Add Manappuram Finance Ltd For Target Rs.185 - Yes Securities
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Trade-off between growth and PPOP margin remains a key monitorable
Our view
Manappuram’s Q3 FY22 performance was much weaker than expected with 9%/21%/26% NII/PPOP/PAT miss. Though consolidated AUM growth was only marginally behind expectations, the drag on profitability came from further sharp contraction in portfolio yield/NIM and incremental surge in opex. PPOP margin and RoA fell to historical lows of 6.2% and 3.1% respectively.
The revival in gold loan business continued with portfolio/tonnage expanding by 9%/7% qoq. The customer base was flat, and the average pledge/loan ticket increased by 11%/7% qoq depicting growth coming from the targeted high-value customer segment. However, such growth continues to come at the cost of portfolio yield/NIM (shrunk 260-270 bps each) and higher investments in advertising (run-rate at Rs500mn+ v/s usual Rs200-250mn) and marketing personnel (employee cost up 6% qoq/40% yoy).
Due to calibrated business stance and focus shifting to collections, the Asirvad MFI book declined by 2% qoq. Its customer base was flat and average loan ticket was stable. MFI collection efficiency improved to 96% in Q3 FY22 from 93% in Q2, causing a 5 ppt reduction in PAR 30 portfolio with minimal net flow forward in PAR 60/90. There was significant growth of 12-30% qoq in affordable housing, vehicle finance and NBFC lending portfolios as the business environment improved; however, asset quality in housing/vehicle finance book was significantly impacted by the RBI’s November 12 circular.
Our estimates for FY22-24 earnings and ABV undergo severe cuts of 15-16% and 7- 9% respectively, underpinned largely by downward adjustments in portfolio yield/NIM and upward adjustment in cost. Manappuram’s dilemma of choosing between growth and profitability is structural, given its weak customer acquisition engine and borrower stickiness. However, RoA is likely to gradually recover from current low levels as growth sustains (at modest levels), advertising expenditure is calibrated, positive adjustments are made to rate structure and loan slabs (to cushion NIM), and on normalization of credit cost. Valuation is undemanding at 1.1x FY24 P/ABV, which also underpins our ADD rating on the stock. Our revised 12m PT is Rs185.
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