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Better-than-expected performance

Manappuram delivered a 2%/3%/4% NII/PPOP/PAT beat on our estimates, with outperformance driven by both better-than-expected AUM growth and portfolio yield. The company’s performance was characterized by a) 1% qoq growth in standalone GL AUM (seasonally weak quarter + stoppage of low-rate/teaser schemes), b) only 1.5% decline in Asirvad’s MFI AUM, notwithstanding the process changes for aligning with new RBI guidelines, c) continuance of growth momentum in VF and HL portfolios, d) material improvement in net GL yield though the quarter (July yields are 200 bps higher than Q1 FY23), e) reduction in GL NPLs (with much lower auctions at Rs1.5bn) and VF NPLs (primarily by collections) and f) substantial increase in Asirvad’s NPLs due to flow from restructured pool (though combined Stage 2 & 3 % was stable)

Gold loan growth outlook remains hazy; Non-GL portfolio on better growth footing

Moderately recovering demand in the core/low-ticket segment, focus on lifting portfolio yield (prioritizing profitability over growth), unwavering competition from banks, lack of distribution expansion (request for branch openings still pending with RBI) and largely unchanged sales/customer acquisition model imply that structural growth outlook for gold loans segment has not changed. Management is targeting 10% growth in this portfolio, which in our view is optimistic as competition may further increase. In Asirvad, growth should improve over coming quarters as monthly disbursements have normalized (alignment with new regulations over in May), there is significant spare capacity to drive growth (AUM/Branch at Rs45mn), and provisioning cycle should subside in next couple of quarters. In VF and HL businesses, besides a favourable operating environment, the stabilization of asset quality and strong capitalization would support continuity of brisk growth.

Negative earnings surprises are likely behind; some valuation recovery plausible

We have raised FY23/24 earnings estimates by 5-10% by penciling slightly better consol growth, raising GL portfolio yield and moderating credit cost of FY24. We upgrade the stock to BUY (12m TP unchanged at Rs135) basis not just its low valuation (0.8x FY24 P/ABV), but on faster-than-anticipated recovery in GL portfolio yield and improving business environment for cyclical businesses of Microfinance and Vehicle Finance. Further, clarity is emerging on floor/trough profitability (3% RoA/12% RoE), and that the return ratios are now in an improvement mode (estimate 4%+/15%+ RoA/RoE

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