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Gold AUM and holdings moderate further; auctions remain elevated

* Manappuram Finance (MGFL) reported consolidated PAT at INR4.4b (up ~19% YoY / down 7% QoQ; 8% miss) in 1QFY22. The company missed our expectations due to a 5% miss on NII (down 2% QoQ) at INR10.3b and elevated provisions at INR1.2b (11% above estimate). PPoP at INR7.1b (5% miss) was down 3% QoQ and up 11% YoY.

* The gold loan book declined 13% QoQ to INR165b and gold holdings 11% QoQ to 58.1t. Over the last two quarters, gold holdings have cumulatively declined 15% and gold AUM 18% over this period. In all non-gold segments, the respective loan books were flat sequentially.

* MGFL has taken a cautious view on gold prices – to guard itself against decline in prices, the company has deemed it more prudent to auction gold to de-risk itself. In the process, it has had to trade off growth for protection on asset quality.

* The management shared that it has introduced attractive products/schemes for higher ticket size customers to protect its turf from pricing competition. It guided that this could lead to yield compression but sustain growth.

* The performances of MUTH and MGFL, in terms of growth in the core gold loan book and gold holdings, have been divergent over the last two quarters. This is in part to do with the average tenure of their primary gold loan products. Despite this, we appreciate that MGFL as a franchise has made considerable progress in its appraisal, security infrastructure, and other processes over the last three years, and remains poised for a decent consolidated AUM CAGR of ~13% over FY21–24E. We estimate consol. RoA/RoE of 6.3%/22% over the medium term and maintain BUY, with Target Price of INR220/share (1.7x FY23E P/BV).

Decline in gold AUM/holdings; churn to competition also played a role

* During the quarter, three factors led to decline in the gold loan book: a) INR15b (4.5mt) worth of gold loans – contributing to ~11% QoQ decline in tonnage to ~58mt – being auctioned; b) the competition poaching highticket gold loan customers; and c) a lower rate of new customer acquisitions (down 36% QoQ due to lockdowns), leading to lower disbursements, coupled with some stressed borrowers choosing to withdraw their collateral rather than having it auctioned by MGFL.

* MGFL has exercised prudence by auctioning its >80% LTV portfolio over the last two quarters. The proportion of this >80% LTV portfolio declined to 6% (v/s 53% in 4QFY21). Blended LTV on gold loans declined 600bp QoQ to 65% and further to 63% by Jul’21.

* New customer acquisitions (NCA) steadily picked up MoM over Jun–Jul’21. NCA recovered sharply to pre-COVID levels of 113k in Jul’21 (up 40% MoM). The total customer base declined to 2.4m (from 2.6m in the previous quarter), and the average ticket size declined ~4% sequentially to ~INR43k.

Stable asset quality in gold loans; non-gold loans see deterioration

* GNPA in the standalone entity was largely stable, changing only marginally to 1.96% (v/s 1.92% in 4QFY21). This was despite vehicle loans (part of the standalone entity) reporting a ~60bp QoQ increase in GNPA.

* While the loan book was largely flat QoQ in the non-gold segments, the MFI, Housing, and Vehicle segments each witnessed a QoQ increase in reported GNPA. MFI GNPA deteriorated by ~110bp QoQ to 3.6%, Housing GNPA by 100bp QoQ to 7.0%, and Vehicle GNPA by ~60bp QoQ to 5.6%.

* Consolidated credit costs stood at 1.9% (annualized), largely due to the MFI segment, which reported credit costs of 6% (annualized).

MFI: Collection efficiency recovers to ~95% in Jul’21; credit costs elevated

* Unlike the past two quarters, over which the MFI business reported cumulative growth of 20%, the loan book in 1QFY22 was broadly flat QoQ at ~INR60.5b. The second wave of the pandemic impacted collection efficiency (CE), which stood at 92%/59%/70% in Apr/May/Jun’21 v/s ~100% in each of the months in the preceding quarter.

* PAR0+ in the MFI segment once again increased ~660bp QoQ to 22.4% in 1QFY22 from the previous peak of ~21% in Sep’20.

Spreads and NIM improve; share of NCD borrowings now at 41%

* Despite the pricing competition, yield (calc.) in the standalone business was up ~90bp QoQ. This suggests high-ticket-size customers (lower yielding) were poached by the competition. Standalone CoB (calc.) was up 8bp QoQ, resulting in standalone spreads (calc.) improving ~85bp QoQ to ~16.6%, a multi-quarter high. NIM on AUM (standalone) at 18% was also a 14-quarter high.

* In the consolidated borrowing mix, the share of NCDs improved 500bp QoQ and inched up to 41%. The share of CPs stood at a modest 5%. Consolidated liquidity on the balance sheet stood at INR28.9b (~15% of borrowings).

Valuation and view

* Commentary from the gold finance NBFC suggests a strong uptick in demand and new customer acquisitions in Jul’21, which appears to have sustained in Aug-MTD’21 as well. MGFL’s shorter tenure gold loan product (three months v/s the industry average of 6–12M) has led to higher auctions and withdrawals from customers, resulting in sustained decline in gold AUM/holdings over the last two quarters.

* Although MGFL has traded off growth, we derive great comfort in its standalone asset quality (which was flat QoQ), especially in the context of its >80% LTV loan portfolio declining to ~6% in 1QFY22. Over the medium term, we expect MGFL to deliver ~15% steady-state gold loan growth. Other segments, especially MFI and Vehicle Finance, would remain moderately vulnerable due to COVID.

* However, we note that a turnaround is imminent (in both growth as well as collections) once there is some semblance of normalcy. We cut our FY22/FY23 EPS estimate by 7%/10%, factoring in lower AUM growth and higher credit cost in FY22E and lower NII growth in FY23E. Despite this, MGFL is poised to deliver RoA/RoE of 6.3%/22% over the medium term. We maintain our Buy rating, with TP of INR220/share (1.7x FY23E BVPS).

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