MANAPPURAM FINANCE LTD.

PICK OF THE WEEK

Jan 8, 2017

Industry CMP Recommendation Add on dips to Sequential Targets Time Horizon

BFSI-NBFC Rs. 120 Buy at CMP and add on declines Rs. 107-109 Rs. 137.5 & Rs. 158 3-4 Quarters

Promoted by Shri. V.P. Nandakumar, Manappuram Finance Ltd (MFL) was incorporated in 1992 and today is the second
largest gold loan company in India. The Manapurram Group was started in 1949 by Late Mr. V. C. Padmanabhan, with focus
primarily on money lending activities. To reduce its concentration risk in gold loans, MFL over the last two years, has
diversified into new business areas like microfinance, vehicle and housing finance, and SME lending. In February 2015, the
HDFC Scrip Code MANPUREQNR company acquired Asirvad Microfinance Pvt. Ltd. with AUM a little short of Rs 300 cr which has grown 6-fold to ~Rs 1965 cr
BSE Code 531213 by the end of Q2FY18 after the subsidiary expanded operations to new geographies like Madhya Pradesh, Chhattisgarh,
NSE Code MANAPPURAM Punjab, Haryana, Chandigarh, and UP. Besides microfinance, the company has also diversified into commercial vehicle loans,
Bloomberg Code MGFL IN housing finance and SME loans with promising results.
CMP (Jan 5, 2018) 120.0
Equity Capital (Rs Cr) 168.4 Investment Rationale
Face Value (Rs) 2  Increasing share of non-gold loan business
Eq- Share O/S(Cr) 84.2  Gold loans market is expected to regain ground
Market Cap (Rs Cr) 10103  Asset quality deterioration peaked out; set to improve going forward
Book Val (Rs) 42.5  Better storing mechanisms to reduce opex
Avg.52 Wk Volume 67,65,000  Online gold loans gaining traction
52 Week High 125.4
52 Week Low 69.2 Concerns
 Fluctuation in gold prices
 Overdependence on Gold loans
Shareholding Pattern % (Sep 30, 17)
 Regulatory risk
Promoters 34.5
 Delay in scaling up non-gold business segments
Institutions 40.3
 Increase in non-gold NPA
Non Institutions 25.3
Total 100.0
Financial Summary - Consolidated
Particulars (Rs Cr) Q2FY18 Q2FY17 YoY % Q1FY18 QoQ % FY17 FY18E FY19E FY20E
NII 584 546 6.9 575 1.7 2219 2371 2554 2815
PPP 288 313 -7.9 315 -8.5 1275 1254 1341 1514
PAT 159 194 -17.6 153 4.6 758 728 839 955
FUNDAMENTAL ANALYST
EPS (Rs) 1.9 2.3 -16.7 1.8 3.4 9.0 8.6 9.9 11.3
AtulKarwa
atul.karwa@hdfcsec.com P/E (x) 13.3 13.9 12.0 10.6
P/ABV (x) 3.2 2.7 2.4 2.0
RoAA (%) 5.4 4.7 4.9 5.0
Source: (Company, HDFC sec)

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KEY HIGHLIGHTS
 Share of non-gold loans have
increased over 20% and stood at
21.6% at the end of Q2FY18 as
compared to just 3.1% at the end of
FY16
 Gold Loan market is expected to
grow between 13-15% over the next
three years from FY17-20 and reach
a market size of Rs 2,100-2,250
billion by FY20
 Resumption of gold auctioning and
repayments/write-offs in the micro
finance portfolio has brought down
gross NPA levels to 1.2% in Q2FY18
 Implementation of cellular storage
model would bring down cost of
physical security, thereby reducing
operating expenses
 Online gold loans gaining traction
with OGL book contributing 17% of
Gold AUM as compared to 11.9% at
the end of FY17
MANAPPURAM FINANCE LTD. PICK OF THE WEEK
Jan 8, 2017
View and Valuation
MFL is pushing shorter tenure gold loans and simultaneously expanding its non-gold loan business. Regular auctioning of
overdue accounts has helped to maintain asset quality in gold loans while the sharp deterioration in microfinance is also
under control. With the effects of demonetization withering away and normal monsoons this year, the rural economy
where MFL largely operates is likely to witness a strong pickup in activity. CARE in Aug-2017 revised the rating for MFL’s
debentures from CARE AA- to CARE AA which would enable the company to lower its borrowing costs further.
The expected decline in security charges and growing share of online gold loans should aid in improving cost-income ratio.
Provisioning requirement is likely to be low going forward aiding better profitability and improvement in its return ratios.
We feel investors could buy the stock at the CMP and add on declines to Rs. 107-109 band (~1.85x FY20E ABV and 9.5x
FY20E EPS) for sequential targets of Rs. 137.5 (~2.35x FY20E ABV and 12.1x FY20E EPS) and Rs. 158 (~2.7x FY20E ABV and
13.9x FY20E EPS) in 3-4 quarters. At CMP of Rs 120 the stock is trading at 2.05x FY20E ABV and 10.6x FY20E EPS.
Company Overview
Promoted by Shri. V.P. Nandakumar, Manappuram Finance Ltd (MFL) was incorporated in 1992 and today is the second
largest gold loan company in India. The Manapurram Group was started in 1949 by Late Mr. V. C. Padmanabhan, with
focus primarily on money lending activities. To reduce its concentration risk in gold loans, MFL over the last two years, has
diversified into new business areas like microfinance, vehicle and housing finance, and SME lending. In February 2015, the
company acquired Asirvad Microfinance Pvt. Ltd. with AUM a little short of Rs 300 cr which has grown 6-fold to ~Rs 1965
by the end of Q2FY18 after the subsidiary expanded operations to new geographies like Madhya Pradesh, Chhattisgarh,
Punjab, Haryana, Chandigarh, and UP.
AUM growth and breakup (Rs Bn)
(Source: Company, HDFC sec)
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Jan 8, 2017

Besides microfinance, the company has also diversified into commercial vehicle loans, housing finance and SME loans with
promising results. Put together, MFL had an AUM of Rs 2962 cr of non-gold loans. Overall, non-gold businesses
contributed 21.6% of the total business as of Q2FY18 as compared to 3.1% in FY16.

AUM growth has been flat in H1FY18 due to auction of ~Rs 700 cr of gold on overdue accounts and decline in gold prices
by ~7%. Non-gold loans AUM increased by 41% yoy resulting in 5.3% yoy dip in AUM to Rs 13723 cr.

Pan India presence & Distribution network (Q2FY18)

(Source: Company)

Investment Rationale
Increasing share of non-gold loan business
MFL had diversified into non-gold financing business in FY15 by launching vehicle finance and housing finance businesses
in Jan-2015. It entered into micro finance business by acquiring Asirvad Microfinance in Feb-2015. These businesses are
witnessing strong growth momentum, albeit on a small base and lending support to AUM growth. In H1FY18, AUM of
micro, home and CV finance have grown by 25%, 53% and 97% respectively over H1FY17. Share of non-gold loans have
increased over 20% and stood at 21.6% at the end of Q2FY18 as compared to just 3.1% at the end of FY16. The business
diversification has not only has resulted in better loan growth of 18.9% over FY14-17; but also improved the insulation
from volatility in the bullion prices.

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Jan 8, 2017

Share of non-gold AUM has been increasing

(Source: Company, HDFC sec)

Gold loans market is expected to regain ground

The gold loans market is expected to regain ground even as the growth rate is expected to be lower than that experienced
during the period of rapid expansion (FY07-12). The Gold Loan market is expected to grow between 13-15% over the next
three years from FY17-20 and reach a market size of Rs 2,100-2,250 billion by FY20. Stable and neutral regulatory regime
for Specialised Gold Loan NBFCs, sustained focus of commercial banks in the sector, increasing penetration especially in
the non-South geographies, stable gold prices and attractive risk adjusted returns are some of the key factors driving gold
loan market in India.

According to traders and jewellers, gold sales in rural areas has increased by 15% in Dec-2017 over the previous month,
and the trend is likely to sustain in Jan-2018. Better realisation from the kharif crop is enabling farmers to purchase gold
which could lead to higher loans in the coming years. Over the next 2 years, Specialised Gold Loan NBFCs like MFL are well
positioned to grow and reclaim their lost customer base from banks/unorganised sector and steadily increase their market
share.

Asset quality deterioration peaked out; set to improve going forward

MFL has maintained lower level of NPAs below 1.5% gross and less than 1% at the net level, as it resorts to auctioning of
gold given as security. However post demonetization NPA levels shot up in the latter half of FY17 as the company did not
take advantage of 60-day relaxation given by the RBI and also provided more time to the borrowers to make payment.
Company has once again resumed auctioning gold on non-payment of dues. It auctioned gold worth Rs 500 cr in Q1FY18

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 MANAPPURAM FINANCE LTD. PICK OF THE WEEK
Jan 8, 2017

and 200 cr in Q2FY18. This has brought down gross NPA levels to 1.2% in Q2FY18. MFL follows a conservative policy of
fully providing for all loans over 120 days and 60% of loans between 90 and 120 days (RBI requirement – 100% for 180+
and 50% of 90-180 dpd).

NPAs in the housing and micro finance business were higher at 3%, CV financing at 1.9% and Gold loans at 1.1%. It carries
an excess provision of Rs 27 cr in micro finance business. The management has brought down its overdue portfolio in
micro finance from Rs 420 cr in Dec-16 to Rs 126 cr at the end of Q2FY18. It is confident of recovering a minimum of ~Rs
100-110 cr from this overdue portfolio.

NPA levels to improve

(Source: Company, HDFC sec)

Collection efficiency normalized

Collection efficiency which has dipped sharply in Q3FY17 has recovered and normalized. Post Q3FY17 MFL has lent ~Rs
1900 cr and collection on these loans have been 99%. MFL has ~Rs 420 cr of pre-demonetization dues outstanding and the
higher provisions are mostly related to this portfolio.

Better storing mechanisms to reduce opex

Other expenses of the company jumped up by 49% in H1FY18 to Rs 263 cr mainly on account of increase in security costs.
Due to some incidents of robbery, MFL has strengthened security at its branches. Some of the larger branches were
provided with night/armed guards as well. The company is now taking efforts to see that security cost which is hovering
around 200 cr annually is brought down to around 50 cr in the coming quarters by new storing mechanism. They are in

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Jan 8, 2017

talks with vendors like Godrej who have developed a cellular storage model. The cellular storage model would increase the
time taken to rob a branch, thereby reducing the scope. With implementation of this model the physical security now
employed would come down drastically.

Cost-Income likely to decline to ~40%

(Source: Company, HDFC sec)

Online gold loans gaining traction

MFL became the first player to launch Online Gold Loan (OGL) in September 2015 which has been gaining traction. At the
end of Q2FY18 OGL book stood at 17% of Gold AUM as compared to 11.9% at the end of FY17. OGL benefits both the
customers as well as the company. In OGL any customers with access to an internet enabled device can avail a gold loan
anytime, from anywhere in the world. A customer has to come to MFL’s branch only once to deposit his gold and execute
necessary documents. After that, he can avail a loan up to eligibility anytime from anywhere using a smart phone and the
loan amount gets transferred to his bank account instantaneously. OGL would enable the company to improve the loan
repayment resulting in faster collections at a lower cost.

Q2FY18 Result Review

Net interest income grew by 6.9% yoy to Rs 584 cr in Q2FY18 driven by ~140 bps expansion in NIM to 17.2%. Expansion in
NIM was driven by interest write back on auctioning of gold and falling cost of funds. Operating expenses increased 27%
yoy to Rs 306 cr on account of increase in security charges and 18% increase in employee expenses. Higher provisioning in
the microfinance subsidiary led to profit shrinking 17% yoy to Rs 160 cr.

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 MANAPPURAM FINANCE LTD. PICK OF THE WEEK
Jan 8, 2017

Gold loan AUM fell 13% yoy, led by a 9.3% decline in gold stock and a 7% decline in gold prices, even as LTV increased by
3%. While GNPA ratio in the standalone entity and home‐loan business remained stable at 1.2% and 3% respectively,
GNPA in microfinance declined sharply to 3% from 6.9% in Q1 as write‐offs were higher. Cumulative write‐off in
microfinance was Rs 110 cr, with balance Rs 5.8 cr as provisioning.

The management has guided for 15-20% CAGR growth in AUM over the next 3 years. It expects gold loans to recover from
Q3FY18 onwards. Security charges is expected to come down from runrate of ~Rs 50 cr per quarter to ~Rs 12-13 cr per
quarter. Auction of gold stood at Rs 200 cr in Q2FY18.

(Rs Cr) Q2FY18 Q2FY17 YoY (%) Q1FY18 QoQ (%) H1FY18 H1FY17 YoY (%)
Interest Income 830 842 -1.5 831 -0.1 1661 1588 4.6
Interest Expenses 246 296 -17.0 256 -4.1 502 561 -10.5
Net Interest Income 584 546 6.9 575 1.7 1159 1028 12.8
Non-interest income 10 7 45.8 24 -59.1 34 11 196.4
Total Income 594 553 7.4 598 -0.7 1192 1039 14.8
Operating Expenses 306 240 27.4 284 7.9 590 460 28.3
Pre Prov. Profit 288 313 -7.9 315 -8.5 602 579 4.1
Prov. & Cont. 46 18 162.5 81 -43.0 127 33 279.1
PBT 242 295 -18.0 234 3.4 476 546 -12.8
Tax 82 102 -18.9 81 1.3 164 191 -14.1
PAT 159 194 -17.6 153 4.6 312 355 -12.1
Adj. PAT 160 192 -16.6 155 3.4 316 353 -10.5
EPS (Rs) 1.9 2.3 -16.7 1.8 3.4 3.8 4.2 -10.5
(Source: Company, HDFC sec)

Concerns
Fluctuation in gold prices
Wide fluctuations in gold prices could lead to disruptions in LTV resulting in higher NPAs. It might also lead to higher costs
due to slower recoveries and increasing auctions.

Overdependence on Gold loans

Although MFL is diversifying to other areas of lending, Gold loans still account for more than 3/4th of its AUM. Given the
large AUM of Gold loans, the non-gold loan portfolio will take time to reach a decent proportion of the overall AUM.

Regulatory risk
MFL largely caters to the poorer segment through gold loans and microfinance where the regulations are stringent. It was
hit by adverse regulation in gold loans by RBI during FY12-14. Any such regulations by Centre/State governments could
derail its growth prospects.

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Delays in scaling up non-gold business segments

Non-gold businesses are growing at a fast pace and MFL could face difficulties due to its inexperience, demand-supply
mismatch, loan recovery, etc. which could cap the expected expansion in RoE.

Increase in non-gold NPA

Though MFL is comfortable with its NPA levels in gold loan business due to the high margin of safety and shorter duration
of loans, the non-gold business could witness higher risks increasing the consolidated NPA levels. NPA in the microfinance
and home finance business stood at 3% at the end of Q2FY18 as compared to 1.1% in gold loan business.

View and Valuation

MFL is pushing shorter tenure gold loans and simultaneously expanding its non-gold loan business. Regular auctioning of
overdue accounts has helped to maintain asset quality in gold loans while the sharp deterioration in microfinance is also
under control. With the effects of demonetization withering away and normal monsoons this year, the rural economy
where MFL largely operates is likely to witness a strong pickup in activity. CARE in Aug-2017 revised the rating for MFL’s
debentures from CARE AA- to CARE AA which would enable the company to lower its borrowing costs further.

The expected decline in security charges and growing share of online gold loans should aid in improving cost-income ratio.
Provisioning requirement is likely to be low going forward aiding better profitability and improvement in its return ratios.

We feel investors could buy the stock at the CMP and add on declines to Rs. 107-109 band (~1.85x FY20E ABV and 9.5x
FY20E EPS) for sequential targets of Rs. 137.5 (~2.35x FY20E ABV and 12.1x FY20E EPS) and Rs. 158 (~2.7x FY20E ABV and
13.9x FY20E EPS) in 3-4 quarters. At CMP of Rs 120 the stock is trading at 2.05x FY20E ABV and 10.6x FY20E EPS.

Peer comparison (Consolidated-TTM)

CMP Mcap AUM NII PAT EPS ABV P/E P/ABV RoNW
(Rs) (Rs Cr) (Rs Cr) (Rs Cr) (Rs Cr) (Rs) (Rs) (x) (x) (%)
Manappuram 120.0 10103 13723 2350.0 719.0 8.5 41.0 14.1 2.9 20.1
Muthoot 471.7 18846 27608 3868.0 1418.0 35.5 155.7 13.3 3.0 19.4
* Price as on Jan 5, 2018

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Financial Statements - Consolidated

Income Statement Ratio Analysis

Particulars FY16 FY17 FY18E FY19E FY20E Particulars FY16 FY17 FY18E FY19E FY20E
Interest Income 2360 3388 3549 3798 4173 Return Ratios
Interest Expenses 947 1169 1177 1244 1358 Calc. Yield on advances 22.5% 26.9% 24.8% 24.2% 23.6%
Net Interest Income 1413 2219 2371 2554 2815 Calc. Cost of borrowings 10.4% 11.3% 10.4% 10.1% 9.9%
Non-interest income 14 21 40 47 60 NIM 13.5% 17.6% 16.6% 16.3% 15.9%
Operating Income 1426 2240 2411 2601 2875 RoAE 13.2% 24.8% 20.1% 20.2% 19.9%
Operating Expenses 833 965 1158 1260 1361 RoAA 2.9% 5.4% 4.7% 4.9% 5.0%
PPP 593 1275 1254 1341 1514 Asset Quality Ratios
Prov & Cont 42 109 150 78 88 GNPA 1.0% 2.0% 1.3% 1.3% 1.2%
Profit Before Tax 551 1166 1103 1262 1426 NNPA 0.7% 1.7% 1.1% 1.1% 1.1%
Tax 193 407 375 423 471 Growth Ratios
PAT 358 758 728 839 955 Advances 18.5% 21.6% 6.7% 12.4% 12.9%
Borrowings 11.7% 13.9% 6.2% 11.3% 11.3%
Balance Sheet NII 27.4% 57.1% 6.9% 7.7% 10.2%
Particulars FY16 FY17 FY18E FY19E FY20E PPP 34.3% 114.9% -1.7% 7.0% 13.0%
Share Capital 168 168 168 168 168 PAT 30.8% 113.6% -4.0% 15.3% 13.8%
Reserves & Surplus 2590 3193 3699 4286 4959 Valuation Ratios
Shareholder funds 2758 3362 3868 4454 5127 EPS 4.2 9.0 8.6 10.0 11.3
Minority Interest 21 24 27 30 35 P/E 28.4 13.3 13.9 12.0 10.6
Borrowings 9638 10980 11661 12981 14450 Adj. BVPS 31.9 37.6 44.0 50.8 58.6
Other Liab & Prov. 422 783 564 540 607 P/ABV 3.8 3.2 2.7 2.4 2.0
SOURCES OF FUNDS 12839 15148 16119 18006 20218 Dividend per share 1.8 2.0 2.2 2.5 2.8
Fixed Assets 195 187 156 127 100 Dividend Yield (%) 1.5 1.7 1.8 2.1 2.3
Goodwill on Cons. 36 36 36 36 36 Other Ratios (%)
Investments 49 5 44 66 94 Cost-Income 58.4 43.1 48.0 48.4 47.3
Cash & Bank balance 604 523 591 598 638 Advances-Borrowings 118.1 126.1 126.7 128.0 129.8
Advances 11385 13842 14776 16613 18751
Other Assets 570 556 517 565 600
TOTAL ASSETS 12839 15148 16119 18006 20218

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One year Forward PABV One year price movement

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Fundamental Research Analyst: Atul Karwa (atul.karwa@hdfcsec.com)

HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066
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__________________________________________________________________________________________________________________________________________________________________________________________________
Disclosure:
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disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate does not have beneficial ownership of 1% or
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conflict of interest.
Any holding in stock – Yes
HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.

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