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A mixed performance; gold loans yield and customer growth and nongold asset quality key monitorables

Manappuram’s performance in Q4 FY23 was a mixed bag wherein the earnings impact of stronger loan growth across products was weakened by a sharp decline in Gold Loans yield. Key positive attributes of the quarter were 1) 2% qoq increase in GL customer base with accelerating new customer acquisition (represents initial signs of competition easing and core segment demand coming back), 2) substantial reduction in PAR 30 portfolio of Asirvad (besides large write-off, there were significant rollbacks/recoveries), 3) material reduction in CoF (due to high-cost dollar bond repayment and Asirvad’ improved financial performance), 4) marginal improvement in RoA/RoE (4.3%/17.5%) even with lower GL yields. Yield drop of 150 bps in Gold Loans portfolio was mainly attributable to portfolio shift on 6m tenor from 3m tenor which resulted in lower penal interest income and other charges.

Management commentary assuaging on yields, growth and the ED matter

Blended yield of GL portfolio has recovered 50 bps by May (small rate hike in early April) and the co. believes that it would further recover to 22-22.5% in a couple of quarters. Competition from Banks and Fintechs seems to be easing a bit in low-ticket gold loans market, where demand seems to be recovering and the share of unorganized lenders remain high. This reflects in improving new customer additions. Yield on the MFI book will also improve, as the lending rate is 24% and portfolio yield stands near 22%. Management expects 10% growth in GL AUM, 35-40% growth in MFI book and 45-50% growth in Vehicle Finance and Home Loans portfolio in the current year. Nongold businesses are estimated to become 50% of AUM in next two years. The co. shared that it has obtained a stay on ED’s actions/execution from Kerala HC and are hopeful of a favourable resolution in the coming weeks. Even amid heightened uncertainty in the preceding week, Manappuram was able to raise more than Rs10bn of fresh funding from a large private bank. As per the management, availability of funding will not be a constrain for growth. However, CoF is expected to increase by 50-60bps in H1 FY24 on account of repricing of borrowings

Low valuation largely captures extant uncertainty/concerns

The uncertainties/risks from the ED matter and possibly dearer funding or some growth constraints seem to be significantly captured in current valuation of 4.4x/0.7x PE/PABV on FY25 basis. We have built estimates assuming much lower than guided growth across segments and moderate benefits from likely yield improvement. We expect CAGR of 13% in consolidated AUM and 18% in PAT over FY23-25, characterizing avg. RoA/RoE delivery of 4.4%/18%. While we would closely track developments on aforesaid issues, we retain BUY recommendation on the stock with an unchanged 12m PT of Rs150. From business standpoint, sustenance of customer franchise growth and sizeable portfolio yield recovery within mainstay gold loan segment would be positive triggers.

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