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Navigating through tough times

Manappuram Finance (MGFL) results surprised negatively with a sharp decline in gold AUM and higher auctioning. Healthy revenue/earnings growth, traction in its MFI portfolio, improved CE in July, and new clientele addition were key positives. Q2/ H2FY22 will be a quarter of test and define the strength of the business model for the gold financiers. We expect MGFL to navigate well as it has resorted to auctioning (vs. recognizing it as NPA) given its product design. We like MGFL for its diversified balance sheet, healthy revenue/earnings growth, and superior return ratios. Retain BUY with SOTP based TP revised at Rs240.

* Gold AUM – Navigating the tough times: Q1FY22 saw MGFL gold AUM declined 6.8% YoY/13.3% QoQ following auctioning, balance transfer of higher ticket size loans, realignment of LTVs and the resultant run-down of a portfolio, and COVID-2 impacting overall business. With normalcy, MGFL has seen growth coming back evident in healthy clientele addition (113k in July’21 vs. 199k in Q1FY22), new product launches (aimed at catering to higher ticket size loans), and improved CE. With pain behind, we are factoring in growth resumption. The high base of last year will see an optically lower YoY growth in gold AUM. This, however, is unlikely to have a bearing on the earnings growth (as seen through the past cycle). Key monitorable thus could well be around the sequential growth in gold AUMs.

* MFI: On a strong footing: Contrary to belief, Asirvad MFI AUM grew 1.1% QoQ/20.1% YoY led by healthy disbursements and client addition. While CE declined to 59% in May, it has improved to 70% in June’21 and further to 95% in July’21. Management has retained its near-term guidance of focus on asset quality over AUM growth. Stable borrowing cost, healthy provisioning bodes well for MFI business and with growth, resumption will augur well for revenue/earnings growth. We are factoring in 22-23% CAGR in AUM and see RoE inch towards 17-18% by FY23E. Capital position (CAR at 22.7%) may warrant fund infusion to supplement AUM growth

* Results, Earnings estimates, and revision: The sharp increase in revenues (13%+ YoY) vis-a-vis the decline in AUM (down 2.3% YoY) reflects the dependence of the former on disbursements (vs. AUM growth for its peers) and is given its product portfolio. We have modelled in flat growth / 8% YoY in gold AUM for FY22E /FY23E and are now factoring in 9.3% CAGR in overall AUM over FY21-23E

* Valuation, view & Risks: Retain BUY with sum-of-parts-based valuation methodology and TP revised lower to Rs240. This implies a valuation of ~1.8x consolidated June’23E BV. The downward revision to our TP follows the lowering of our AUM estimates largely in the gold loan segment. Key risks: Auctioning, concerns around client addition, and impact of any socio-political upheavals on business/ collections across various sectors.

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