IGI Logo

We retain BUY on Manappuram Finance (MGFL) with SOTP based target price (TP) of Rs255. Superior risk management and credit underwriting have enabled MGFL avert severe shocks, as also seen in the FY21 results. This should also help overcome nearterm challenges posed by the second wave of COVID (in addition to the healthy provisioning buffer and respectable CE trends) and emerge stronger as normalcy is restored. MGFL offers a blend of a diversified balance sheet, healthy revenue/earnings growth, and superior return ratios. At 1.2x FY23E ABV, it remains grossly under-valued for a franchise that can potentially generate 23-24% RoE over FY22-23E.

* Gold AUM –

Arrests the decline: Q4FY21 saw MGFL arrest the decline in its gold loan AUM to a mere 5.6% QoQ (vs. 12% decline in gold prices in Q4) led by a) auctioning c.Rs4bn of loans of defaulting customers (well within industry standards and at 0.16% of disbursements) and b) a temporary shift in its LTV to 71% (long-term average ~63- 64%). The largely 3-month loan tenor for MGFL (vs. industry practice of 6-12m), while resulting in a QoQ drop in the portfolio, has traditionally served well to contain NPAs through timely auctions. With a recovery in gold prices, new client additions, repeat customers (80% of customers roll over their loans), and transition of customers across various loan segments, we see gold AUM witness 14.4% CAGR over FY21-23E.

* Vehicle financing, Housing finance –

Back on track: After a prolonged period of portfolio consolidation, the VF segment grew 6.5% QoQ (highest in last 5 quarters). CE has been on a rise; GNPA declined to 5% (vs. 8% in Dec’20). Restructuring in VF was a low 8%. Manappuram Finance has created Rs640mn of provisions (6.1% of AUM). HF AUM grew 5.8% YoY. CE stood at 95% (vs. 97% in Dec'20).

* Earnings, Valuation, view & Risks:

We have tweaked our estimates marginally on the AUM/earnings front. Retain BUY with sum-of-parts-based valuation methodology and TP of Rs255. This implies a valuation of ~2x consolidated FY23E BV (10% premium to its 5-year average 1-yr forward P/B). Sustainable RoE for MGFL could be well above the reported/near-term RoE as businesses gain scale/attain maturity, and valuations could scale up as a consequence. Key risks: Volatility in gold prices, and impact of any socio-political upheavals on business/ collections across various sectors.

* MFI: Gaining ground:

Asirvad MFI AUM grew 11.7% QoQ (highest in past 5 quarters) led by healthy disbursements and client addition. CE trends remained healthy in Q4FY21 and while April saw a marginal drop (7-8% from Mar levels), May witnessed contraction (on back of stricter lockdowns). Management has guided for greater focus on asset quality over AUM growth (in the near term). PAR 90+ at 2.5% remains comfortable when compared to its peers and guarded well with provisioning at Rs3.41bn (5.7% of AUM). Reduction in borrowing cost, healthy CAR (23%+), and credit to existing customers augur well for earnings/ROE. We are factoring in 22% CAGR in AUM and see RoE inch towards 19.5% by FY23E. Our sensitivity analysis suggests 34- 210bps impact on ROE due to lower growth/higher than expected provisions.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at  https://www.mnclgroup.com/disclaimer

SEBI Registration Number : INZ000043833

Above views are of the author and not of the website kindly read disclaimer