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Upping the ante on growth

Manappuram Finance (Manappuram) reported 13% QoQ gold AUM growth led by aggressive marketing and pricing strategy in Q2FY22. Two key takeaways include: (1) all round growth in gold as well as other segments and (2) more organic efforts to achieve this growth compared to only broad based macro recovery. In this context, we have seen tactical dip in NIMs and increase in opex under various strategic heads. As such, Manappuram has chosen a strategic objective of growth over profitability. This could be in anticipation of a cyclical expected recovery in the economy (also hinted by Muthoot) and/or a counter to higher competition. Asset quality has improved across asset classes for Manappuram. We maintain BUY with unchanged target price of Rs280 based on Sep’23E (average FY23/24E) SoTP valuations of 2.3x P/B for gold loan and 1.0x P/B for non-gold businesses

Maintain BUY. We factor gold AUM to grow by 15%/15% in FY22/23E. At consolidated level, we expect NIMs of 14.4%/15.0% in FY22/23E (14.7% in FY21) and overall credit cost of 1.5%/1.0% in FY22/23E (1.7% in FY21). Cost to income is expected to stay at 38.7%/34.1% for FY22/23E (33.7% in FY21).

Strong growth in gold AUM in Q2FY22 led by conscious aggressive strategy:

Gold AUM (~91% of standalone) grew 13% QoQ to Rs187bn as on Sep-21, slightly higher than our expectations. The aggressive strategy manifested through (1) heavy investments on marketing and advertisement. Standalone opex to AUM increased to 7.2% in Q2FY22 from 5.8% in Q1FY22, (2) hiring 1622 sales and marketing professionals. As a result, the online gold loan proportion as a percentage of AUM decreased to 45% as on Sep-21 from 53% as on Jun-21, and (3) offering low yield for higher ticket size customers (> Rs3lakh). Manappuram has guided for yields to further lower by 200bps eventually in FY22. Standalone annualized Q2FY22 yield decreased to 24% from 25.6% in Q1FY22. Decrease in annualized Q2FY22 NIMs to 17% from 18% in Q1 FY22 was partially offset by lower cost of funds to 8.3% in Q2FY22(9.0% in Q1FY22).

Drivers for Gold AUM growth:

Gold holdings/LTV/Average ticket size/Gold loan per branch increased to 65tonnes/67%/Rs48,100/Rs53.1mn as on Sep-21 from 58tonnes/65%/Rs42,700/Rs46.9mn as on Jun-21. There was a shift in tenure of the portfolio as well as only 53% of the portfolio had 3 months contracted tenure as on Sep-21 as compared to 93% in Q1FY22. Increasing tenure of the portfolio is noteworthy and highlights the aggressive strategy. Vehicle Finance (~6% of standalone AUM) grew 21% QoQ to reach Rs13bn as on Sep-21.

Improvement in asset quality is not a surprise.

Overall standalone GNPA improved to 1.6% as on Sep-21 from 2.0% as on Jun-21. This was expected considering stable gold prices. Vehicle Finance’s GNPA also improved to 3.7% as on Sep-21 from 5.6% as on Jun-21. Credit cost declined by 65% QoQ and credit cost was 0.2% (annualized) during Q2FY22 as compared to 0.6% in Q1FY22.

Non-gold performance has also seen healthy boost. The print remains same of high growth, improvement in asset quality indicators and higher opex.

Asirvad/Manappuram Home Finance witnessed 18%/10% QoQ growth in their AUMs and their respective AUMs stood at Rs72bn/Rs7.3bn as on Sep-21. Asirvad/Manappuram Home Finance GNPA improved to 2.6%/6.0% as on Sep-21 as compared to 3.6%/7.0%, respectively, as on Jun-21. Asirvad’s 0+/30+/60+ dpd portfolio stood at 25.8%/13.8%/4.6%, respectively, as on Sep-21 as compared to 22.4%/4.3%/3.9%, respectively, as on Jun-21. Its collection efficiency also improved to 91% in Q2FY22 from 74% in Q1FY22. Additionally, it further improved to 94% during Oct-21. Asirvad’s PAT grew 60% to QoQ to Rs123mn on the back of good growth and improved credit cost. Its credit cost improved to 5.8% (annualized) during Q2FY22 from 6.0% previous quarters. Its Opex to AUM increased to 6.0% (annualized) during Q2FY22 as compared to 5.4% during Q1FY22 in line with the AUM growth. NIMs were little subdued at 11.5% (annualized) during Q2FY22 as compared to 11.8% previous quarter.

Interesting data points of Q2FY22

* Gold holdings increased to 65 tonnes from 58 tonnes (QoQ).

* LTV of gold loan increased to 67% from 65% (QoQ).

* Overall average ticket size of gold loan increased to Rs48,100 from Rs42,700 whereas online gold loan’s average ticket size increased to Rs53,500 from Rs49,800 (QoQ).

* Asirvad and Manappuram Home Finance’s branch reach increased to 1,334/73 from 1,144/68, respectively (QoQ)

.* Standalone/consolidated opex increased by Rs664/872mn (QoQ).

* Online gold loan decreased to 45% of AUM from 53.0% (QoQ).

* 53% loans have 3-month contracted tenor as on Sep-21 (93% in Q1FY22).

* Since Mar-20, Asirvad has either written-off or provided 10.2% of pre-covid AUM on a cumulative basis (excluding standard provisions). As per our estimates, this is on similar lines compared to demonetisation.

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