I feel Manappuram has a long way to go if things it is trying to do work out. Some random thoughts below.
Few things that Manappuram is trying to do and at the top of my mind are:
Trying to increase the product penetration per customer (increasing product penetration per customer can do wonders to a company with large base of customers;although I think that the scope of increasing product penetration per customer would be limited on its current base as compared to something like Bajaj Finance)
Trying to increase the product penetration and revenue per branch
Focus on adding volumes too (be it actual gold volumes or addition of more customers) rather than just increasing business by milking the existing customers etc.
High focus on technology and fintech - Making existing businesses technology oriented (had taken Gartner’s consulting services + IBMs services in IT program implementations, also saw an ad to hire an IT head couple of months back) + looking to acquire fintech based businesses (hope it acquires at the right price)
Looking to expand in synergistic businesses
Amongst other things Manappuram is very well capitalized, has scope for increasing leverage further + there is still lot of scope for improvement in terms of cost of funding, funding mix, operation cost efficiency, etc.
I liked seeing things like adding business like foreign currency transfers etc. which would not be a major contributor overall but if can leverage the brand name in an asset light business like this then why not. I also feel and like, that the brand name and its distribution reach make it easier for Manappuram to venture into new businesses.
There are catalysts and enablers falling into place in terms of good regulatory environment, government’s focus (e.g. financial inclusion, housing for all, road connectivity etc.), exposing the uncatered segments of society to digitalization and last mile connectivity, etc.
There is huge opportunity size for new business that it has ventured in for e.g. Commercial vehicle financing, Affordable housing finance (avg. ticket size of 14-15 lacs at present), Micro finance, etc. Acquiring business intelligence and big data analytics based new generation fintech oriented loan provider companies maybe an addition to its existing businesses going forward.
I won’t comment on valuations as I am no expert. All I can say is that I intend to hold on to it for a long time by keeping an eye on the usual monitorables that apply to this kind of business and keeping a track of how it goes about executing its plans.
Read your rationale behind investing in manappuram based on the diversification activities carried out by management. What are your views on Muthoot?
As mentioned in other thread, are we not factoring in the event of lending slowdown period? In my circle, many known persons are availing loan against gold. In a country like india, where huge amount of gold is with families, more and more people are bound to take gold loans in future. with its pan india presence and being largest player, does it not make sense to go long on Muthoot?
Following the realignment of gold loan book, the expected improvement in Manappuram Finance Ltd’s (Manappuram) RoE materialized sooner than expected; thanks to the swift transition of the loan book to shorter tenure loans, and favorable movement in gold prices, thereby resulting in an improvement in asset quality and lower auctioning.
Manappuram has successfully got its gold financing business back on track with far superior yields, on account of higher IRRs on shorter tenure loans, and lower cost of borrowing, led by improvement in credit rating and better mix of funding. This has led to expansion in NIMs from 10.6% in Q2-FY16, just before the realignment of its gold loan book to 14.0% in Q1-FY17 thereby resulting in an improvement in RoE from 10% to 23%.
While Manappuram managed to turnaround its metrics, it also outpaced the no.1 gold financing NBFC – Muthoot on all fronts. Hence, the next leg of RoE expansion would most likely emanate from the improvement in the productivity of its gold financing infrastructure, as Manappuram plans to grow its book at a CAGR of 20-25%.
Manappuram’s gold financing infrastructure measured in terms of branch network and employee base is more or less on par with that of Muthoot. However, when it comes to AUM, Manappuram’s AUM is half that of Muthoot, although the growth in AUM over the last 2 years has been much stronger at CAGR of 18% for Manappuram as against Muthoot’s 10%.
Hence, it’s obvious that Manappuram’s productivity, measured in terms of AUM per branch and AUM per employee is significantly lower by 43% and 39% than that of Muthoot, respectively.
Should Manappuram grow its gold loan book at a CAGR of 20-25%, as guided by the management, the productivity metrics should well inch upward, thereby resulting in an expansion in RoA by 45-55 bps from the current levels.
The company is also scaling up the “Online Gold Loan” facility which was initially launched as the optional facility in October 2015 but was recently carved into a separate vertical and integrated with a mobile app facility in April 2016. In a span of 4 months there were more than 50,000 downloads with an overall rating of 3.9 stars, on Android platform alone.
Also, Manappuram is gradually bringing in technology for security and surveillance of its branches and safety vaults, thereby steadily driving down its security charges from 2.4% of income in Q1-FY16 to 0.4% in Q1-FY17.
Technologicy initiatives like these, in an operations intensive business like gold lending, will help Manappuram stay ahead of the competition.
~20-25% CAGR in AUM over the medium term is expected to outpace the growth in retained earnings which is expected to result in increase in asset/equity to 5.1x over the medium term, from 4.6x as on March 31, 2016, thereby resulting in 350-375 bps improvement in RoE over Q1-FY17. At 5.1x asset/equity, CAR would still remain comfortable at 20%.
With a well-entrenched branch network, stronger loan book, better yields, lower cost of funds, immense scope for improvement in productivity and hence higher operating leverage, Manappuram is well positioned to enjoy sector-leading RoE of 26-28% over the medium term.
Manappuram’s non-gold book – MFI, housing and CV finance, which is just 2 years old and is in the investment phase, is another segment that could benefit from operating leverage. However, since this segment is relatively new and continues to be in an expansion mode, the benefit would not be substantial, at least over the medium term.
I think the key monitorables in this company are :-
Gold prices - There is been an extensive debate about this already and gold prices remain a key monitorable for the topline growth.
RBI regulation :- I think a yield of 15% is highly unsustainable. Its only a matter of time that the RBI mandates the companies lending against gold to have a cap on its NIM (similar to the microfinance rules). This is a key point to watch out for. You can argue that the unorganised lending takes place at a much higher rate and hence there should not be a limit in place, but that’s the case with microfinance too. The only points that might work in its favour are the cyclic nature of the business and that this lending is generally for discretionary spending.
Online facility :- This is a brilliant initiative, but the reviews of the Manappuram app on the Play Store show that it has a long way to go before it can provide a seamless service. Monitorable growth trigger.
NCDs :- Replacing bank borrowings by NCDs will help bring down the borrowing costs. The company seems to be doing this aggressively, which is a positive development. Covered here.
Microfinance division :- While this has aided in the AUM growth and the diversification of the gold risk, it adds yet another factor to monitor here. There is a general consensus that this space is at the early/middle stage of a potential bubble (need not necessarily turn out to be so if kept in check). If this risk plays out, this is again going to damage the company significantly since there is no collateral here. Hence diversification could well turn out to be a double edged sword. Same is the case with the concerns in the LAP lending.
To mitigate these risks, the company wants to get converted to a bank, for which it is increasing its priority sector lending by expanding its microfinance division. Let’s see how that goes.
Overall, I think this company still has a few more growth triggers in its favour. But you need to keep tracking it on a regular basis and it definitely does not fall in the “buy and forget” category.
Gold loans AUM crosses 12k cr landmark for the first time since FY12.
OGL now at 5.4% of total gold AUM.
Microfinance business AUM grows 24% QoQ, 191% YoY. AUM now at ~1500 Cr. CRISIL upgraded rating to A+, highest rated MFI in the country. Share of new states now accounts for 33% of this business’ AUM
Commercial vehicles + housing finance now has an AUM of 430 Cr.
New businesses (microfinance, housing finance, commercial vehicle finance) now comprise of 15% of total AUM. Was 11% in the previous quarter.
In the investor conference call MD said that the recent demonetization move is an opportunity to push for online gold loans. Already 50% of disbursements happen via cheques. Any issues affecting collections (EMI & principal) should be normalized in the next 10 days.
Manappuram and other finance companies have been disproportionately hit by the market since demonetization scheme. There maybe a short term liquidity issue for these companies for the longer term, the story seems to be intact. Or am I missing something?
What happens with the gold loan companies - when the Govt. starts tightening the noose on gold? People who are hoarding black money in the form of gold. Rules may come in place for giving declaration of identity etc.