Add Manappuram Finance Ltd For Target Rs.222 - Yes Securities
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Trade-off between growth and PPOP margin will be key monitorable
Our view
MGFL’s Q2 FY22 performance had somewhat unpleasant divergences such as between growth and earnings in gold loans business and between growth and asset quality trends in microfinance segment. Gold AUM grew by significant 13% qoq underpinned by 4% growth in active customer base (added nearly 0.4mn customers v/s 0.2mn in Q1 FY22) and much higher 11% growth in tonnage (accretion in high value/ticket loans), but it came with an unattractive trade-off of profitability (PPOP margin fell 180 bps qoq to 9%, causing 130/480 bps RoA/RoE compression). The portfolio yield came-off by 100+ bps qoq with the co. focusing on not just retaining by attracting customers in the more competitive high value segment (loans > Rs0.3mn). Further, the demonstrated growth revival required structural investments (Opex/AUM deteriorated by 1+ ppt to 6.9%) like addition of marketing personnel, augmentation of advt. spends and distribution of incentives. Thus, despite significant loan growth, the stand-alone RoE declined by 5 ppt qoq.
Substantial 18% qoq growth in MFI AUM seemed aggressive in the context of operating environment, asset quality trends (PAR 30 jumped nearly 10 ppt qoq to 14%) and moderate capital adequacy (fell to 18.6%). AUM growth in vehicle finance and housing finance businesses was strong too at 21% qoq and 10% qoq respectively, but they witnessed 2 ppt and 1 ppt NPL reduction respectively. CoF declined by 70 bps qoq with significant shift in borrowing mix towards banks (corresponding decline in NCDs).
We cut PAT estimate of FY22 by 5%, which is a net outcome of opex and AUM growth estimates being revised upwards and marginal increase of credit cost assumption. We see possibility of RoA recovery from H2 FY23 with sustained growth likely driving some opex efficiencies in gold loans and credit cost normalizing in MFI business. In near-term, the trade-off between PPOP margin and growth would be the key monitorable. Stock trades at 1.3x FY24 P/ABV, which is an undemanding valuation in the context of long-run growth-return matrix. Retain ADD with increased 12m TP of Rs222 (rollover of valuation to FY24).
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