Manappuram reported its highest ever quarterly profits post the change in regulatory regime and its reported earnings at INR1.24bn were 25% higher than our estimates of INR1.0bn (standalone). The strong performance was driven by lower auction losses on the back of product re-engineering. Key highlights of the quarter are:
1) Business growth in its gold loan business was relatively modest with AUM and customers growing 4.6% and 3.2% sequentially. Auctions have subsided from an average of INR5.5bn per quarter to INR1.8bn in the current quarter.
2) Gross yields expanded 230bps on a YoY basis to 24.1%, resulting in 40.7% NII growth. This was largely a result of shift to shorter tenured products, a strategy orchestrated in Oct’14.
3) Asset quality was in fine fettle with GNPAs at 1.4% despite migration to 120 days recognition. Standard asset provisioning was increased to 35bps (30bps earlier) during the quarter.
4) Asirvad, the microfinance subsidiary, reported 43% sequential growth in AUMs to INR10bn. It now constitutes 9% of Manappuram’s consolidated AUM.
Lessons learnt, businesses transformed, accrual of benefits started!
Two important lessons were learnt during the turbulent phase of 2012-14. Firstly, gold loan business is a commodity business and needs to be de-risked from gold price fluctuations. Secondly, it is important to reduce the dependency on single product and explore other retail lending products. With these learning’s in mind, management implemented the following changes – 1) Introduced shorter tenured products so that decline in gold prices don’t lead to interest income losses and, 2) Acquired Asirvad Microfinance and forayed into home finance as well as vehicle finance.
The fruits of these transformations have started to flow. Auctions have declined significantly in H2FY16 and yields have expanded, indicating the success of the short term product. New businesses have enabled consolidated AUMs to grow at 19% despite only 9% growth in gold loan AUMs. We expect growth and profitability profile of Manappuram to significantly improve over FY16-18e.
Valuations inexpensive, upgrade target multiple on reduced risk & improved earnings
On the standalone business, we expect AUM CAGR of 11% to drive earnings CARG at 21% over FY16-18e. On the consolidated basis, we expect AUM CARG of 15% to drive earnings CAGR of 25%. Given the reduced auction risk in its gold loan business and improving return ratios, we assign 1.4x book value to the gold loan business (1.1x earlier) which translates to Rs50 per share. Now that its microfinance business has started contributing to earnings, we value it at 1.5x FY18e book or Rs 8 per share. Thus, we arrive at SOTP based valuations of Rs58 per share. Current valuations at 1.1x book look attractive. Maintain BUY.
Research - NBFCs
Antique | Institutional Equities