branch Network 697 34 46*
Number of States 15 6 9
Average Ticket Size (Rs lacs) 0.2 12.7 5.87
Average Yield (%) 25% 15.3% 18.9%
* CV Branches are co-located with the Gold Loan Branches

Scope to tap unorganized market

Currently it is estimated that less than 2% of the total gold stock in India is used for
pledging/obtaining gold loans. In addition to a growing organized gold loan
market, there is a large long-standing, unorganized gold loan market which is believed
to be upto 3 times the size of organized gold loan market. Unorganized market is
characterized by numerous pawn-brokers, money lenders and landlords operating at
the local level. These players charge interest rates usually in excess of 30%. Being
completely unregulated, customers are vulnerable to exploitation at the hands of
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money lenders and pawn-brokers. Organized players have gained market share on the
back of better distribution and relatively lower lending rates and there is immense
scope to tap this unorganized market.

Q3FY17 Result Analysis

AUM rose 38% y-o-y, whereby gold loan segment's AUM grew by 28% y-o-y
and 0.5% q-o-q. Microfinance institution segment (Asirvad Microfinance) grew
136% y-o-y and accounted for 11% of overall loan book. Other segments
(housing loan, commercial vehicle loan and loan against property) grew
exponentially on a lower base.

NII grew by 53%. NIM expanded 140 bps y-o-y and 10 bps q-o-q to 15.9%. The
expansion in NIM can be largely attributed to higher net yield of 24.6% against
23.8% in Q3FY16 and 24.5% in Q2FY17.

Cost of funds eased to 9.9% from 10.6% in Q3FY16 and 10.1% in Q2FY17.
Operating expenses grew only 9%, which led the cost-to-AUM ratio to improve
200 bps y-o-y to 6.4% as growth in gold loan business was achieved without
the need to expand branches.

Operating profit grew 110%. Credit costs (annualised) increased to 97bps as

against 51bps in the previous quarter.

PAT grew by 102% in Q3FY17.

GNPAs disappointed though as it increased by 140bps sequentially to 2.3% as

auctions were delayed on account of volatility in gold prices and shortage of
liquidity.

1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 6611 1700, Extn. - 704 www.ashikagroup.com 3
 Ashika Research - Equities

Investment Rationale Cont

Particulars (In Rs Mn) 9MFY17 9MFY16 YOY % Q3FY17 Q3FY16 YOY % Q2FY17 QOQ %
Closing AUM (Rs in bn) 146 106 37.6% 146 106 37.6% 145 0.5%
Net interest income 16,106.1 9,950.9 61.9% 5,830.9 3,816.9 52.8% 5,463.4 6.7%
Pre provision profit 9,137.3 3,710.0 146.3% 3,445.9 1,641.1 110.0% 3,064.7 12.4%
Provisions/Bad debts 686.0 295.8 131.9% 351.7 96.6 264.0% 175.3 100.7%
PAT 5,552.7 2,226.7 149.4% 2,025.4 1,003.4 101.9% 1,924.0 5.3%

AUM Break-up Product Wise (Rs. mn) AUM Break-up Asset Region Wise
414 442 445 423 406
895 292 1298 510 1684 487 2126 686 827
815 1286 2505 8% 8% 8% 9% 9%
1705 2134 2630
6983 14% 15% 15% 15% 15%
9988 12368 12%
15705 12% 12% 11% 11%
16504

96,392 66% 65% 65% 65% 65%

100,806 113,451
123,827 122,672
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Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17
Gold Loan Micro Finance Home Loan
CV LAP Other Loan South North West East

Source: Company

Competitive Advantage - Gold Loan NBFC's

Parameter Gold lone NBFCs
LTV Upto 75%
Processing Fees No/Minimal Processing Fees
Interest Charges 18% to 24% p.a.
Penetration Highly Penetrated
Cash/Cheque (Disbursals More
Mode of Disbursal
than Rs. 0.1 mn in Cheque)
Working Hours Open Beyond Banking Hours
Regulated Regulated by RBI
Fixed Office space for Proper Branch with dedicated
conducting transactions staff for gold loans
Customer service High- Gold Loan is core focus
Minimal documentation, ID
Documentation requirement
Proof
Flexible Repayment Options.
Borrowers can pay both
Repayment
interest and principal at the
Structure/Flexibility
closure No Pre- payment
charges
Turnaround Time 10 minutes
Banks Moneylenders
Lower LTV than NBFCs Higher than 75%
Processing charges are much
No Processing Fees
higher compared to NBFCs
Usually in the range of 36% to
12% to 15% p.a.
60% p.a.
Not highly penetrated.
Highly Penetrated
Selective Branches
Cheque Cash
Typical Banking Hours Open Beyond Banking Hours
Regulated by RBI Not Regulated
No fixed place for conducting
Proper Branch
business
Non Core Core Focus
Entire KYC Compliance Minimal Documentation
EMI compulsorily consists of
interest and principal. Pre- -
payment Penalty is charged
1-2 hours 10 minutes

Source: Company

1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 6611 1700, Extn. - 704 www.ashikagroup.com 4
 Ashika Research - Equities

Key Risks
Correction in gold prices restricting the demand for gold loans.
Loan slippage from microfinance segment.
Changes in RBI regulation

Valuation
MFL has a strong positioning in the gold financing industry backed by favourable
regulatory environment and stable gold prices. Besides, the company is expected to
witness significant upside from foray into new businesses of home loans, mortgages
and microfinance, and is poised to report healthy growth going forward also. Its de-
risking strategy has helped in keeping credit costs at a lower level. Diversification into
other segments will enable faster utilisation of excess capital on its balance sheet and
avoid any undesirable treatment from the regulator for being a single-product
company. Based on Bloomberg consensus, MFL trades at an attractive valuation i.e.
P/B value of 2.3x and ROA of 4.3% on FY18E financials. Investors are advised to Buy
the scrip with a target price of Rs. 120.
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1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 6611 1700, Extn. - 704 www.ashikagroup.com 5
 Ashika Research - Equities

BOTHRA Digitally signed by

BOTHRA PARAS

PARAS Date: 2017.03.01

14:33:20 +05'30'

Research Team
Name Designation Email ID Contact No.
Paras Bothra VP Equity Research paras@ashikagroup.com +91 22 6611 1704
Krishna Kumar Agarwal Equity Research Analyst krishna.a@ashikagroup.com +91 33 4036 0646
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Partha Mazumder Equity Research Analyst partha.m@ashikagroup.com +91 33 4036 0647

Arijit Malakar Equity Research Analyst amalakar@ashikagroup.com +91 33 4036 0644
Kapil Jagasia, CFA Equity Research Analyst kapil.j@ashikagroup.com +91 22 6611 1715

Tirthankar Das Technical & Derivative Analyst tirthankar.d@ashikagroup.com +91 33 4036 0645

SEBI Registration No. INH000000206

Disclosure
The Research Analysts and /or Ashika Stock Broking Limited do hereby certify that all the views expressed in this research report accurately reflect
their views about the subject issuer(s) or securities. Moreover, they also certify the followings:-
The Research Analyst or Ashika Stock Broking Limited or his/its Associates or his/its relative, has any financial interest in the subject company (ies)
covered in this report. Yes
The Research Analyst or Ashika Stock Broking Limited or his/its Associates or his/its relative, have actual/beneficial ownership of 1% or more in
the subject company, at the end of the month immediately preceding the date of the publication of the research report. No
The Research Analyst or Ashika Stock Broking Limited or his/its Associates or his/its relatives has any material conflict of interest at the time of
publication of the research report. No
The Research Analyst or Ashika Stock Broking Limited or his/its Associates have received any compensation or compensation for investment
banking or merchant banking or brokerage services or for product other than for investment banking or merchant banking or brokerage services
from the companies covered in this report in the past 12 months. No
The Research Analyst or Ashika Stock Broking Limited or his/its Associates have managed or co managed in the previous 12 months any private or
public offering of securities for the company (ies) covered in this report. No
The Research Analyst or Ashika Stock Broking Limited or his/its Associates have received any compensation or other benefits from the company
(ies) covered in this report or any third party in connection with the Research Report. No
The Research Analyst has served as an officer, director or employee of the company (ies) covered in the research report. No
The Research Analyst or Ashika Stock Broking Limited has been engaged in Market making activity of the company (ies) covered in the research
report. No

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