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Challenges continue; uncertainty remains

Our view

Manappuram’s earnings performance though largely in-line (NII/PPOP beat offset by higher provisions) had some material disappointments viz. 1) contraction in gold loan customers/tonnage/AUM by 1.5-4% qoq despite running teaser/low rate scheme, 2) higher gold auctions (Rs9.2bn v/s Rs7-8bn in Q3) notwithstanding stable gold prices and improved operating environment for customers, 3) significant incremental decline in gold portfolio yield (18.8% v/s 20.3% in Q3 and 25%+ in Q2) and 4) portfolio degrowth, higher provisions and PAR increase (abs. PAR net of ECL is nearly equal to NW) in Asirvad MFI. The share of higher-ticket loans (> 2 lacs) rose to 33% of gold AUM from 29% in preceding quarter aided by the teaser/low rate scheme which was stopped in March.

Incrementally, the management has shifted focus to restoring yield and profitability in gold loan business and collecting delinquencies and ensuring quality of growth in microfinance business. Competition has followed Manappuram on yield stance, and blended disbursements yield for the co. has been 20-21% from April (rack rates are 10- 25% with the lower-end only for higher-ticket loans). While the absence of teaser/low rate scheme is impacting growth, the management believes that achieving 10% AUM growth in FY23 is plausible with a broader pick-up in gold loan demand. Co. is looking to grow MFI portfolio by 20% in FY23 with disbursements targeted around Rs60bn. MFI lending rates have been raised by 400 bps with an estimation of 3 ppt credit cost.

We cut earnings estimates significantly for FY23/24 by assuming much lower growth in Gold AUM (due to structural competition and stoppage of low rate scheme), slower growth in Microfinance portfolio (challenges with quality and capital), gradual recovery in gold portfolio yield and likely continuance of elevated credit cost in microfinance. However, we retain ADD rating on the stock in the light of estimated 4%/16% RoA/RoE delivery in FY23-24 and that stock/valuation (0.8x/5x FY24 PABV/PE) seems to be largely discounting headwinds in gold and MFI businesses. Key risks to our view would be re-introduction of teaser/lower rate schemes by market/competition and capital call at Asirvad Microfinance (given abs. PAR net of ECL is nearly equal to NW). Manappuram’s dilemma of choosing between growth and profitability is structural, given its weak customer acquisition engine and borrower stickiness.

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