Nothing. But banks tried that in the past and it didn’t work for them as they are not geared for making small ticket loans. They are looking for multi-crore wholesale loans. Banks with wider reach have assets that are about 100 times assets of gold loan companies. even if they take entire business away from gold loan companies it will only add about 1% to their loan book.
Gold loan is practically micro finance with adequate security and that’s why it has best of both worlds. Any financial institution will die for the combination of very high yield and low NPA since gold is the most liquid assets. The key question of execution is more or less settled. The quick turnaround, flexibility in packaging loans and low cost operations compared with banks is not the only advantage. IMO, there are few issues to be settled for which some cooling period is required. Volatility will always be there in this biz and past corp governance transgressions would need to be forgotten. Only thing it needs is time to settle all negative notions and domestic investors to come back.
Manappuram share price is undervalued (Price Vs Value) though it has good business model, strong management, decent growth, good results. What could be reason from Mr. Market? If the stock is undervalued for so long we may need to re-think!
Disc: Invested during demon. If i find better opportunity, i will switch lanes for long-term
One of the reasons stock is undervalued (I think) is Mutual Funds are staying away from gold loan companies. Manappuram is owned by very few MFs, the market is reaching new highs on backs of SIP revolution.
yes but till howlong is the question growth will have to be rewarded patience willbe tested…
“NIRMAL BANG” Came up with their report after Q4 results and they are not seeing much growth in FY18 as PAT/EPS numbers are almost same as FY17. Not really sure about their theory behind such low projections.
Disc : Invested
Typical nonsense from brokerages. They invent numbers to arrive at ‘acceptable/marketable’ TP else how would they explain price behaviour. They say 10% growth in gold loan AUM, strong growth in MFI, home loan and CV loan. Cost to AUM to fall to 5% but asset quality to deteriorate and hence cut in estimates. The assumption regarding asset quality is very subjective.
Another brokerage (Edelweiss) downgrade their growth estimates, but better than what Nirmal Bang suggested
Not to read these reports for price targets, but to know their opinion about what these experts think about business performance and then monitor the key concern areas, highlighted in reports, yourself going forward .
Helps to learn the industry.
Motilal’s report will be most optimistic - as and when they issue ! - whom
to rely upon ?
Well go through all of them and the use your own judgement based on understanding of the business. One common thing among all is that they are confident on MF maintaining 24% or higher ROE going forward, which is a real motivation for me to to be optimistic on this. Concern regarding AUM growth and NPA needs to be monitored on quarterly basis going forward.
Another one from Axis Securities:
Plugged in some numbers in a very basic (and conservative) model, where I have assumed 10% PAT growth to FY25 and 5% perpetually and ran a DCF on that. The key variables in DCF are 15% ROE on incremental profits, which hopefully takes care of credit costs of MF and other financing business forays.
At various CoE’s it throws up the following results
15% - Rs 63/share
14% - Rs 72/share
13% - Rs 83/share
12% - Rs 98/share
I have assumed no opex cost benefit, no leverage benefit (or deterioration) separately - or the other way to put it is that it all folds into a final 15% RoE for incremental profits vs. RoE of >20% today. Wondering if these assumptions are conservative enough, or need some more tightening.
My sense is if we can get a thru the cycle comparison between COE vs ROE vs Gold Rates it will help to get a better feel about how much compression would make sense for the business. Disc - Invested
Isn’t this too optimistic? Developed nations are presently in the range of 2-2.5% growth rate so statistically MF will outgrow these nations in the long run which is not practical. I would use 2%. Do you always use high perpetuity? Just trying to understand.
2% is a bad idea for a growing country like India. It will take long, long time before even 3% is justified for India. 5-6% is what I would be comfortable with.
Hi Folks, I have a slightly different view on the valuation of Manappuram…Mr. Market is absolutely wrong here. Market Cap of 8000 Crores for a company with FY17 expected profit of Rs.1000 Crores, RoE in excess of 25%, growing at 40-50% CAGR looks very cheap.
Business Quality: I have been tracking/ investing in this company since 2009 and it has always been considered a poorer cousin of the bluechip NBFI’s like Bajaj Finance, Edelweiss etc. No doubt the fact that gold loans still contribute about 80% of its loan book makes it a bit susceptible to RBI Regulations as the regulators would try to contain the systematic risks here. However, the fact that none of the bank could penetrate materially into this market despite trying for well over a decade tells you that there is some moat in the business. Folks from deep south will appreciate the brand pull of the Manappuram and Muthoot brand which command greater trust than some of the smaller private banks. The network developed over the years and the understanding of the key risks in the business, along with the risk mitigation tools are the key in my opinion. The asset book is getting better all the time with increased diversification. My gut feeling is that, by 2020, the non-gold asset book will be 50% and that will automatically propel the valuation orbit of the company. Boarder’s who are raising question about the slippages in Ashirwad’s numbers will do well to recollect that Ashirwad was the main growth driver in till Q3. I am from this industry and I have seen the MFI industry evolve agressively from 2007 onwards as I was working in the structured finance departments with one of the banks where we used to repackage a lot of these MFI Loans and sell it off as PTC’s. The number’s of Ashirvad were impacted due to the blackswan event of demonitisation and the numbers will be back with a bang from Q2 Onwards with a normal monsoon and receding effects of demonitisation.
Management Quality: I am a huge fan of this management as it is a growth oriented management. Whenever there have been breaks in their growth, ala. 2013-14 or in Q4 and possibly Q1, it has always been due to regulatory reasons/ government actions. However, the management was smart enough to change its business strategy in FY15 which have been well documented in their earnings presentation. They did chose to degrow by reducing the tenure and LTV to make the growth more sustainable. Also the big bang decision of diversifying their loan book agressively is bound to yield fruits from FY19 onwards. A diversiifed loan book will reduce their profit sustainability risks (which I believe is just a perception risk) substnatially and give it the valuation bank which I think it deserves (PE of 20-25/ Price to Book of 3.5-5x). The management has always walked the talk and their capital allocation skills are improving all the time.
Financials and Valuations- The most storied bluechip in the market , Bajaj Finance could post only around 42% YoY growth in Q4 FY17 due to demonitisation impact, albeit with a much better asset qulaity. However, what is commendable is that despite being in a business which is significantly more impacted by demonitisation due to the construct of its asset book, it could post YoY revenue growth of 50 odd percent (that too depsite provisioning higher than RBI mandates in it MFI Business). The market in my pinion is taking a myopic view of the business and the asset quality, which is bound to improve drastically in Q2 FY18. My gut feeling (knowing the management and their growth over the years) is that by the end of FY18 their non gold portfolio would be towards north of 25%. I am absolutely confident that their FY18 profits will be more than 1000 Crores with a much better quality asset book. Although, I would not like to give any forward looking statement, however, the market cap for this kind of growth and business fundamentals should be in the range of 20000-25000 Crores.
Risks: The biggest risk for Manappuram is the regulatory risk as the gold loan companies are always under the watch of RBI and that’s precisely the reason why it will never command a PE of more than 30x until and unless the non gold portfolio contributes about 75% of the book. However, there are enough mitigants and moat in this business and market is severely undervaluing the company.
Disclosure: Holding since 60 odd levels and looking at a 3x from these levels over the next 12-8 months.
Apart from quality of business and other aspects discussed in this forum, I would like to add few other related points.
- One should really visit rural public sector banks to witness the service levels. I am from a small town and i witness how sbi bank staff treat the people. This is the reason why NBFCs will do amazingly well going forward. Everytime I go to the branch i make sure to remind them who a customer is.
- Gold is a major asset class of Indians. Whether it is poor or rich. When going gets tough Gold is the only leverageble asset for many of the middle and poor class ppl
Disclaimer: looking to add…
I agree all are very valid points. I am confident with management (Mr. VP. Nandakumar) and his ability to keep the company in the growth path. However there are some rumors around selling the company and no succession from Nandakumar (son/daughter’s interest towards the business) to continue to keep the company in growth path. If rumor becomes true then we have to see the buyer and their vision/plans.
Also, are we missing any parameter which Mr. Market recognizes to keep the stock undervalued for considerable amount of time?
Disc: Invested during demon and look forward to add if any corrections
Gold loan is practically micro finance with adequate security and that’s why it has best of both worlds. Any financial institution will die for the combination of very high
This is the UNIQUE aspect
Second your conclusion -
- Compared MF with Ujjivan on Net Profit/ Market Cap, and NP CAGR/PE ratio
- Compared MF with Muthoot Finance on above
The fact is MF has shown good growth - given regulatory forbearance
It DESERVES higher price earning multiple
Am patiently waiting for a re-rating since 2013, am confident it will give 2-3x appreciation in 2-3 years
Disclosure - Invested and top holding in portfolio
i believe its more a case of general perception about the business - (perceived low moat - i still believe the gold loan spreads are too high to not be exploited by the banks + regulatory risk) that’s led to an apparent mispricing by Mr. Market.