Manappuram Finance

Stock Opportunities
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It’s not the first time that Manappuram has been discussed here, but very few posts in the recent past and so I am starting a new thread here.

Manappuram has primarily been a Gold loan company and had a great run from 2006 to 2012 during which their sales increased from just 20 cr to 2600 Cr +. The profits also had a similar jump from 4cr to almost 600 cr in the above period - a 150 fold increase.

The steep correction in gold prices starting from 2012 along with the lax lending standards (to the extent of more than 90% of the underlying collateral) that had crept in during the high growth years was a rude shock to them. Since then, manappuram has been working assiduously on tweaking their business model to reduce the impact of fall in gold prices on their P&L. They have now almost entirely transitioned (more than 90% of the loan book) to a 60/90 day loan for 75% of value products and that has largely reduced the npa’s for them.

For the year ending 2015-16, the achieved a sales of 2300 cr with a net profit of 350 cr. One important feature of this business is that there is no major seasonality and so q4*4 can be considered to be the base eps for the next year. With an eps of 1.55 in q4, we will have an eps of 6.2 for 2016-17 even if there is zero growth.

Also since they were having tier I capital in excess of 25%, they got into related fields of microfinance and low income housing finance which has growing exceedingly well, albeit from a decidedly small base.

They should make an eps of 7.5 for 2016-17 and growing at 25% for the next few years and with net NPA’s of almost zero. Over the next 3 years, i.e. FY 2019-20, we can expect the eps to touch atleast 15 on account of significant contributions from their newly created divisions. Their target is to have 25% of the business coming from newly created subsidiaries from the current 10% by FY 2019.

Even a moderate p/e of 15 would put the stock price close to 200 which is almost 5 times the current market price. So indeed a very attractive proposition.

Of course, I am self-confessed goldbug and a gold bull and I expect the price of gold to go up sharply over the next few years with very tumultous economic conditions. Manappuram would be one of the best positioned to gain from such a scenario and I expect the above projections to be the base case without any of the above mentioned factors taken into account.

With a dividend yield of 4.3%, what more can one ask for in a stock. I started purchasing this a few years back at 20+… bought it all the way down till 10 and then all the way up till 35. I hold some decent quantities and intend owning them for the next several years.

The key risk would ofcourse be a sharp correction in gold prices. Any corrections of upto 10% over a few days/weeks wouldn’t affect them too much. A 20% correction would start eating into the interest cover and greater than would risk the principal itself. Otherwise, it’s the normal execution risk involved in their other start-ups of micro, housing, vehicle financing that needs to be monitored.

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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.

Regards,
Digant Haria
Research - NBFCs
Antique | Institutional Equities

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Hi @saeyons
I just saw the investor presentation for Q4FY16 of Manapurram and I notice the following:

Spreads rose from 22.3% t 24.5% (YoY)
NIM rose from 12.2% to 15.5% (YoY)

In your view is this sustainable? I am a novice in gold financing space but doesn’t this seem unusually high?

Sachit

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Its a cyclical stock, as its performance is highly dependent on Gold prices. Higher Gold prices = Higher value of collateral = Higher loans = Higher Interest Income Unless its business mix changes substantially its going to remain a cyclical stock. The business has a long way to go in that respect.

As gold prices head towards $1330 and $1430 levels its going to have this cushion for say next couple of quarters (hard to predict how long will Gold take to reach these targets). Unfortunately Gold prices are not in a secular bull run. In fact they are in a bear market. The bounce from $1040-60 levels is corrective an may carry prices to around the said levels. Post which a crash is Gold prices is highly likely. The stock though may enter a frenzy buying spree (like the upper circuit performance witnessed today) as market sentiment turns super bullish on Gold. So stock prices may have steam left. But whoever is entering should take into account that this is a cyclical stock and be sure about their analysis on Gold prices.

My 2 cents.

Disclosure: Invested from 20-22 levels (largely based on anticipated corrective up move in Gold prices & because dividend yield was good 8-9%). Going to be progressively getting out of the stock as Gold prices peak.

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If you look at the gold loan business, still about 80% of it happens in the informal sector where the rates of interest are upwards of 40% if not 50% pa. So they have huge scope to grow without having to sacrifice on the margins.

Also the improvement in margins have happened not bcos of increase in lending rates, but a fall in interest cost as well as reduced losses on account of better collections and shorter duration loans.

My guess is that NIM’s will stabilize between 14 and 15%. One cannot compare this to a bank loan where margins are substantially lower bcos of the lower size and tenure of the loans. Banks are not equipped to deal with the kind of volumes and low value loans that these gold loan companies deal with.

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@hsay What you are saying is extremely true, that apart from the incremental volume growth, this is largely a play on gold prices, and hence very cyclical. Though I am in the camp which believes that gold prices are headed much higher - gold has peaked when gold:silver prices are about 16:1, which is currently around 80:1. When I look at Keynesian central bankers, this becomes a no brainer for me.

However, those are our personal bets, and everyone should form their own opinion. However, I think we could both agree that gold prices are likely to be extremely volatile and anyone buying this stock should be clear on the underlying risk/reward payoffs. While the gold loan business has been “derisked” by reducing LTV, so that what damage could earlier be caused by a 20% decline in gold price would now require a 40% decline - its not completely risk free. Here the risk is of rising NPAs and recovery by auctioning gold at reduced prices. For gold, or any commodity for that matter (I personally do not classify gold with other commodities, but that’s another matter) such declines in very short time frames are par for the course and if there was ever a time when I expect extreme volatility in gold prices, I surely do in the next few years.

This is different from a sure consequence of even moderate decrease/increase in gold price viz. similar decrease/increase in AUM with a lag of few months. Here the risk is of decrease/increase in Sales, Earnings. In general for a business this is a major risk, but here it is the lesser of two devils, though it is more probable (rather its a question of when, not if) we meet this devil in my opinion.

In the concall management indicated 20% YoY growth till FY18 (next 2 years). They also said by then other businesses would contibute 25% of AUM. Since they expect 4000cr. as AUM from Ashirvad (MFI) and 1000cr. from Home Finance, (and I guess 1000 cr. from other businesses, which we ignore), this gives at least 15000cr. as expected AUM from core business. This concurs with growth guidance, which assumes stable gold prices.

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I think we are at the start of a bull run in gold that will surpass the 1970’s run even in % terms. But then, that’s an individual call and this is hardly the forum to discuss and debate it. By the time this bull run in gold is over, it will well be into 5 digits with the first digit not necessarily being “1” - Rs/gm or even $/ounce.

But I think Manappuram will do well with stable gold prices. The projections they have given of a 25% CAGR assumes flat to moderately rising gold prices. So a p/e of 7 for such a stock is quite an undervaluation.

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Actually I am more concerned with their revenue impact per say than their ability to recover their dues by selling Gold collateral. If their tenure is as suggested by them (mostly short term), with LTV of 75% they surely have reasonable cushion to recover their dues.

With increase in volatility of Gold prices there would be another risk and it may materialize as RBI going back to LTV of 60% (this is pure speculation though and would hit their revenues further like it did around 2012 I think, this regulatory change may materialize if Gold shoots up in a big way or dumps down! In the later case though it would be a double hit for their revenues).

What drives the cyclical nature of their revenues is Gold prices. So if gold prices crash by 40% (like the $1900 to $1040 move between 2011 to 2015), the revenue gets hit by as much and one needs a volume growth of 66% to just report flat revenue. This is a crude approximation of course. But it is essentially meant to highlight that even management forecasts may not be very reliable (assuming Gold prices are stable for 2 years is quite a wild assumption that can go anywhere, hardly reliable).

Even after achieving their targets in other segments where by 25% of AUMs is contributed by other segments 75% concentration in Gold business would still mean their performance will be dominated by what happens in Gold prices. This is true unless this contribution is switched, essentially meaning they have 25-30% revenues from Gold loans and rest from other business lines, which of course is not even in anyone’s thought for they are primarily into Gold Lending.

Of course if one has strong reasons to believe that Gold prices would stay strong (or stable), their diversification is still a positive step and their guidance may well be met. If however one believes that Gold prices may be in for a similar fall as they suffered from $1900 to $1040 (like my analysis tells me). It would mean they would unlikely meet their forecasts because first they need to compensate for de-growth due to gold prices and then grow further by 25%. Herculean task.

In any case at least for say a couple of quarters my opinion is also that Gold prices will be supportive to their business. But, In my opinion even if the management puts in its best effort, the fate of this stock is primarily tied to the trend in Gold prices. I feel any analysis of this stock should primarily be driven by analysis of Gold prices & secondly by fundamentals of the company (ensuring hygiene levels of fundamental soundness). But I guess on this count each to his own opinion & preferences.

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Their interest spread is high and I think that will weather volatality in gold prices.Also what I feel is that there is very little competition from organised sector. The management is clearly not considering banks as competition and local moneylenders are their competitors.With an increased AUM and decreasing cost of funds the margins can be sustained.

My only worry is that AUM per branch is not growing and with 3293 branches I dont know how much more branches they can add.

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I hv been buying Manapuram for last 6 months since 29 to 41 due to

  1. V cheap valuation at mouthwatering div yield of 3.5 to 8% -and low PE

  2. Change in business model of gold loan due to co going in for shorter tenure of loan,higher LTV and no bullet payment at the end of tenure

  3. Huge opp size in both gold loan & MFI as humongous amount of gold jewelry is lying idle in bank lockers which is virtually dead money.RBI under Rajan unlike previous bureaucratic IAS governors understood the importance of monetizing this big horde of gold by following conducive policy.

4)Manapuram was the cheapest MFI in terms of BV at 1 and even lower plus remaining business well secured by gold as collateral. Nandakumar n Equitas founder Vasudevan were good friends so Manapuram understood the opp size of MFI well n diversified into huge growing sector by buying Asirwad MFI

  1. Similar foray into Home finance,CV finance to reduce the dependency on gold loans.

  2. Nandakumar is one of the rare entrepreneur from his Ezhava/Theeya community who enjoys tremendous respect in his community.He has built stellar ethical reputation over last 20-30 years

  3. He has totally professionalized the co with family playing little or no role ,

  4. Big investment in branding by using big filmstars like Akshay Kumar and others stars of diff regions

  5. Excellent distribution reach in nook and corner of country on which MFI business is successfully riding with Op leverage coming into play

  6. Due to high div yld investment was akin to a bank FD with yield of 7-12% and added bonus of capital appreciation.

11)With little institutional holding so far and interest now building up the journey has just started imho

  1. Capital adequacy at 25% good enough for the foray into different segments.
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CONFERENCE CALL - from Capital Markets

Expects 20% gold loans AUM growth for next two years

Manappuram Finance conducted a conference call on 12 May 2016 to discuss the financial performance of the company for quarter ended March 2016. V.P. Nandakumar, MD&CEO and Kapil Krishan, Group CEO of the company addressed the call.

Highlights:

  • The consolidated AUM of the company increased 19% to Rs 11433 crore at end March 2016 over March 2015.
  • Gold holding increased by 2% QOQ to 59.6 tonnes and it is up 12.2% on a year-on-year basis. Total number of gold loan customers increased to 19.2 lakhs at end March 2016 from 18.72 lakhs at end December 2015. New customer addition was 3.7 lakhs in Q4FY2016.
  • The company expects 20% AUM growth in the gold business for next two years.
  • The consolidated profit after tax and after minority interest was Rs 130.7 crore, which is an increase of 30% on qoq basis and surge of 87% on yoy basis.
  • Weighted average LTV on gold loans has declined to 63% at end March 2016 from 70% at end December 2015. Gold loan disbursements continued to be strong at Rs 10869 crore in Q4 compared with Rs 9045 crore in Q3FY16.
  • Interest accrued in the balance sheet was Rs 344 crore which is 3.4% of the gold loan AUM and this compares to 7.2% a year ago, showing higher interest due collection.
  • Average cost of borrowings during the quarter declined to 10.5%, driven by raising of low cost deposits from banks and mutual funds. The average cost is down 150 basis points on a year-on-year basis.
  • The overall number of gold loan branches remains stable at 3,293 branches at end March 2016. The consolidated employee count of the company stood at 18734 at end March 2016.
  • The company has accelerated standard asset provision to 35 bps from 30 bps, in line with the regulatory guidelines and ahead of regulatory deadline. Accordingly, the provision and write offs in the standalone entity increased to Rs 9.09 crore in Q4FY2016 from Rs 6.6 crore in Q3FY2016
  • The company has improved asset quality reducing Gross NPA to 1% at end March 2016 from 1.1% on sequential basis. However, an improvement in asset quality is despite the company has shifted to the 120-days over due basis NPA recognition norm that too one year ahead of regulatory deadline of March 2017.
  • As per the company, the GNPA ratio applying 90-days overdue basis NPA recognition norms, which are applicable by March 2018, stands at 1.4%.
  • The gold auctions were lower at Rs 185 crore in Q4FY2016 on account of better collection performance and higher gold prices.
  • Loss due to theft, spurious gold etc amounted to 0.12% of AUM.
  • The share of Southern states in AUM of the company has declined to 65% at end March 2016 from 68% at end March 2015.
  • The leverage ratio of the company stands at 3.5X, the company would be comfortable with the leverage ratio of 5X-6X.

New businesses

  • The new businesses, set up and acquired in FY2015 haved accelerated share in AUM to 12% at end March 2016 from 8.6% at end December 2015. The company expect the new businesses to contribute around 25% of total AUM by March 2018.
  • Asirvad Microfinance had closing AUM of Rs 998.8 crore, up 299% year-on-year. It has 271 branches 346 and 6.18 lakh customer base spread across 13 states and earned ROA of 3.9% during the quarter.
  • The company has infused additional equity of Rs 100 crore in Q4FY2016 raising shareholding to 90.2% from 85%.
  • Since the acquisition, the Asirvad Microfinance has witnessed 250 bps reduction in its cost of funds.
  • AUM of Asirvad Microfinance is expected to increase to Rs 4000 crore by March 2018.
  • The home loans business had a total book of Rs 128.6 crore and loans against property had a book of Rs 44.2 crore. Commercial vehicle business had a book of Rs 129.8 crore at end March 2016.
  • The company has commenced insurance broking business, and that is expected to add fee income to overall business offerings.
  • The company plans to enter into new businesses such as two-wheeler loans, credit card etc in next two years.
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manappuram.jpg763×324 129 KB

from http://www.manappuram.com/

How does the company recover such shortfalls? If recovery is easy and fast, business model has low risk.
Company is trying to de-link itself from gold price fluctuations, but it depends on time frame in which such fluctuations happen. With new 90 days schemes, company can now digest more %age of quick fall of gold price than in past.
Share price will give bigger swings than gold price, so invest as per risk appetite.

disc: Invested

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Reproducing 2 tables from the latest investor presentation from Manappuram’s website.

You can observe that to delink the loss from fall in gold prices, Manappuram has linked the LTV to the tenure of the loan.

|                               | 3 Months | 6 months | 9 months | 12 months |
|-------------------------------|----------|----------|----------|-----------|
| Gold Value                    | 100      | 100      | 100      | 100       |
| LTV                           | 75%      | 70%      | 65%      | 60%       |
| Gold Loan                     | 75       | 70       | 65       | 60        |
| Interest Rate                 | 24%      | 24%      | 24%      | 24%       |
| Interest Cost*                | 7.5      | 11.2     | 14.3     | 16.8      |
| Total (Principal + Interest*) | 82.5     | 81.2     | 79.3     | 76.8      |

*Includes interest outgo during 2 months of auctioning period

So a shorter tenure loan has a higher LTV (3 months ~ 75%) and a longer tenure loan has lower LTV (12 months ~ 60%).

Whereas the earlier scenario was:

|                               | 12 Months |
|-------------------------------|-----------|
| Gold Value                    | 100       |
| LTV                           | 75%       |
| Gold Loan                     | 75        |
| Interest Rate                 | 24%       |
| Interest Cost*                | 21        |
| Total (Principal + Interest*) | 96        |

Moreover, the presentation states the following about NPAs:

Most of Gross NPAs are from regular customers who have serviced over half of interest due

If the Customer does not pay or close the Loan, there is a ample margin of safety to recover Principal as well as Interest. Also, Linkage to Gold prices is Negligible.

So gold prices would have to fall by > 20% within 3 months or 25% within 6 months or 30% within a 12 months for Manappuram to suffer a significant loss in their portfolio.

What do other members think about this?

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Good point.Seems market is also taking note.Valuation still v attractive with BV of 35 & attractive div yield is the icing on the cake.

Max wealth is created when both EPS & PE both rises.

PE seem to be rising due to perception changing from it being a pure gold loan co to a diversified NBFC with booming verticals of MFI,HFCs and CV financing,predictability in earnings,attractive div yield,professionalized management,huge opp size ,good investment to build brands,good distribution reach n thence op leverage comes into play for its foray in other verticals.

Risk remains volatality in gold prices,situated in business unfriendly Kerala state where a Commie govt has just come in,if interst rate rises etc

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Fad rate hike is coming. Many experts believe the event negative for gold price. But, came across this contra opinion, an interesting read

And depreciating rupee with fad rate hike will cover up some dollar gold price erosion (if any)

Getting more and more bullish on financials like Housing finance cos, MFIs, selected NBFCs and ethical gold loan co like manappuram.

Reduced pharma and increased Technology and financial co in PF in last 4 months.

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Quite a run in the last few weeks since we initiated this post. But there has been a similar un in other counters such as Muthoot and Bajaj as well.

But as said in the initial post, these are early days and we are well on track for a Rs.200 valuation by 2020. Also people concerned about immediate Fed hikes can now relax given the jobs report. That said, the US is solvent today bcos on near ZIRP. Even at slightly higher rates, the interest burden on Govt debt is so huge that they will crumble. Short of a dollar crisis, the US Fed will never voluntarily raise rates. Maybe another 25bps is the max they will do, if at all.

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Hi Saeyons

Nice post.

Do you have any data on these, it will be really helpful

  1. How much is the US Govt. debt?

  2. How much is present out-go on interest of US Govt. debt?

  3. How much the out-go on interest will increase if Fed increases rate by 50 bps?

Thanks

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US government’s debt = $19.5 trillion, 50 bps increase means $100 billion more annual out-go on interest. FY15 annual budget income for US govt. = $3.25 trillion

Btw, the ratio of US govt. debt to annual govt. income becomes 19.5/3.25=6. this ratio is highest ever in history except during world war II.

I think its important to note the trajectory of debt growth vs the trajectory of GDP growth. This makes it clear enough that if one wants to look at USA or Europe 20 years into future, then one should look at present state of Japan. (declining population, govt. debt to GDP ratio at 230%+ ).

Central banks are increasing the money supply through bond buying (QEs). Some of this money will ultimately go into buying Gold. Amount of Gold is limited in this world (size of an Olympic sized swimming pool iirc and Gold mining is very expensive) which is why Gold is 5000 yrs old currency. This is going to drive the price of Gold higher (perhaps multiple times higher) and perhaps governments would ban owning Gold in future or would further increase the tax on buying Gold.

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largely correct. Excepting that the official debt hides all of their unfunded liabilities.

nobody really has a good handle on this, but estimates range from $100 to $300 trillion (check out kotlikoff). So their situation is similar to that of Mallya.

Mallya might well be having a jolly good time even today if interest rate is 0%… The US is no different. Bcos of this they will never voluntarily raise rates.

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Lol… I see a lot of Zero Hedge, Peter Schiff, Mike Maloney talking in your words.

On a serious note, I feel the same. The collapse is imminent, but don’t know when it’ll happen. These levels don’t comfort me at all. Everywhere I look, there are no easy bargains to be found. Everywhere, margin of safety is not much unless you assume too much IMHO.

Read somewhere very recently: “A bull market is like Sex, it feels the best just before it ends.”

DISC: I’m 80% cash, 15% Gold/Silver, 5% equity (mostly because I can’t find any bargains), tracking Manappuram closely.

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