In this post, I will give my take on a medium quality business + high quality management + cyclical business
Manappuram Finance
Business quality (MEDIUM)
| Year | ROE > 20% | ||||
|---|---|---|---|---|---|
| FY10 | Yes | Total # years | 12 | ||
| FY11 | Yes | # ROCE & ROE > 20% | 7 | ||
| FY12 | Yes | ||||
| FY13 | No | ||||
| FY14 | No | SUM | 7 | ||
| FY15 | No | AVERAGE | 58.33% | ||
| FY16 | No | HIGH BUSINESS QUALITY | No | ||
| FY17 | Yes | ||||
| FY18 | No | ||||
| FY19 | Yes | ||||
| FY20 | Yes | ||||
| FY21 | Yes |
Management quality (High)
- Organic sales growth greater than category level growth: Yes (in-line with growth in Muthoot finance who is the category leader, detailed work here)
- Able to find new avenues to grow: Yes (have managed to grow other business segments like MFI, vehicle finance, home finance, etc.)
- Treats minority shareholders in a fair manner: Yes (In tough years of 2013-16, quarterly dividends were never cut or stopped + management has been very transparent in communications + conservative provisioning)
Financial projections as on 26.05.2021
FY21 Book value is 86:
- Based on trailing book, sell price is ~215 (2.5x P/B)
- Based on 1-year forward book growth ~ 16%, sell price is ~250
- 4-year growth of 16% means book value will be 156, sell at 2.5 P/B @390 share price
Cyclical?: Yes (70% of book is gold loan which relies on gold prices which is cyclical)
Confidence in projection (High)
- Business quality (high/medium/low): Medium (Cyclically adjusted ROE ~ 18-20%)
- Promoter quality (high/medium/low): High (They have a better gold business model compared to Muthoot + High promoter integrity + Decentralized control of different business units + High dividend distribution)
- Financial projections (high/medium/low): High (Should be able to grow book at 16%)
- Valuation projections (high/medium/low): High (Should be able to get 2.5x P/B; can even get 3x P/B)
- Is it a cyclical business (Yes/No): Yes (Majority of book is still gold loan which is driven by gold prices)
SUMMARY
| Companies | Projection date | Price | 4 years fwd Price (FY25) | Price return % | Dividend yield % | Total returns % | Confidence | Business | Promoter | Financial proj. | Valuation proj. | Cyclical? |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Manappuram Finance Ltd. | 26.05.21 | 160.30 | 390.00 | 24.89% | 1.87% | 26.76% | Medium | High | High | High | Yes |
This comes in the 4% allocation range. I might increase the position size to 8% if forward returns > 32% (at price ~ 135) and NPAs in other loan books are well provisioned and in-line with industry.