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:
Manappuram Finance - Q4 FY17 - Result Update_29-05-2017_12.pdf (651.3 KB)
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.
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
Regards,
Vinoth
sumi00:
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
Agree
This is the UNIQUE aspect
@Maverickroger
Second your conclusion -
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.
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.
Thanks
http://www.livemint.com/Opinion/yLqLISrnY6OAt9xtH13rnM/Who-are-the-biggest-buyers-of-gold-in-India.html…
So much inflow …
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.
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 -
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.
Banks don’t have the sort of network penetration these gold loan NBFCs have.
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!
Banks charge pre-payment penalties, while most of the gold NBFC’s don’t.
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!
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.
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).
will you please elaborate on this. it may be simple but beyond my understanding.
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.
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
