Last qtr they had mentioned operating expense to AUM will come down to 5% but that can happen only if AUM grows or expense reduce
Hi Hitesh,
Since I have been following this for a while, I can tell you with a reasonable amount of confidence about the valuation differences in Muthoot vs Manappuram. Muthoot is endowed with a better promoter and better risk management and cautious attitude, while Manappuram is endowed with a more risk-taking, more aggressive and less cautious promoter. So when the going is all clear, like it was before the demonetization led crisis, Manappuram appreciated faster and had a higher multiple than Muthoot also (which was labelled as slow growing especially because it took only baby steps towards MFI business). Now when the market found about risks in MFI business (which Manappuram had scaled up pretty quickly to double digit % of its book), it derated Manappuram and part of the money circulation (because there is a only two way to play this enormously high RoA business ie. gold loan business) went to Muthoot and it got re-rated. Otherwise there is no major change in the business fundamentals, gold loan is a safe and secure business except in case of quickly falling gold prices scenarios but there is not much growth - and microfinance has also been eating part of gold loan business. So both Manappuram and Muthoot recognize this and have been diversifying and the difference is just than Mana was ahead in the curve to diversify into MFI and got burnt while Muthoot was behind the curve because it took baby steps and got saved because of its slow timing. Overall, gold loan is a high RoA but low growth business and even with most banks and NBFCs exiting, if these two players are unable to grow fast then god knows when will growth come. However still the low valuation (relative given the massive re-rating of entire sector) might make it a good case for certain types of investors. But be aware that regulatory risk of any kind has always been an overhang on valuations.
Bottomline is that in a risk-on environment (which is the perception in the market currently for MFI exposed players), Muthoot P/B will be > than Manappuram. And in a risk-off environment (when MFI and any other such businesses which faced problems in the past will settle down and market will forget the risks of such a business), Manappuram will grow much faster than Muthoot and will command a premium over its slower cousing Muthoot.
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Hi Sarvesh,
I have been tracking MFIs for quite sometime. Based on this, worst seems to be behind in terms of NPL (new loans have ~100% collection for all MFIs). Due to break neck growth, there was general view that 5% borrowers are difficult ones and group liability is forcing them to repay (borrowers believed group liability to be sancrosanct). During demo, due to political interventions, this structure broke down and hence, defaults. Risks such as drought etc. will be there but will have local impact. The biggest risk is political intervention as the borrower base is strong vote bank. It will bite the sector again in future in some other form.
MFIs have already started growth though I think it will be slower going forward as Credit Bureau rejects have been increasing which shows that indebtedness has been increasing (long term impact).
Low ticket Gold Loan customers face similar problems as MFI borrowers as they below to same strata. Hence, gold loan has also slowed down after demo. Going forward it should have better growth.
Mana specific
Gold Loan: Mana auctioned 531 cr of gold (~5% of gold loan book). 90% of clients are existing clients (60% roll over + 30% existing i.e. who come after some gap) and 10% new. I think their short term 3 month product led to NPA (due to non payment of interest, again related to weakness in rural economy post demo) which led to higher auction. Cautious growth combined with lower growth in new customers in general led to loan book run down.
MFI: PAR>60 was 7.7% (con call) and >90 was ~7%. The borrowers less than 90 PAR would have been paying installments and will still be in PAR if they have not cleared 100% overdue (the non repayment story gained strength in Dec’16, by June it is 180 days). Hence, I do not think we should really worry about more write-offs unless there is new political turmoil during upcoming state elections.
I think Mana has good strategy of Gold Loan + MFI + Affordable Housing + Commercial Vehicles, catering to the same segment of borrowers which it can leverage in future. Also, its non gold loan book is 20%. Since target is to achieve 25% (by FY18 end ?) we can expect strong growth there.
I hope to see good results next q onwards, will be worried if it does not come.
Disclosure: Recently took small position in the stock
8 Likes
From 20-25% AUM growth guidance till last interview in July, they have now guided for 10-15% AUM growth for this fiscal. That is some cut! Good thing is that he collections are back to 100%. But demand is yet to pick up…still demonetization woes haunting the lower brass?
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I do not think this is one off event. Though they said they will try to find ways to reduce, does not look like they have a clue on “How”. They may not able able to do on an absolute basis anytime sooner (without compromising on coverage by time and location). However, they might be able to do on % of revenue basis if they are able to show AUM growth
Hi Hitesh,
What do you think of the result and the way forward?
Regards
AJ
Disc: Added today; substantial allocation in pf.
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I think things for rural India started coming back in Apr - May. Some of the MFIs have also de grown in q1.
Also 10-15%, is for gold loan (?), other products will grow faster
Not sure what he meant … is this just for gold loans or for overall portfolio?
“He expects 10-15 percent growth in AUM going ahead. Gold loan business is free from credit risk, he further mentioned.”
Likely to be gold loans. Since a quarter of de growth is there and recovery has started in q2, so 10-15% for the year.
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In Muthoot Vs Manappuram comparision, sometimes NPA takes a back seat.
Avg. GNPA of Manappuram is around 1% with 90 DPD. Avg. GNPA of Muthoot is above 2% with 120 DPD. Muthoot GNPA will go up even higher once they move to 90 DPD in Q4FY18.
My point is, Let’s not look at Gold AUM growth in isolation. See it along with other parameters including NPA.
My take on Q1 result:
I am invested and following Manappuram for a while now and the Q1 growth slowdown seems to be a short-term blip. Some decent amount of gold was auctioned during Q4FY17 and getting that quantity back into books is going to take some time.
Some people might ask why this is not a problem for Muthoot? Answer is, they do 1 year loan (vs 3 months for Manappuram) and accounts are not so frequently up for renewal like Manappuram. This is why their NPA is high.
For a 20%+ ROE, 2%+ dividend yield company run by great management, I see lots of valuation comfort with stock trading at 2 times trailing book and under 10 times earnings.
Disc: I am long Manappuram and it is one of my top 5 holdings. Views could be biased please do your own due diligence.
11 Likes
My take from concall -
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Growth - the management is slightly rattled by continued weakness in MFI and refrained from giving any portfolio level AUM growth target for this year. They maintain that long term trend of 10-15% growth in gold loan AUM will continue but this year is difficult to predict. I find this sensible since their past guidance was not met so better to keep your mouth shut till you gain confidence. Gold loan AUM declined due to sizable auctions of 500cr+. CV and Home loan will grow faster till the portfolio attains some decent size.
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MFI - Their approach towards NPA in very good. They made extra 33cr provision vs. RBI requirement in this quarter and some of this (~10-15%) could come back too… Growth will be calibrated and selective in few states.
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Operating costs - Security costs have gone up as they hired security guards at all locations and with guns at some places . Should remain elevated till they find a better solution.
One must see that operating leverage in their gold loan biz is substantial now. PAT growth in standalone biz is decent despite low AUM growth and high security charges. Declining cost of funds will help them cross the difficult times. Clearly, overall demand for credit is low except may be home finance/MSME segments where its presence is limited. One can not fault them for slow growth when their backyard is troublesome. They have cleaned the book and maintaining it in healthy condition for expected growth.
Disc - Invested
8 Likes
Manappuram results have been a disappointment on the MFI front. While they say that they have provided 33 crores excess than what is stipulated by RBI we need to watch for next few quarters how the asset quality of the MFI business pans out. They mention about write back of 15-20% of provisions also needs to be observed.
Gold loan and other businesses seem to be doing okay.
With the correction post the results, stock is at around 2 times book which seems interesting in view of valuation of other lending businesses in the market. I think with the overhang of MFI asset quality, the stock may remain under pressure or range bound in the shorter term.
disc: invested.
8 Likes
Muthoot, in similar business, has shown excellent growth in this quarter. Macro environment is same for both.
Edelweiss maintain buy rating with TP of 118 https://www.edelweiss.in/ewwebimages/WebFiles/Research/9152bcc1-da43-4062-a480-0f6ad41f07ac.pdf
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In muthut, growth comes with relatively poor business model , risk assessment framework and credit quality .in long run, everything becomes visible.in short run , we can just give reasons . I think some of forum members have highlighted the issues in detail ,so, won’t repeat .Ultimately it’s all about having conviction without developing any kind of biases . Time to go back to do numbers , talk on ground and form or revalidate unbiased analysis. Disc : invested in manappuram
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So much has been written on comparing Manappuram and Muthoot. Since both companies originated from Kerala and the public perception about both cos are different. Manappuram management in the past has put their personal wealth at stake when the company was having financial crisis. I doubt Muthoot would do that. I have put my money on Manappuram!!
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Exactly, I have a feeling that some of the riskier gold loan borrowers are gravitating towards Muthoot and that has led to slightly higher AUM growth vs. MFS. It is said that lax norms attract risk like bees in the lending business. Muthoot provides much longer credit period exposing itself to gold price movements compared to MFS. From a client’s perspective I would certainly be sad if my gold ornaments got auctioned just after 6 months in case of MFS. I will certainly go to Muthoot which might give me longer rope for repayments.
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Basic question
I have seen that many unorganized players (small jewellery shops mostly) in Bangalore, Hyderabad and Chennai are offering loan against gold at interest rate of (12%-16%) whereas manappuram is 18%-24%. So why would anyone go to manappuram to get loan instead of these small shops?
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How secure is it with the small jeweller? If he closes shop or relocates or denies getting the jewel? Why do we use Nestle products for kids instead of no name brands. There is always a premium for brands and organized sector. How much is the debate.
My 2 cent on it is that lending is commoditized business, right now every Tom Dick wants to be in the retail lending,