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Challenges to navigate in H2 FY25

Reasonably good Q2 FY25 driven by GL business; asset quality in MFI, VF and HF businesses further deteriorate

Manappuram delivered 4% beat on NII/PPOP and 7% beat on PAT versus our expectations, driven by 1) strong growth in Gold Loans (GL) portfolio in H1 FY25 (9% qoq in Q1 and 3% qoq in Q2), 2) improvement in GL portfolio yield (22.5% in Q2 v/s 22.2% in Q1), 3) slight decline in consolidated CoB (driven by Asirvad), and 4) controlled increase in opex (employee cost in Asirvad was lower sequentially). The consolidated credit cost was in-line with our estimate at 2.3% with provisioning in Asirvad running high at annualized 7% and even the non-MFI credit cost remaining sticky at 70 bps due to deterioration in asset quality in vehicle finance and housing finance portfolios. consolidated RoA/RoE in Q2 FY25 stood at 4.4%/18.6%.

GL portfolio grew by 3% qoq with sustained healthy growth in customer base (increased 2.3% qoq/8% yoy). Tonnage was flat qoq and portfolio LTV came-off further to 58% on account of further increase in gold price during the quarter. Loan ATS was stable sequentially with steady portfolio/customer mix and much lesser availment of top-up/larger loans by customers. Asirvad MFI’s AUM declined by 2% qoq on lower disbursements, collection issues and capital/leverage challenges. Its RoA/RoE further reduced to 2.3%/13.1% with the increase in GNPLs (4.3% v/s 3%) and credit cost runrate. Vehicle Finance and Mortgage AUM grew by 6.5-7% qoq but both the businesses witnessed an increase in NPLs by 40-60 bps and their RoA declined on sequential basis

Key monitorables: incremental growth in Gold Loans, impact of Asirvad embargo and asset quality in VF and HF businesses

Asirvad has been ordered by RBI to desist from disbursing new loans from Oct 21st due to non-compliance with fair practices on pricing, income/FOIR assessment and some other aspects. While the Management claims to have taken the necessary corrective actions, it would likely take a few months for RBI to inspect, assess compliance and then remove the lending restriction. Hence, Asirvad’s AUM is expected to run-down significantly in the coming months and its asset quality issue is likely to exacerbate on disbursement stoppage. However, from a capital and liquidity perspective the challenge would likely be tackled by a capital infusion from the parent company.

Even in Gold Loans, there could be some change in practices (by the industry at large) in the wake of RBI’s Sept 30th circular highlighting certain irregularities at regulated entities (including Banks and SFBs). Calibration of LTVs for fresh loans/renewals and any change in the policy of rolling over/renewing loans could impact growth of Gold Loan portfolio in the near term. Further, some impact on customer base accretion is likely with the resumption of IIFL Finance from late Sept. Trend in collection efficiencies (95-96% in Q2 FY25) and NPL recoveries/resolutions would be closely monitored in VF and HF portfolios.

Valuation recovery contingent on quicker resolution of Asirvad embargo and abatement of asset quality challenges

On incorporating the likely impact from Asirvad embargo and possible growth adjustments in Gold Loans, we have cut FY25/FY26 estimates by 19%/32%. At a consolidated level, we foresee sustainable AUM growth of 11-12% and sustainable RoA/RoE near 4%/15%. While stock’s valuation is inexpensive at 0.9x FY26 P/ABV after the recent sell-off, a re-rating would be contingent on quicker resolution of Asirvad embargo and abatement of asset quality challenges. Downgrade recommendation to ADD with a reduced 12m PT of Rs175.

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