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.