Neutral Manappuram Finance Ltd for the Target Rs. 230 by Motilal Oswal Financial Services Ltd
Operationally weak; asset quality deteriorates across segments
Gold loan AUM grew ~4% QoQ; appointment of new CEO
* MGFL has appointed Mr. Deepak Reddy as the new CEO (effective Aug’25). He will report to Mr. VP Nandakumar, who will be re-designated as the Managing Director (MD) of the company. Mr. Reddy previously served as President – Rural Lending, Gold Loans, and Insurance Businesses at Bajaj Finance. He has also held diverse roles across HR, Mortgages, Business Loans, Personal Loans, and Vendor Financing at Bajaj Finance and Bajaj Finserv.
* MGFL reported consol. loss of INR2b in 4QFY25 (vs. MOFSLe PAT of INR2.1b). FY25 consol. PAT declined ~45% YoY to INR12b. NII in 4QFY25 declined ~3% YoY to ~INR14.4b (~9% miss). PPoP declined ~27% YoY to ~INR6.8b, driven by elevated operating expenses in the MFI business.
* Consol. credit costs stood at ~INR9.2b (vs MOFSLe of ~INR6.8b). Annualized credit costs in 4QFY25 rose ~350bp QoQ to 8.4% (vs PQ: ~4.9%). Higher credit costs were attributed to the MFI, Vehicle Finance, and MSME segments.
* Gold AUM grew ~4% QoQ and ~19% YoY to ~INR256b. Net yields on gold loans stood at ~22.35% in FY25 (vs ~22.7% in 9MFY25). Net yields on the standalone business declined ~50bp QoQ to 21.7%, while standalone CoB was stable QoQ at 9.2%, resulting in a ~50bp decline in spreads.
* Standalone (Gold +Vehicle + Onlending + MSME) GNPA/NNPA increased ~30bp/20bp QoQ to ~2.8%/~2.5%, respectively. Asset quality deteriorated across non-gold segments, with GS3 increasing in vehicle finance (~6.7% vs. ~5.2% in 3Q) and MSME (~5.1% vs ~4.1% in 3Q).
* Management shared that the rise in GNPA in Vehicle Finance was driven by higher delinquencies in the 2W and farm equipment segments. In response, the company has tightened its credit underwriting policies for these categories, with disbursements resuming under the revised norms.
* MGFL is confident that the draft gold lending guidelines will not disrupt the industry and provide a level playing field for all players. Management has guided for gold AUM growth of >20%, but we conservatively estimate gold AUM growth of ~15% in FY26.
* We cut our FY26/FY27 PAT estimates by ~12%/13% to factor in a lower loan growth and NIM contraction. Over FY25-27, we estimate a CAGR of 15% each in gold/consolidated AUM and ~50% in consolidated PAT, with consolidated RoA/RoE of ~4.6%/14% in FY27 (after factoring in the expected equity infusion from Bain Capital). Reiterate our Neutral rating on the stock with a TP of INR230 (based on 1.1x Mar’27E consolidated BVPS).
Gold AUM grew ~4% QoQ; sequential decline in gold tonnage and LTV
* Gold AUM grew ~4% QoQ and ~19% YoY to ~INR256b. Gold tonnage declined ~2% QoQ to ~56.4 tons. Within gold loans, LTV declined ~3pp QoQ to ~57%, while the Average Ticket Size (ATS) in gold loans rose to INR67.8K (PQ: INR64.3K). Gold loan customer base declined to ~2.58m (PQ: 2.6m).
* Management expects robust growth in gold loans to continue in the coming quarters, driven by a significant shift in customer preference from the unorganized to the organized sector.
* MGFL is targeting higher ticket sizes in gold lending, with a slight reduction in yields. After a successful pilot in 3Q across select branches, the initiative was expanded to more branches in Feb’25. While the customer base has remained broadly stable, the ATS has increased, with loans above INR500k now comprising 16% of the loan mix, up from 14%.
Asirvad MFI: Credit costs elevated; GS3 rose ~270bp QoQ
* Asirvad’s GNPA rose ~270bp QoQ to 8.5%, while NNPA was stable QoQ at ~2.5%. Credit costs stood at ~INR8.5b (PQ: ~INR4.7b), translating into annualized credit costs of ~37% (PQ: ~17%). ? Asirvad’s AUM declined ~31% YoY and ~18% QoQ to ~INR82b. It reported a loss of INR6.3b in 4QFY25 (vs. loss of INR1.9b in 3QFY25).
* MGFL acknowledged that while 4QFY25 was the most difficult quarter, it has started seeing early signs of improvement in its MFI business. To strengthen its collection efforts, the company has increased collection incentives to improve customer retention and is expanding its collections team. The company expects MFI credit costs to decline in the subsequent quarters.
Highlights from the management commentary
* Banks have started reducing the MCLR, which has led to some benefits from Apr’25. CPs are also being raised at slightly lower rates, and the company expects to see further improvements in its cost of borrowings in 1QFY26.
* MGFL anticipates a decline in gold loan yields in the coming quarters due to increased competitive pressure. However, the company also expects its cost of borrowings to decline. Even with potential contraction in RoA, MGFL plans to leverage its capital to maintain a healthy RoE.
Valuation and view
* MGFL reported a weak operational performance for the quarter, primarily due to elevated credit costs and a deterioration in asset quality across its non-gold segments. Although the gold loan portfolio registered healthy growth, both the MFI and vehicle finance segments saw a sequential decline in AUM. Asirvad Microfinance posted a net loss for the second consecutive quarter, impacted by significantly elevated credit costs.
* MGFL trades at 1.1x FY27E P/BV, and we believe that there could be a near-term impact on profitability and growth due to stress in the MFI and other non-gold product segments. We reiterate our Neutral rating on the stock with a TP of INR230 (based on 1.1x Mar’27E consolidated BVPS).
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