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Continuing Momentum in Gold Loan Growth

Manappuram Finance is the second-largest gold lending NBFC in India and has established a significant presence in various other lending sectors, including microfinance, vehicle financing, MSME loans, and personal loans. The company boasts a strong nationwide footprint with over 5,000 branches and consolidated employee strength of more than 50,000.

Diverse product portfolio: Company has a diverse product portfolio, offering loans in various segments, including gold financing, vehicle financing, housing finance, MSME lending, and personal loans. This diversified approach not only helps mitigate risks but also provides attractive yields by catering to a wide range of customer segments.

Competition intensity from banks stabilising: The gold loan market has experienced heightened competition in recent years, with banks and NBFCs competing for market share. Following the pandemic, banks intensified their focus on retail gold loans, offering larger ticket sizes at lower yields, while NBFCs catered to the lower-middle income segment. This shift allowed banks to gain market share in FY23, achieving a 20% growth in retail gold loans compared to a 10% increase for NBFCs. However, competitive pressure has eased recently as NBFCs stabilized their market share above 60% after banks withdrew teaser schemes. Public sector banks are also scaling back their gold loan growth due to government directives aimed at tightening processes. Meanwhile gold financing NBFCs like Manappuram Finance, reported a 9.2% QoQ and 19.3% YoY growth in its gold lending business for Q1FY25.

Competition intensity from banks stabilising: The gold loan market has experienced heightened competition in recent years, with banks and NBFCs competing for market share. Following the pandemic, banks intensified their focus on retail gold loans, offering larger ticket sizes at lower yields, while NBFCs catered to the lower-middle income segment. This shift allowed banks to gain market share in FY23, achieving a 20% growth in retail gold loans compared to a 10% increase for NBFCs. However, competitive pressure has eased recently as NBFCs stabilized their market share above 60% after banks withdrew teaser schemes. Public sector banks are also scaling back their gold loan growth due to government directives aimed at tightening processes. Meanwhile gold financing NBFCs like Manappuram Finance, reported a 9.2% QoQ and 19.3% YoY growth in its gold lending business for Q1FY25.

NIMs recover as price led competition wanes: Manappuram finance used to earn margins or yields to the north of 24% to 25% in gold lending space before Q2FY22, but in the light of competition from Banks, fintech and other NBFCs which were offering loans at very low rates around 7% to 9% they also had to cut back on rates which lowered it overall yields to 18.8% in Q4FY22. But as the competition is stabilizing and yields have started to recover to 21.8% in Q1FY25. We expect yields to stabilize around 21% to 22% levels for FY24 to FY26E in gold lending business.

Overall asset quality held well, non-gold situation currently monitorable: Credit loss in the gold business is limited, with microfinance institutions (MFIs) driving 75% of consolidated credit costs. While short-term stress may arise in the MFI portfolio due to elections, the overall cycle remains favorable. Asset quality in legacy non-gold sectors is stable, but newer segments like MSME and personal loans are seeing a rise in GNPA, though they comprise only 7% of the portfolio.

Valuation: We maintain a positive outlook on Manappuram Finance, driven by robust growth in AuM, a diverse range of product offerings, strong asset quality, and a decrease in competitive pressure that is revitalizing gold lending. We are initiating coverage with a target price of Rs 261, which values the company's consolidated operations at 1.33 times its projected Adjusted Book Value for FY26E.

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