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A wholesome beat on earnings; significant yield increases across businesses

Manappuram delivered 9%/18%/10% NII/PPOP/PAT beat versus our expectations on stronger AUM growth (up 4.6% qoq/20.6% yoy), substantial margin improvement despite material increases in CoF and modest sequential growth in opex. The earnings beat came in notwithstanding the incurrence of higher credit cost (annualized 3.9%) in Asirvad MFI to address the slippages and higher writing-offs. Consolidated RoA/RoE stood at 5%/20% on annualized basis.

The net yield of Gold Loan (GL) book improved by 60 bps aided by change in customer composition (shift towards low-ticket higher yielding) and there was yield expansion even in MFI portfolio on the back of higher incremental lending rate of 25%. The growth in GL during the quarter was solely driven by higher avg. gold prices (lagged reflection in LTV which moved up from 60% to 64%), as the customer base was stagnant. New customer addition in GL was sound at 4.5 lacs (5.6 lac/4.8 lac in Q4/Q3 FY23). MFI disbursements were impacted for about 1-1.5 months as the co. reserved liquidity to overcome any adverse fallout of the ED investigation. Growth in Housing Finance, CV Finance and SME/NBFC Lending continued to be strong, and the contribution of these products increased to 19% (v/s 12% yoy).

Incremental upgrade in earnings; retain BUY with 12m PT of Rs175

We upgrade FY24 earnings estimate by 3% on better growth and NIM assumptions. On consolidated basis, we expect AUM growth of 15% pa, PAT growth of 20% pa and average RoA/RoE delivery of 4.6%/18% over FY23-25. We have factored GL growth of 7-8% pa, much lower than management’s expectation, assuming modest customer accretion (competition + ordinary growth effort) and stable gold prices. Any improvement in the outlook of GL growth with stable yields would be a key valuation re-rating trigger. Other catalysts would be sustained strong microfinance cycle, capital raising in Asirvad and holding-up of asset quality in CV, HL and SME products. The stock trades at attractive valuation of 6x PE and 1x PABV on FY25 estimates in the context of healthy RoE delivery. Retain BUY with an upgraded 12m PT of Rs175.

Key management commentary on growth, yields and credit cost

Key comments from the Management were 1) expectation of 10-12% growth in Gold Loan portfolio mainly led by customer growth, 2) GL yield to remain in the range of 21- 22% with adjustment of customer/yield mix complete, 3) expectation of 30-35% growth in Asirvad MFI book, aided by restored liquidity lines and capital raise, 4) CoF to further increase in coming quarters, 5) expectation of improvement in Opex/AUM ratio, 6) decline in credit cost in coming quarters due to reduction in the quantum of slippages and write-offs in Asirvad MFI and 7) aspiration to maintain 5% RoA.

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