Mr. V. P. Nandakumar, MD & CEO, Manappuram Finance Ltd. discusses impact of demonetisation on 15th Dec 2016
I can see from your last few posts that you are seeking short term advice on Manappuram. This forum is not the right place for that. If you have any arguments over why Manappuram is undervalued or overvalued at the the current market price and how you see the situation changing in the future, then your thoughts would be most welcome 
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I think you are wrong in your understanding that Manappuram management is saying that their operations are completely delinked from gold prices. What they meant is that actual credit losses are delinked from gold prices because of change in business model to the short tenure product which given at 75% LTV for 3 months at 24% would require gold price falling by 19% and they not selling in time for them to have credit losses.
Their current LTV if I am not wrong stands at 1850/gram which is much more than 81% (1-19%) of the current gold prices. This means that they are safe till around INR 2300/gm (gold price). However they might need to start the operational part of auctioning etc. earlier, so they will need a margin of safety here.
However the revenues of the company as well as PPoP are clearly linked to gold prices as gold prices are a major contributor to AUM and people are forced to either liquidate their loans or put up additional collateral as gold prices fall.
Over the long term, gold price has increased only which has been further accentuated in India due to continuous fall in rupee vs dollar. If you believe any of these trends are going to get reversed from now on, then there is case of exit consideration. However, in case you don’t believe that gold prices in rupee terms over the long term are going to decrease, then there is a case for investment consideration.
The joker in the pack if whether the management is able to protect the networth by not having short term actual credit losses (which means collaterized gold being sold in way that the company isnt able to recover the due interest and principal). This is the factor that needs to be tracked in the short term.
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@fabregas, No and i am not looking for any short-term advice :-). Trying to get the views from experts to understand cause for the correction (few shared their views already), valuation and long-term view on growth.
@8sarveshg Well said and I stand corrected. I should have phrased the linkage with gold prices, the way you have done it.
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I think you are spot on. They probably didn’t do that earlier for competitive reasons but now that all gold lenders have been though the 2012-14 phase of declining gold prices, no one is trying to steal the customers by offering a 1 year balloon loans. Looking at the growth of assets (25% growth in H1 2016-17), Manapprum is able to grow even while reducing gold price risk.
As mentioned in their AR, for a 1 year loan, they are exposed to a price decline over a period of 15 months as they cannot auction the gold for 15 months since disbursal (1 year loan term plus 90 days after loan is due). Now that period has come down to 6 months. With a 3 month loan, they have auction the collateral sooner if the gold prices drop and borrower defaults.
A borrower who is borrowing against gold is essentially going long on gold. Borrower always has an option to sell the gold instead of taking a loan. If the borrower chooses to take a loan, he/she is essentially betting that gold prices will go up more than the interest rate on the loan. If the prices drop, it’s the borrower who has to bear the losses and not the lender.
I think the right way of doing this business (of lending money against gold) is to mark to market the collateral on a daily basis and give a margin call when the price drops and if the borrower does not put up the required margin, lender should be allowed to auction the collateral and not have to wait until the end of the loan term. This will substantially eliminate the gold price risk. I guess such lending business will have low interests as well.
Either Manappuram or Investors in Manappuram can buy a put option on gold to hedge this risk. I never invested in commodities. Any idea how to buy gold puts? Does MCX do that now?
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I guess you are talking about positive case. But a borrower who wants to default (-ve case) is short on gold. Is n’t it ? Then loan amount > gold collateral.
Borrower who wants to default is borrowing as a hedge against his/her long gold position. So yes, he is expecting the gold price to decline more than 25% (1 - LTV%) over the term of the loan plus 90 days after that lender is allowed to auction the gold. I guess if a borrower has short view, he might just sell the gold instead of taking a loan against it and default. So IMO, borrower who default get into cashflow issues rather than willful defaulters. There will be some some willful defaulters but now that the lender is making 3 month loans, gold has to decline 25% in 6 months for a willful defaulter to win.
With MTM on a daily/weekly basis with a maintenance margin, loan amount will not drop below collateral. This is exactly how a broker lends money against shares. IMo this is the right model if the collateral is actively traded. Interest rates on such low risk loans is about 12-14% much less than 20% that Manappurum is earning for taking gold price risk.
looking at the auction numbers from last 3 years, amount recovered and amount written off, this is much safer lending model than unsecured lending and still Manappuram is selling at a P/B less than that of MFIs.
Disc: building a position.
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A quick look at the current valuations of Manappuram :-
Please note that this is just a back of the envelope calculation. I was trying to figure out how much of the negativity surrounding gold prices is already priced in, considering REALLY conservative assumptions.The rally in gold prices started at the beginning of this year (see annexure).
Even if you assume that all the gold loans disbursed this year are underwater, the potential quantum of losses can be provisioned by the increase in the annualised profits of this year.
Annualising the latest quarter should not be an issue since there should not be any pressure on the yields due to the falling cost of funds, while assuming a 0% growth in AUM.
This makes you wonder if this stock is nearing its bottom now since the single digit P/E, high dividend yield and good growth figures( not considered in this calculation) do provide a safety margin. To understand the fundamentals of the company, please go through the messages in the above thread.
Annexure:-
Personally, I am also not negative on the price outlook for gold due to the following factors :
- The uncertainties impacting the markets this year have certainly not ended (Brexit, Trump, etc.)
- The magical growth in the US economy due to Trump’s policies seem overblown and more importantly, priced into the markets. This could lead to the US Fed hiking rates lower than the anticipated 75bps
- Even if international prices of gold decline slightly, the depreciation of the INR should add a layer of comfort
- Highly improbable that the international prices of gold should fall below US$1,000/oz since the cost of gold production is close to this mark
- Gold is an investment vehicle, unlike other commodities. A fall in its price will only increase its demand (elasticity)
Disclosure :- Invested
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Manappuram dividend yield crosses 3% on FY basis (div of Rs. 1.8 for FY 16 on share price of Rs. 58).
Dividend history from FY 2012 to 2016 = Rupees 1 (excl. 0.5 special div), 1.5, 1.8, 1.8, 1.8. All on FV of Rs 2.
Div declared in FY 17 is Rs. 1 till date (2 interim div of 0.5 Rs each).
Discl. invested recently and adding.
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You are assuming that all disbursal this year were at the peak gold price for the year. I think the correct way to calculate current value of collateral is to take difference between average gold price for the year and current gold price. Just looking at the charts, we can say MTM loss on collateral will be around 10% instead of 21% as you suggested. This is assuming that disbursal happened uniformly throughout the year. If we assume more lending at higher gold prices, we can take the losses at 12-13%.
Hi Yogesh,
The above valuation was an extreme bear case scenario, while you are asking for the base case.
In the most recent interview (23rd December, here), the management has guided for a 50 bps increase in NPA, while there is no growth expected for this year.
In my base case scenario, I have taken a 100bps worth of provisioning this year. Before demonitisation, the management had guided for a 30% increase in NII. This would have lead to a tremendous increase in the bottomline due to economies of scale and falling cost of funds. For FY18E, I have taken a 25% increase in PAT, which I believe is extremely realistic.
Again, this is a very basic calculation.
Base case scenario :-
Bull case scenario:-
Assumptions: 50bps provisioning, 40% PAT growth
These are the assumptions that I am comfortable with. In case you feel like changing the assumptions, feel free to use the attached file.
Manappuram Finance.xlsx (15.2 KB)
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Two loots. One after the other. Not nice !
The golds pledged by customers are fully insured by company hence loss will be minimal to zero. Yes, agree it might affect customer base growth/sentiments in short-term and company must tighten the security controls in all branches. In the recent press release management mentioned they are discussion with security experts to increase the security measures.
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I smell something unusual here. Muhoort finance MD was on tv last week for same reason , 2 thefts of gold in muthoot too. Both companies , massive gold stolen at the same time
Mr Nandakumar continues to increase stake.
Disc: Added more recently around 60 levels. Bought initial tranche around 25-30 levels about 1.5 years back. My initial investment thesis is in a different thread ( Gold loan companies-- muthoot and manappuram finance )
The investment thesis then used to be that it was a value stock and an opportunistic bet. Now I have more conviction about the business and hence averaged up in the recent correction. Fairly confident that they will capture more business from the unorganized segment and their diversification other than gold loans should help them in the long run. Views are most likely positively biased. Please do your own research before investing.
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As per the latest shareholding some marquee investors have partially reduced & others are taking huge pisitions.
In the budget announcements made by the Finance Minister Arun Jaitley today, affordable housing is to be given infrastructure status. Will it benefit Manappuram’s housing finance operations? If yes, in what way?
I am no expert, but to my limited understanding:
This will help people in business of constructing Affordable housing by virtue of some interest and tax benefits as is available to infrastructure sector.
indirectly it should benefit all companies working in and around this sector as all prosper together due to tail wind working positively for all involved in this business.
Competitive advantage of Manappuram gold loans over PSU and Private Banks
Please have a look at the interest rate comparison of leading gold loan companies as on Feb-2017, PSU and Private Banks in the below table. I have few questions in my mind,
a) Manappuram has higher interest rate provision (e.g. up to 26%) compare to PSUs offering at half of the interest rate (e.g. 11-12%). This may influence customers to reach PSUs instead of Manappuram. If the viewpoint is that customer might not have bank account, post demonization and digital initiatives perspective would be different and the same customer segment might have access to competitive banking products like cheaper gold loans.
b) The amount of loan sanctioned in PSUs is up to 80-90% of the Gold current market value compare to Manappuram which is offering short-term (3 months) with 65% of Gold value to de-risk. This may be resulting in lower monetization of footfalls
c) 85% of Manappuram revenue comes from gold loan which is acutely linked with physical gold price. There are rumors that gold will have to correct further before it makes another attempt to breach its previous highs. This if analysed further we can see manappuram raises and falls with gold price. Due to the short term loan strategy, there might not be NPAs but the AUM will be reduced due to this gold price fall.
d) Even though attempts are being made by the management to diversify into Housing loan and MFI, this is only 15% of total AUM. There are major new entrants in this field (like PNB Housing and Reliance Housing in HFC) or major competition in MFI like Bharat finance, Ujjivan, Equitas etc. Thus we cannot be over bullish for any growth in these sectors as well.
e) Safety factors - The other point concerns me in recent times gold loan companies like Manappuram have been in headlines for gold loots from across branches, even if branches are insured the customer preference now might be shifting to bank on PSUs for better safety of their gold ornaments
Based on the above factors how do see the Manappuram growth story in long-term (5+ years)? The current run-up only seems following overall NBFC run-up along with other factors like promoter buying shares, new positions taken by ACE investors like Dolly Khana etc.
Source: Gold Loan Interest Rates @ 9.00% - Compare Rate of Top Banks
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