Manappuram Finance

(stockpicker123) #227

5% perpetual is the lowest I would use for India based revenues. This is because real GDP + inflation together should be higher than that range for the foreseeable future. For export revenues the 5% would be comprised of real GDP linked growth + INR dep (due to inflation differential)

So yeah, I dont use <5% in either case.

(divyansh ) #228
So much inflow …

(Yogesh Sane) #229

Agree. terminal growth rate should be close to expected nominal GDP growth rate of the economy from which company’s sales come from. For India based companies I use between 7 to 10% and export driven companies I generally use 5 to 7% as developed markets will grow at 1-3% real growth and INR will depreciate around 3-4% minimum.

(Mridul) #230

You are right that the spreads are pretty high for banks to target gold loans. Cost of borrowing for banks is close to 6-6.5% while NBFCs like Manappuram get it at 9.7%. Interest rate charges by banks for gold loans is 12-15%, while NBFCs charge 18-24%.

Can’t believe banks are not privy to these spreads without doubt. Though, if none of the banks are going aggressively towards pursuing gold loans, there might be a reason for it. What i could think of is -

  1. Banks see gold loans as a very small segment to their overall portfolio. Majorly, banks are after high ticket loans, as these small gold loans won’t add meaningfully to their loan book. In addition, it is much of a headache processing gold loans and small ticket auctions, etc.

  2. Banks don’t have the sort of network penetration these gold loan NBFCs have.

  3. Ease of getting loans and that too at higher LTVs -
    a. Loan processing fee for the banks is much higher in comparison to what NBFCs charge for gold loans.
    b. Documentation requirements are also much more stringent for banks.
    c. Processing time for banks is much longer than that of NBFCs.
    d. On the other hand, LTVs from banks are on the lower side.
    So, customers despite having to pay higher interest look for ease of getting loan and of course at higher LTVs. Advantage NBFCs!

  4. Banks charge pre-payment penalties, while most of the gold NBFC’s don’t.

  5. Flexible repayment options are there in case of NBFCs, while a compulsory EMI has to be dealt with when the gold loan is taken from a bank. So overall, NBFCs are much more flexible than banks in processing gold loans.

Much of this might be because gold loan is non core area for the banks. If the banks would like to focus on this segment, they probably can! But the trade-off between efforts to be put in in comparison to returns it would generate are probably not in favor of the overall scheme of things for the banks. This might keep gold loans always as non-core segment for the banks. They would probably look at gold loans as a cross-sell at best!

(us121) #231

Aptly described.

There is never ending debate on specialisation v/s generalisation. Both have their merits and demerits. Cases are where each of these approaches have failed and few have succeeded.

In my view fault/smartness does not lie in being specialised or not but understanding who you are/what you are doing/ how it adds tremendous value versus generalists. That too in this case where cost to customer is higher for gold loan companies, value addition has to be substantial.

i believe, these few companies in gold loan have understood this aspect well and that is why they have sustained for long long period. This may not be possible to articulate and justify by adding/subtracting numbers but more of by sustained success. Icing on the cake is they have weathered regulatory headwinds and come out successfully.

All debate on gold loan companies versus banks are to remain cautious and alert understanding the edge and limitations both have and if any of those parameters starts moving the other side of threshold, must be reason to worry or else not.

When a person is in distress (reason: only option he/she sees is mortgaging the gold to have money) and looking for a small amount of loan comfort/convenience/trust plays much bigger role than just a rate.

Good part in Manappuram is they are proactive, they quickly change processes to align with regulatory compliances, they deploy best of the associates/vendors to do all these jobs. And hence a comfort.

Discl: Invested.

(Mridul) #232

Conference-call highlights:

● Around 3.9 lakh new customers were added during the quarter.

● Due to disruptions in cash supply during demonetization, the momentum of AUM growth was sluggish and it also disrupted the working capital requirements of the unorganized sector. The management has guided for ~10% growth in gold AUM.

● Gold holdings for 4QFY17 fell to 61.1 tonnes versus 65.1 tonnes YoY. A large part of the contraction is on account of higher auctions during the quarter (Rs 789 cr or 3.8 tonnes) due to postponed auctions from 3QFY17 due to demonetization. The monsoon is expected to drive growth in H1FY18 and the decline in tonnage is expected to recover.

GNPA stood at 2% of the gold loans. GNPA eased 30 bps to 2.2%, as auctions due in 3QFY17 were completed in 4QFY17.

NIM expanded 197 bps YoY and 101 bps QoQ to 17.1%. The expansion in NIM can be largely attributed to higher net yield.

Online disbursements of gold loans stood at 11.9%, while disbursements via cheque stood at 60%. Around
15% of disbursements were below ticket size of Rs 20,000. The company aims to achieve 100% cashless disbursements in the MFI business eventually. Cashless disbursements will result in cost savings.

There was a 30% increase in administration costs driven by demonetisation expenses and hiring of
additional security personnel. Drought conditions in South also affected the business adversely.

Average cost of borrowing continues to fall and there is room for it to fall further. It is 9.7% at the moment. The borrowing mix will continue in the same trend and there is no sharing of resources among subsidiaries.

Asirvad MFI reported a loss of Rs 7.4 cr in 4QFY17. AUM grew 80% YoY and 9% QoQ. Accounted for 13% of the overall loan book. Provisions stood at Rs 39.6 cr, CAR stood at 21%. Disbursements are back to pre-demonetization levels and the MFI business has expanded to 17 states now. 55% of AUM growth came from the newer geographies. GNPA in the MFI book has increased 450 bps to 4.7%. Company has not used the RBI dispensation on non-performing assets and voluntarily shifted to 90-day asset quality recognition during the earlier quarters.

● The MFI business has no significant exposure in the states of UP (4%) and Maharashtra (0.1%).
Business was mainly affected in Karnataka, especially the metropolitan region of Bangalore. The
company is looking to cut exposure to metro cities and focus on the smaller cities. The MFI business has tremendous potential in the East and North Eastern states, where they are looking to expand operations. They are not moving aggressively in UP, Haryana, and Karnataka.

Vehicle finance segment will continue to grow at a healthy pace of 20% QoQ. The vehicle
finance business was relatively unaffected by demonetization. The company had not taken
RBI dispensation for this vertical.

Housing loans to get a push in affordable housing segment, with an AUM target of Rs 3000 cr by the year 2020. (Currently, housing loans stands at Rs 300 cr) i.e 10 times from the current loan book in 4 years.

● The management is ready for equity infusion in the MFI business if needed. The management is
comfortable with the current CAR and has raised subordinate debt.

AUM growth guidance for the entire business is ~20%-25% in the next 3-5 years. They have targeted the non-gold segments to account for 25% of AUM by FY18 and expect them to touch 50% eventually.

In my opinion, Manappuram management has steered the company out of the demonetization mess largely unscathed. However, increase in loan delinquency post demonetization needs to be managed well. Stable gold prices and derisking strategy have helped them in their cause. Now, with the worst-case scenario behind (hopefully), MFL is targeting healthy growth going forward not just in gold loans but in other segments as well. I am very hopeful on its housing and vehicle loan book prospects. This diversification has not just helped them better utilize excess capital on BS, but has also enabled them to not be viewed as a single product company open to regulatory risks. Good Tier I capital (22%) will ensure unhindered growth without the need to raise capital for foreseeable future (1.5-2 years).

(us121) #233

will you please elaborate on this. it may be simple but beyond my understanding.

(8sarveshg) #234

What do you mean by 40-50% CAGR in growth, the relevant number for growth here is AUM in tons of gold since other businesses are marginal (Housing/CV) or face their own challenges (MFI).

AUM in tons of gold has grown by 20% this year but the 3 year CAGR as well as management guidance going forward is 10%. So I dont know where is your number of growth driver coming from.

And please be aware of the fact that RBI at any point of time can since there is an onward lending cap of 10% for MFI (small ticket, poor people without collateral) then why should gold loan companies be allowed to get spreads of 15% (small ticket, poor people with collateral). And as someone mentioned that gold loan companies is just 1% of banking assets, RBI wont have any problem if this busines model gets completely disrupted. So there is a question on both growth as well as profitability going forward which has an effect on valuations. I am not saying that this is a cheap or expensive valuation but please dont extrapolate just one year performance and think this is going to continue for ever.

(Mridul) #235

Mana is trading at these valuations because of such regulatory risks. That is why mgmt is actively trying to grow other segments.


Well, price action reflects market’s worry on several fronts. the main biz of gold loan is growing @10% cagr for the last few years. High RoE and low gold loan growth should result in capital allocation to other businesses and dividend which is happening. The key question is are they adding shareholder value?

Well, it looks like their biggest diversification in the form of MFI has bombed. It could recover but not before applying breaks on growth engine in the medium term. Before Q3-FY17 they were bullish on growing MFI biz now they want to focus on secure lending in priority of Gold>Home>CV>MSME. Except MFI, others are small enough to contribute to any meaningful AUM growth. I don’t think big investors are worried about MFI as such but the biggest worry is slow AUM growth in the short term when other NBFCs/HFCs are growing at 30-50%. Promoter’s interview suggested 20-25% cagr in loan but the cash cow gold loan is expected to grow @10%.

In long term, Manappuram doesn’t face competition from Banks etc but change in consumer behaviour. IMO, Gold loan is largely a distressed MFI loan biz. A distressed villager will try to secure a loan first and sort out issues rather than sell gold holdings as a first response during financial hardships. The question keeps coming to my mind ‘will repeated loan waivers,Kisan credit and proliferation of Mudra loans etc will reduce general stress level resulting in reduced potential for gold loan companies?’

disc: Holding and keep adding below 90

(vinoths) #239

Hi All,

We believe manappuram story looks good in mid/long-term - decent growth, good management, undervalued etc. Wondering why insiders are selling continuously if stock expected to run anytime soon. Are they know about the business and outlook which is unknown to us currently?

Is it something to worry?

Disc: Invested in 70 to 80 range.

(..pd..) #240

Most of them are ESOPs. That is normal for any entity. Baring India Pvt Fund sold a major chunk which was already in the media.

(Saji John) #241

(kanvgarg123) #242

I think Home Loan has now become a me too section. It is better to focus on specialized players.

(Mridul) #243

He said there will be some write-offs in ashirvad mf going fwd. Collection still at 92% is pretty bad.

Home loans is now a commodity. Everyone is trying to get into it.

Gold loan, being tge core segment, is very important. I am really hoping they can keep growing this around 12-15%.

(rvetri) #244

It beats me on why home loan cos demand such high valuation…From just one
player 35 yrs back, it has become like 100+ players now. What is the moat
for each company and there is zero entry barrier…

(Mridul) #245

It is just that the pie has got very big. Still, competition is eventually going to hurt the players.

(madhavikkutti) #246

Manappuram has a large customer base spanning around 3.5 million. VP Nandakumar, in his latest interview has mentioned that, company is planning to cross sell affordable housing to those existing customers. Can’t we consider the above itself as a moat for the company against the other established Housing Finance players? Why I feel so is that, Manappuram’s customers (gold loan, MFI) would mostly likely be having an yearly income of less than Rs. 6 lakhs. As I understand, maximum subsidy (6.5%) under the affordable housing scheme is offered to those whose annual income less than 6 lakh rupees (EWS/LIG category). With 50 million houses as the target, I think, the above category of customers are likely to be the main beneficiaries of the affordable housing program. I do not think that, other established HFC’s have many customers with less than Rs. 6 lakhs of annual income

(insanemaverick) #247

The reason why home loan companies are getting a much higher valuation is probably the same reason why any company would get higher valuation- Predictability and Stability of earnings, besides lower exposure to regulatory risks. Housing loans are least exposed to regulatory risks.

  1. Every government that rules this country will want increase in housing loans as much as possible and to that extent the housing loan rules will also be attractive as no regulator (there is nothing called an independent regulator BTW)/ government would want to restrict housing loans.

  2. Housing prices have been steady for a long period of time and hence the NPA shocks are substantially lower, resulting in more predictable earnings. Also, home loans repayments are the first priority for majority of families in India and hence customers will default in home loan payments only as a last resort. All said and done, housing loans are secured loans. However, it is critical to note that gold loans, business loans and vehicle loans are also secured loans. Then why don’t they enjoy the same discounting as Home Loans? One critical reason is the volatility of the asset class which is used as a security besides the probable order of customer defaults among asset classes in case of a stress scenario.

  3. Also, the market size has increased considerably with the present dispensation’s focus on housing for all. However, the proliferation of home loan players means that the underwriting standards may be lax. If there is steep fall in home prices, NPAs may buildup rapidly. The market is not discounting for any such black swan events, Enjoy the party while the music lasts!! Hope this clarifies.

(sanketkulkarni1987) #248

Just to add on … Not all housing finance companies are enjoying the same valuations … Companies like Can fin homes which cater mainly to salaried class and have consistently recorded Net NPA of 0 and Gross NPA of less than 1% , growth of 25% plus over last few years and healthy return ratios and trading at a premium…

Same is not the case with lets say a PNB housing which got listed in November last year… Many differences exist with respect to the above points i mentioned and the difference is clear in the valuations …And PNB is not a bad housing finance by any standards… its growing at 40% and doesnt have “bad” parameters to put it that way … just that there are some differences and these are visible in the valuations …

Housing finance in general is not trading cheap, but you cant take the shots on a complete sector as a whole. You still need to pick your bets and market is giving premium valuations only to the ones that deserve it… (correction can happen in near future, but if it happens then it will happen for all alike)…

So how MF or any one else goes around in this game of housing finance will be closely looked at…if they do poorly, it will show in the valuation…