IGI Logo

Healthy gold loan growth; MFI business remains key monitorable

Asset quality deteriorates across segments; credit costs high in microfinance

* Manappuram Finance’s (MGFL) consol. PAT in 2QFY25 grew 2% YoY to INR5.7b (in line). NII grew ~21% YoY to ~INR16.4b and PPoP rose ~19% YoY to ~INR10.3b. 1HFY25 PAT grew 7% YoY to INR11.3b and we expect 2HFY25 PAT to decline 8% YoY.

* Consol. credit costs stood at ~INR2.6b, resulting in annualized credit costs of ~2.3% (vs. ~2.1% in 1Q). Higher credit costs were primarily attributable to asset quality stress in its microfinance business.

* Gold AUM grew ~3% QoQ and ~17% YoY to ~INR244b. Net yields on gold loans rose ~30bp QoQ to ~22.5%. However, net yields on the standalone business rose ~20bp QoQ to ~22% and standalone CoB increased by ~10bp QoQ to ~9.1%, resulting in a ~10bp expansion in spreads.

* Standalone GNPA/NNPA increased by ~40bp each QoQ to ~2.4%/~2.1%. Asirvad’s Stage 3 rose ~160bp QoQ to 4.5%. Asset quality deteriorated across non-gold segments, with GS3 increasing in vehicle finance (~4.2% vs. ~3.6% in 1Q), housing finance (~3.3% vs ~2.9% in 1Q) and MSME & personal loans (~4.2% vs. ~3.4% in 1Q).

* The management shared that the secured segments within the product mix are expected to grow faster than the unsecured segments and the company is aiming for consolidated AUM growth of ~15%-18%.

* While the gold loan growth and increase in gold customer additions were healthy, we will watch out for the developments in its microfinance business amid asset quality headwinds in the sector and the RBI ban on Asirvad on new sanctions and disbursements. The management said that Asirvad has addressed all the concerns raised by the regulator and has already submitted a plan for compliance to the RBI. It remains hopeful that the RBI will conduct an inspection soon and lift the ban on Asirvad MFI.

* We keep our FY25/FY26 PAT estimates largely unchanged. Over FY24-27, we estimate a CAGR of 15%/14% in gold/consolidated AUM and ~11% in consolidated PAT, with consolidated RoA/RoE of ~4.7%/18% in FY27. Reiterate our Neutral rating on the stock with a TP of INR160 (based on 0.8x Sep’26E consolidated BVPS).

Gold AUM up ~3% QoQ; Gold tonnage remains sequentially stable

* Gold AUM grew ~3% QoQ and ~17% YoY to ~INR244b. Gold tonnage was stable QoQ at ~60t. LTV declined ~2pp QoQ to ~58%, while the average ticket size (ATS) in gold loans rose to INR62.5K (vs. INR62k in 1Q). Its gold loan customer base increased to ~2.7m (vs. 2.6m in 1Q).

vThe management continued to guide for gold loan growth of ~12%-15% in FY25. We estimate gold loan growth of ~18% in FY25.

Asirvad MFI: Credit costs high; GS3 up ~160bp QoQ

*  Asirvad’s GS3 rose ~160bp QoQ to 4.5%. Credit costs stood at ~INR2b (~INR1.7b in 1Q), translating into annualized credit costs of ~7% (~6% in 1Q). Credit costs were high because of a decline in collections in specific regions and adverse climate conditions.

* Asirvad’s AUM grew ~11% YoY but declined ~1% QoQ to ~INR121.5b. Asirvad reported PAT of INR750m (vs. INR1b in 1Q), down ~37% YoY and ~25% QoQ.

* The management expects repayments to improve from 4QFY25 onward, with green-shoots already visible in 3QFY25.

Update on RBI ban on Asirvad MFI

* Asirvad MFI has submitted a compliance report to the RBI, conveying that it will reduce its lending rates to be among the lowest in the industry. It has also implemented advanced tracking systems for better borrower assessment.

* Its entire framework is now fully compliant with the RBI's requirements, and the company anticipates that the regulator will expedite its process and carry out the inspection soon.

* The company has halted lending operations and is focusing on collections by motivating customers and incentivizing employees. It will ensure that collections are not impacted by regulatory actions.

* Asirvad’s lenders are confident in its compliance efforts, backed by strong liquidity support from its parent company. It is addressing a covenant breach and awaits the RBI’s inspection, after which the ban could be lifted.

Highlights from the management commentary

* The company has decided not to grant any digital personal loans (PL) to customers until they close their gold loans. This issue was raised by the regulator in its inspection of MGFL in Sep'24. After this was flagged by the RBI, MGFL stopped digital PLs to its gold loan customers.

* The company has guided for slightly elevated credit costs in the microfinance business in FY25. It expects momentum to improve from 4QFY25 onward.

Valuation and view

* MGFL management said that the company is now fully compliant with all RBI observations that led to the ban on Asirvad MFI. The company is now awaiting the RBI’s inspection, after which the ban could potentially be lifted. Historically, such bans have taken ~6 months to resolve, but the management expects this ban to be lifted within ~4-6 months.

* MGFL trades at 0.9x FY26E P/BV, and we believe that there could be a near-term impact on profitability and growth due to the ban on Asirvad MFI. We reiterate our Neutral rating on the stock with a TP of INR160 (based on 0.8x Sep’26E consolidated BVPS).

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412