Manappuram Finance

This is a typical modus operandi of a microfinance business. In fact, this is how the microfinance industry generally operates. I have a friend who runs a small microfinance business and goes out every day to disburse and recover payments. Out of curiosity, I decided to accompany him one day to observe the business firsthand, and I noticed a similar pattern among all his customers.

Each customer had multiple small books, similar to passbooks, which were used to maintain their financial records. These customers are typically small, daily-wage business owners who rotate money between different lenders. There’s nothing particularly new about this system. Microfinance companies essentially rely on the fact that customers will repay their loans by borrowing from another lender.

Ultimately, it all comes down to how aggressive the recovery efforts are. For example, my friend is not very aggressive, which often results in payment delays exceeding six months. Although the typical payback period in his business is around 100 days, more than 80% of his clients take 180–240 days to repay.

In some cases, these customers resort to taking unsecured loans from smaller lenders at exorbitant interest rates to settle the high-interest payments owed to registered microfinance institutions (MFIs).

My intention here is to share how the microfinance industry functions. Thank you.

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Agree about the Operational part MFI. But this is now in the trending news in Economic Time over the last 2 week.

Here the ET article:

I just tried checking the earnings potential of the Manappuram MFI division in comparison to the growth mentioned in the ET article (specific to karnataka). I’m aware that Manappuram MFI division is not only based of karnataka.

MFI Growth in Karnataka Region- 59.9% (In Absolute Terms)

Total Gross loan Portfolio of MFI in Karnataka
As at March,2024 - 42,265 Cr
As at March,2019 - 16,946 Cr

=42265 - 16946
=25319/42265
=59.9%

Manappuram loan value growth - 59.5% (In Absolute Terms)

Loan Valued at amortised cost:

Annual Report (Micro Finance Loan Value at amortised cost)
As at March,2024 - 97405.11 Mn
As at March,2020 - 39374.98 Mn

=97405.11 - 39374.98
=58031/97405.11
=59.5%

As per RBI, the maximum lending limit is 2 lakh per family, Some MFIs are lending about ₹5-6 lakh per family, pushing poor people into a debt trap, Gowda told the media Monday evening after the DCs’ conference.

Govt will try to control the process of over lending to people, but what if the loan value grew at a similar rate in next five years. Even though MFI is only 20% of the profit share, but the potential is high for the current valuation in my view. any thoughts?

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Thank you for laying out the information. I would like to add a correction to the percentage calculations. Shouldn’t it be “(new value - old value) / old value” for percentage increase?

The microfinance industry has been highly unpredictable, with cases of over-leveraging, forced collections leading to criminal cases, higher impairment costs/NPAs, and low collection efficiencies. All microfinance companies are facing the same situation. For example, Fusion Microfinance reported a staggering 585% increase in impairment losses (non-recoverable assets) from H1 FY24 to H1 FY25.

Regarding the valuations of Manappuram, they remain highly attractive, as they have been in the past year. Only time will tell whether the stock is truly undervalued or if it deserves to trade at such low valuations.

Disclosure: Invested and biased.

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Smallcap World Fund (FII) now holds 5% of Manappuram.

However in it’s equity portfolio manappuram is just one among 850+ companies, and represent hardly 0.15% of overall AUM (assets) - https://www.capitalgroup.com/individual/investments/quarterlyholdings/smcwx

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Yes, you are right. Thanks for correcting the calc error.

Agree with you on the risk involved in impairment loss.

If i’m not wrong, we build conviction about the company/stock through the historical analysis (Quantitative & Qualitative), I’m not sure about the future growth Manappuram.

In my view, the company’s biggest asset is the gold lending business. I tried checking the earning potential, quantitative analysis on P&L, Balance Sheet & Cash flow statement.

for ex:

when i entered the stock, it was trading below its intrinsic value excluding the MFI business. In the long run (10-year range), it might give good returns. I guess.

Disclaimer: My Analysis are personal & not recommendations.

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Company is still trading at single digit P/E. The trigger for this has to be rerating. There has been re-rating in the last 10 years or so. Market seems to hate this stock but really high value in it. it has high volatility and putting a GTT order might be the best at the 52 week low

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Asirvad going against name - atleast for shareholders in Manappuram.

For Q3 FY2025 results are out. Technical writeoff of Rs. 400 Cr in, overall provisions - Rs. 472 Cr.

Net Loss of 188 Cr. GNPA - 5.82%, NNPA - 2.48%

https://asirvadmicrofinance.co.in/wp-content/uploads/2025/02/Financial%20Results%20(1).pdf

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MANAPPURAM outperform rating by CLSA
TP 225

Muthoot 2400

High gold price
Expected growth

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-Very Strong numbers by muthoot

——————

Usually both Manappuram standalone and muthoot standalone results go in same direction

I am Expecting similar Manappuram standalone growth

Ongoing Microfinance challenge will impair consolidated growth

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Manappuram will announce it’s results tomorrow.

Unfortunately, though on standalone basis, their results may have similar directions - but market perception (especially in recent years by DIIs) seems to be saying something different.

For the first time, I attended the concall of Muthoot today - and with the clarity & enthusiasm it’s promoters were answering the questions - speaks itself about the reason of over-valued perception vs that of Manappuram.

Disc: Invested in Manappuram, but not yet in Muthoot.

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I have been following the conference calls of both companies for many years.
Both management teams have different communication styles, but both walk the talk and maintain high transparency.
I have not observed any issues with Manappuram’s management so far.
Can you point any particular issue you observed( apart from communication style and enthusiasm )

Regarding the valuation difference between Manappuram and Muthoot, I would say the markets s perception varies at different times. There was a period when Manappuram traded at higher valuations than Muthoot, whereas recently, Muthoot has been valued higher.

Muthoot has separated its microfinance business, making it relatively safer, while Manappuram has yet to launch an IPO for its microfinance segment. Although Muthoot has a microfinance subsidiary, which carries inherent risks, the microfinance sector typically experiences cycles of challenges followed by periods of strong growth that compensate for previous losses.

Both companies have their own advantages and disadvantages. This is similar to the debate over whether large-cap stocks deserve higher valuations than mid- and small-cap stocks. At times, mid-caps trade at a premium to large caps, while at other times, large caps command higher valuations. Market perception will continue to shift, and I wouldn’t be surprised if Manappuram trades at a higher valuation than Muthoot again in the future.

Regarding competition:
The gold loan business is highly operationally intensive, making it unlikely for fintech to completely disrupt or break into the industry. Instead, I believe Manappuram and Muthoot will leverage fintech solutions, and their hybrid model will ultimately outperform pure fintech models. Banks and NBFCs cater to different customer segments, ensuring that both have a long growth runway. Manappuram and Muthoot, in particular, still have significant business potential ahead. This is my perspective.

Miscellaneous

Challenges in the microfinance sector can indirectly benefit the gold loan business, as some borrowers who struggle to secure unsecured loans may turn to gold loans for liquidity. However, this is not a universal trend, as not all microfinance borrowers possess sufficient gold to pledge. The growth of gold loans depends on multiple factors, including gold price trends, consumer sentiment, and overall market liquidity.

As the situation in microfinance stabilizes, Manappurams consolidated profits are also expected to improve. While a well-balanced portfolio between gold loans and microfinance provides resilience, prolonged stress in microfinance could offset some gains. That said, looking ahead, achieving double-digit growth over the medium to long term seems feasible, supported by the increasing demand for secured lending. Additionally, the upward trend in gold prices driven by factors such as inflation and central bank buying provides further support to gold-backed financing.

Initially, Warren Buffett was skeptical about gold as an investment, as it does not generate cash flow. There was also a phase where Bitcoins rise led to speculation about its potential to replace gold as a store of value. However, gold has retained its traditional role, particularly among institutional investors and central banks. The U.S. freezing Russian reserves has further reinforced gold s status as a global safe-haven asset, leading to increased purchases by central banks worldwide. While this may challenge Buffet’s s traditional view, his investment philosophy focuses on productive assets rather than speculative price movements.

Several factors contribute to the long-term growth of the gold finance industry. The gradual increase in gold prices, inflation, and the constant demand for liquidity ensure that gold loans remain relevant. While interest rates can influence borrowing behavior, the need for quick access to cash often outweighs rate considerations, making gold loans a preferred choice for many.
I feel as a result, the gold finance sector remains well-positioned for sustained growth, regardless of short-term fluctuations in economic conditions.

I feel golds rally is in the early stages of a potential long-term trend

I feel that golds rally is still in its early stages. Limited supply and rising demand suggest the rally could continue, driven by increasing central bank purchases.

May be this is the first step of gold surge in a larger trend

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No doubt on long term growth of gold finance industry, unfortunately there is not a index for this sector - hence need to evaluate each player independently on its pros & cons.

I haven’t tracked muthoot that extensively, so my views may be biased considering human psychology. My view is - in case a promoter / businessman is clear on his vision on company growth, valuation, objectives, and above all his reputation in biz circle vs others - it will reflect in their work as well as talk.

Listening to their voice vs reading transcript - gives a different prospective, I have recently learned only.

Some of the observations about Manappuram management - I have already mentioned above - which caused a red flag to me, but still i continued with my investment :slight_smile:

This

This

and more above …

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Funds exit for various reasons, including differing timeframes and alternative investment opportunities. Meetings and plans are subject to change, making it difficult to establish fixed schedules. Given multiple concerns, the market has yet to provide full confidence, which explains current valuations. Many companies experience such phases in their early stages. If all indicators were positive, valuations would reflect a premium. Whether Manappuram presents a value opportunity or a value trap remains uncertain only time will tell though I lean toward the former.

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As I have mentioned previously there are lots of factors going against Manappuram making it a value trap. The major one is Mr Nandkumar unable to find alternate management without a family transition option.

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Worst result… Thinking of exiting it completely

Profitability has been impacted because of MFI segment which has reported significant losses.Other than that gold business growth look stable(but not spectacular as Muthoot)

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Is this impairment due to higher defaults? If so, the theory that F&O traders pledged ornaments to help FPIs get richer also makes sense… This could be one of the reasons urban consumption is slowing down — they bet all their money on F&O trades and lost it all…

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is it confirm it is due to fno ?
may be it can be because of mtf or any stock specific

Higher impairment comes from MFI business(Ashirvad), Not from Gold loan business. Please look at standalone financial statement for Gold loan impairment

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Yes, even with gold loans, it’s 275% higher YoY (from 28 to 77.3). well, the question is, since there has been high growth in unsecured credit across the board, and given the substantial losses to retail investors in the F&O game per SEBI, is there a correlation?