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MFI headwinds mitigating Gold Loan tailwinds

In-line profits, but Gold Loan growth was stronger

Manappuram’s NII/PPOP/PAT were largely in-line with our estimates even as the Gold Loans growth was much stronger at 10% qoq (expectation was 7% qoq). While sturdy growth momentum was maintained in CV finance (up 11% qoq) and Housing loans (up 5% qoq), the growth in Asirvad MFI moderated (up 2.7% qoq) due to increase in delinquencies. The 20-bps increase in funding cost and marginal decline in net yield of Gold Loan portfolio (22.2% v/s 22.5%) impacted NII growth/NIMs. Increase in employee cost (higher incentives) curtailed operating leverage in Gold Loans business. Consolidated credit cost was higher owing to adverse asset quality movement in MFI and other non-Gold lending products. The 10% sequential growth in Gold Loans portfolio was driven by 3.6% growth in customer base and 6% increase in loan ATS. The improved growth in customer base was underpinned by sustained volume of customer acquisition (adding > 4 lac customers every quarter) and marked improvement in activation of existing inactive customers. The latter reflects tailwinds from 1) absence of IIFL, 2) some moderation in competition from banks and 3) restrictions on cash disbursements benefitting Manappuram (having an online loan product). The increase in Gold Loan ATS reflected shift in portfolio towards higher value customers (>Rs.2 lac ticket customers’ share increasing from 33% to 35%) and availment of LTV headroom by many customers (portfolio LTV increased from 58% to 60%).

Management expects 15-18% growth in Gold Loans for FY25; MFI credit cost to stay elevated

Versus earlier expectation of 12-15% growth, the Management now expects 15-18% growth in Gold Loans for FY25. The upgrade in growth expectation is driven by stronger growth in Q1 FY25, likely continuity of improved trends in customer reactivations, and expected further normalization of portfolio LTV (on stable gold prices). Portfolio growth in July has been in the positive. Assuming a 2% qoq growth in customer base in remaining quarters and another 2% uptick in portfolio LTV, the full-year growth would be around 18% in Gold Loans. Credit cost in Asirvad MFI is estimated to stay elevated as delinquency buckets have increased, the provisioning coverage seems inadequate (Stage-3 ECL at 55%) and there could be likely provisions on the SRs.

Inexpensive valuation for reasonable growth and healthy profitability

We estimate 15-16% AUM and Earnings growth for Manappuram over FY24-26. This assumes stable gold prices and some capital raise in Asirvad during the year. Manappuram trades at inexpensive valuation of 6x PE and 1.1x PABV on FY26 estimates. Key triggers for re-rating would be 1) sustained healthy traction in gold loans along with firm yields, 2) capital raising in Asirvad MFI, and 3) stabilization of asset quality/credit cost in Asirvad MFI. Retain BUY with unchanged 12m PT of Rs240.

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