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Well-entrenched franchise, attractive valuations

Yield stabilisation in gold loans and turnaround in the MFI business are noteworthy developments in Manappuram Finance (Manappuram). Company has guided for 10-12% gold AUM growth with 21-22% yields while its growth guidance for MFI segment is >30% for FY24. However, rising cost of funds in both the businesses and overall elevated competition in gold loans remain headwinds. Strategically, the company is focussing on diversification (aiming to take gold loan mix down to 50%), digital transformation and employee investment. Manappuram currently trades at an attractive valuation of 1x FY25E consolidated P/B. Maintain BUY. Key risks include: (1) yield reduction and continued slow growth in gold loan business, and 2) asset quality issues with growth in non-gold loan business.

Maintain BUY

Our SoTP-based target price for Manappuram stands at INR 172 (earlier: INR 147) based on 1.2/1.0 P/B for gold/other businesses on FY25E BV. We now factor-in AUM growth of ~11% in gold, ~25% in MFI and ~15% for others in both FY24E/FY25E. We model standalone ‘NIMs / opex / credit cost’ to AUM estimates at 14.0% / 6.5% / 0.2% for FY24E and 13.8% / 6.6% / 0.2% for FY25E. This leads to a standalone RoE of ~15.7% / 14.9% in FY24E / FY25E. For Asirvad, we factor-in a RoE of 20% / 19% for FY24E / FY25E. Consolidated RoE stands at 18% / 17% for FY24E / FY25E.

Attractive valuations

FY23 annual report mentions about competitive environment in gold loan business along with the strong growth prospects on the back of increase in organised market share. Additionally, the company mentioned about steady outlook in gold loan yields ahead along with expectations of expansion in customer base. The MFI business has completed a turnaround in terms of asset quality while growth outlook is strong at >30% YoY. While the current low multiples reflect business stresses in past from sharp yield decline in gold business and the covid impact in MFI segment, current outlook is significantly better. As such, current prices offer value. Strategic focus on business diversification will likely fortify the business offering enhancing the value proposition.

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