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Attractive valuation despite competition pressure

Manappuram Finance (MGFL) is one of the leading gold loan NBFCs in India. MGFL has also diversified into other business segments like housing loan, vehicle loan and microfinance, with a branch network size of around 5,000 spread across the country

* Total AUM grew by 24.3% YoY while it showcased only a marginal growth of 1.6% sequentially due to intense competition from Banks and NBFCs.

* Gold AUM grew by 1.5% and non gold AUM by 1.9% on a QoQ basis

* With the new RBI guideline removing cap on MFI spread, the segment is expected to expand its NIM to 15%.

* Standalone GNPA moderated from 3.0% in Q4FY22 to 1.4% while that of Ashirvad MF increased from 3.5% to 7.7% due to increased stress from restructured book. However, much of it is provided for and the NNPA of Ashirvad stands at 1.9%.

* With the attractive valuation we maintain our Accumulate rating with a target price of Rs. 127 based on 1.0x Adj BVPS of FY24E.

Intense competition limits growth

During Q1FY23, total AUM grew 24.3% YoY while on a sequential basis, the grow was muted at 1.6%. This was due to high competition from NBFCs and Banks which has resulted in a flattish trend in gold AUM. Management has decided to maintain the yield of gold loan at 21% without cutting it down further to beat the competition. For the quarter, gold AUM grew by 1.5% QoQ and 23.0% on a YoY basis, while non-gold portfolio grew by 1.9% QoQ and 25.6% on a YoY basis. Micro-Finance segment which constitutes 24% of the total AUM has shown a sequential decline of 1.6%, while on a YoY basis it grew by 9.4%. Post the new RBI guideline removing cap on MFI spread, the segment is expected to have NIM of 15% on incremental MFI business. Vehicle finance segment which contributes 4% of the consolidated AUM registered a growth of 6.8% QoQ/68.0% YoY and housing finance segment which adds up 3% of total AUM grew at 3.5% QoQ/22.6% YoY. Management expects gold loan book to grow slower due to competition pressure and focus on maintaining the yield. However, non-gold segment is expected to grow at 20% YoY. Net yield of the gold business improved sequentially to 19.7% from 18.8%. Average ticket size of gold loan declined to Rs.56,300 in comparison with Rs.56,600 last quarter while LTV as on June stood at 65% compared to 62% during Q4FY22.

YoY growth hit by yield contraction in gold AUM

Net Interest Income for the quarter declined 7.0% YoY due to contraction in yield compared to Q1FY22. While, due to sequential expansion of yield, the NII grew by 1.1% compared to last quarter. Interest income grew 4.9% QoQ while de -grew by 4.0% YoY and interest expense grew by 2.0% QoQ and 2.3% YoY. Opex to AUM ratio stood at 6% during Q1FY23. The pre-provision profit of the company grew 0.7% QoQ while declined 28.2% YoY to Rs.509.1cr. Provision for the quarter stood at Rs.128.3cr compared to 151.3cr during previous quarter. PAT grew by 8.0% sequentially to Rs.281.9cr while it declined 44.3% on YoY. ROA for the quarter stood to 3.3% while ROE at 13.3%

Asset quality impacted by the new RBI policy

Standalone GNPA increased from 3.0% in Q4FY22 to 1.4% in current quarter while that of Ashirvad Micro Finance increased from 3.5% to 7.7% as stress was brought from restructured books. However, much of the NPA accounts are provided with NNPA of 1.9%. Credit cost is coming down as guided by the management

Outlook and valuation

Management is focusing on profitability over growth and decided to maintain gold loan yield at 21% irrespective of competitive pricing pressure. This will impact the growth of gold business in the near term. Gold loan is expected to grow at 10% and non-gold segments at 20%. Considering the current low valuation, we maintain our Accumulate rating and value the stock at 1.0x FY24E Adj BVPS with a revised target price of Rs. 127.

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