Excellent analysis. How do you compare Muthoot Finance with Manappuram Finance ? Yes, Muthoot Finance has largest network, largest gold AUM. But, I am finding Manappuram better for following reasons …
Manappuram:
turning around fast compared to Muthoot. Loan book growth % and Profit growth % are higher than Muthoot.
micro finance venture is already profitable
Home loan venture has started the business
Commercial vehicle lending venture just started the business
deploying eLocker with camera and other advanced security facilities, projected savings of 100cr over next 3 years
Expecting non-gold business to be 50% of AUM in next 5 years.
Is this a good thing (diversification) or bad thing (di-worse-ification)?
I tend to think it is a bad thing. Let me explain…
Micro-finance is more riskier than gold loan.
Commercial vehicle lending is more riskier than gold loan.
Home finance (especially low ticket sizes to weaker section of society) is more riskier than gold loan.
In general, diversification is good - only if you are diversifying into areas which are better than (or equally good as) your current business. Not if you are diversifying into areas which are worse than your current business.
Of course, I agree that home finance (Gruh, Repco, CanFin, etc.) is the flavour of the current stock market. But these companies have never gone through a stress period - example, an economic downturn, when most of the economically weaker folks who borrow from these companies will be unable to repay their loans. Then, the risks of these businesses will come out in true light.
Gold loan NBFCs have gone through a stress period (2013 gold price crash by 30%, and simultaneously RBI restrictions on LTV, growth, etc.). Muthoot Finance came out in flying colors even during this stress period - shows the robustness of the business model.
Had done a comparison of Muthoot Fin with Manappuram around 1 year ago - let me relook at it once again, and I will share my thoughts.
Muthoot Finance has a higher RoA (3%) than Manappuram (2.4%)
If you break it down - the 2 drivers are
Net Interest Margins (NIM)
Cost to income ratio (C2I)
NIM for Muthoot - 9.4%
NIM for Manappuram - 13.5%
Despite higher margins, Manappuram has a lower RoA - why is that? (It is another question whether these high margins are a good thing - such high NIMs could also imply that Manappuram is lending to a riskier set of customers who are willing to pay higher interest rates)
C2I for Muthoot - 45%
C2I for Manappuram - 60%
So, Manappuram is spending most of its income on operating costs. Breaking down the operating costs will further help understand this. E.g. how much gold loans outstanding per branch (Manappuram - 2.9 crores, Muthoot - 5.75 crores) - implying more business per branch / scale advantages / better operating leverage for Muthoot. Or you could look at gold loans per employee (Muthoot - 1.1 crores per employee, Manappuram - 0.57 crores per employee)
In general, Muthoot is run more efficiently with more control on costs. Also, Muthoot lends more conservatively than Manappuram. All signs of a better management. (Other signs of a better management are also there - e.g. 40% dividend payout ratio by Muthoot). Structurally, Muthoot has scale advantages, reputation advantages, better operating leverage, higher branding, etc.
Muthoot loan book growth (from its bottom) - 14%
Manappuram loan book growth (from its bottom) - 13.55%
The higher profit growth of Manappuram is only due to some reduction in operating expenses, which is one-time kind of improvement.
Just my thoughts based on ultra-quick analysis - so maybe I am missing something. Would like to hear your views on Muthoot vs. Manappuram.
Well, I was indeed looking at the new ventures as good diversification given the current skyrocketing valuations given to home finance, vehicle finance and micro finance. But, I didn’t account for a bad economy. I hope we will have a good economy for the next 3 years at least.
Thanks for digging NIM and C2I details. That does bring out the hidden strengths in Muthoot, its operations and its management caliber. Especially I am liking Muthoot’s business per branch, its large network and dividend yield. Good analysis.
I have heard good stuffs about Manappuram’s management. Coming to valuations, Manappuram looks cheaper in PE and Mcap To Sales. But, Muthoot has better ROIC, PEG. Given other strengths, Muthoot doesn’t look bad at all. Thanks for sharing good amount of details on Muthoot and doing a comparative study.
The analyst community looks at the diversification efforts of Manappuram as something admirable - and keep harping about it.
Then I fully understand their folly - because these same analysts advise mutual funds to diversify (or di-worse-ify) by buying a bunch of cyclical / commodity / risky stocks.
As an equity investor - if you have a portfolio of 10 great stocks, then adding another 5 mediocre stocks is not diversification, it is di-worse-ification. That is a good analogy for this phenomena.
I really like your analysis about the diversification (diworsification) PP1. Good thoughts on diversifications and actuarial mind-set.
I’m new but wanted your thoughts on big retailers without franchises like Pantaloons with their own brands vs brands like Monte carlo who sell their merchandise through retailers (including the pantaloons, shoppers stops of the world).
I would look at the higher C/I as an opportunity for Manapuram. If you view the business growing, which it should, they can grow into their cost structure and improve ROA - a tool that Muthoot may not have.
Also Manapuram is trading below book, so better margin of safety more than incorporating the lower ROA.
I do agree de-worsification - not a good sign that mgmt goes for fglavour of the season lending. Having said that, it will reduce regulatory risks like the last time RBI went after gold lenders.
Most NBFCs and Banks who entered Gold Loan business a few years back regarding it as an easy, low hanging fruit have now realized that this is a fairly specialized area and not everyone can be successful.
As a result, most of them are now exiting this business. Exit of other NBFCs will ultimately benefit Muthoot as it seems to be the only big, organized, efficient gold lender in the game. Even Manappuram is far less efficient on all parameters and is diworsifying into a whole lot of other areas.
Q1FY16 results and investor presentations for both Muthoot and Manappuram are available now. Here are my inferences.
Muthoot:
Other businesses (you might already know) include money transfer service, ATM, NPS, collection services, windmill power generation (??)
Dividend payout ration constantly going UP. now at 35%
Gross AUM 14% UP YoY, 4% UP QoQ. (Less compared to Manappuram)
NII 4% UP YoY (Significantly less compared to Manappuram)
PBT 4% UP YoY (Significantly less compared to Manappuram)
GNPA 2.13%, trend is going UP
NNPA 1.82%, trend is going UP
Funding profile is already well diversified, less room for growth and so less room for CoF % to come down
Manappuram:
Other businesses include MicroFinance, Housing Finance, Loan Against Property, Commercial vehicle Finance. As you see these are all into lending businesses and makes use of existing PAN india branches and existing infra. I am see these new businesses as ADD ON on top of already growing gold loan business. Currently these constitutes 5% of income and mgmt told its going to be 25% in next 3 years. I am seeing this 25% as extra on top of gold loan growth.
Gross AUM 23% UP YoY, 5% UP QoQ
NII 24% UP YoY, 5% UP QoQ
PBT 37% UP YoY
GNPA 1.2%, trend is going DOWN
NNPA 1.0%, trend is going DOWN
Funding is 75% from banks, lots of room for growth to lend from cheap sources. CoF % is constantly coming down for the past several quarters.
Valuations wise Manappuram is cheaper than Muthoot
In manappuram current AR, they have explained in detail how with use of new technology they are gonna reduce branch size and staff with increased safety. With high security system in place (by this year end) they will save a lot on guards salary etc (Check security expence in otehr expence details). Its quite encouraging to read this year Manappuram AR and seems they are on right track to improve branch efficiency and hence might get reflected in higher RoA in this year results.
[quote=“PP1, post:32, topic:1614”]
The lower P/BV is partly because, the Book Value has been eroded in recent years (2013? 2014?). Compare with Muthoot Fin, which always grew its book value, even in the troubled years of 2013 and 2014. Financiers trade at below book value, only when the market doubts the sustainability of book value.
[/quote] Shouldn’t it be other way round or am i missing something, I mean if Manappuram has eroded book value in previous years, their price to book value should be higher due to lower absolute book value. And if even after eroding their book value, their price to book is half that of muthoot, it means their stock price has taken huge beating compared to muthoot finance which again makes manappuram cheap (may be undervalued). Please correct me if I have misunderstood your inference.
