Neutral Manappuram Finance Ltd for the Target Rs. 725 by Motilal Oswal Financial Services Ltd
Strong gold loan momentum tempered by yield compression
Asset quality deteriorated across segments; MFI credit costs declined QoQ
* MGFL reported 1QFY26 consol. profit of INR1.3b. NII declined ~10% YoY to ~INR13.8b (in line) and PPoP fell ~33% YoY to ~INR6.6b (in line). Operating expenses grew 10% YoY to ~INR7.5b (~6% lower than our est.). ? Consol. credit costs stood at ~INR5.6b (vs. est. ~INR7.5b). Annualized credit costs for the quarter declined ~325bp QoQ to 5.2% (PQ: ~8.4%).
? Consol. AUM rose ~3% QoQ and declined 1% YoY. Gold AUM grew ~13% QoQ and ~22% YoY to ~INR288b.
? Gold loan yields declined to ~20.7% (PQ: 22.2%). Net yields on the standalone business declined ~120bp QoQ to 20.5%, while standalone CoB was stable QoQ at 9.2%, resulting in a ~120bp contraction in spreads.
? Management indicated that gold loan yields are expected to moderate to ~18% over the next 4-6 quarters, as the company plans a calibrated reduction in lending rates. This strategic move is aimed at aligning its gold loan yields with that of peer gold loan NBFCs. The company also highlighted that the impact of lower gold loan yields will be offset by stronger loan growth, ensuring that the projected income from the gold loan portfolio remains unaffected during the course of this year
? Standalone (Gold + Vehicle + Onlending + MSME) GNPA/NNPA ratios increased by ~20bp/10bp QoQ to ~3%/~2.6%. There was a significant deterioration in asset quality in vehicle finance (with GNPA of 9.2% in 1QFY26 vs 6.7% in 4QFY25). Asset quality deteriorated in the housing finance and MSME segments as well.
? Management shared that the rise in GNPA in vehicle finance was driven by higher delinquencies in the 2W and farm equipment segment. As part of its corrective actions, the company exited the farm equipment segment and revamped its 2W lending by implementing an automated underwriting system (which will also reduce opex in the segment).
? MGFL plans to gradually raise the share of gold loans to ~75% of its total portfolio, aided by the rollout of multiple attractive gold loan schemes and cut in gold loan yields. Growth in Housing, CV, and MSME loans will be pursued in a calibrated manner, with the secured book maintained at ~90% of total AUM. The MFI portfolio will be capped at ~10% of AUM.
? We cut our FY26/FY27 PAT estimates by ~15%/18% to factor in lower loan growth in non-gold segments and low spreads/NIM. Over FY25-27, we estimate a CAGR of 23%/15% in gold/consolidated AUM and ~29% in consolidated PAT, with consolidated RoA/RoE of ~3.5%/12% in FY27. Reiterate our Neutral rating on the stock with a TP of INR280 (based on 1.5x Mar’27E consolidated BVPS).
Strong gold loan growth of ~13% QoQ; gold tonnage rises sequentially
? Gold AUM grew ~13% QoQ and ~22% YoY to ~INR288b. Gold tonnage rose ~1% QoQ to ~56.9 tons. Within gold loans, LTV was stable QoQ at ~57%, while the average ticket size (ATS) rose to INR75.7k (PQ: INR67.8k). Gold loan customer base was broadly stable at ~2.6m.
* Management anticipates gold loan growth in FY26 to exceed FY25 levels. We project a 26% increase in gold loan disbursements for FY26. The company shared that small-ticket gold loans
Asirvad MFI: MFI book declined ~46% YoY; GNPA declined ~4pp QoQ
* Asirvad’s GNPA declined ~4pp QoQ to 4.4%, while NNPA declined ~110bp QoQ to ~1.4%. Credit costs stood at ~INR4.8b (PQ: ~INR8.5b), translating into annualized credit costs of ~26% (PQ: ~37%).
* Asirvad MFI book declined ~50% YoY and ~23% QoQ to ~INR55.4b and its gold loan book rose 9% YoY/20% QoQ to INR11.1b Asirvad reported 1QFY26 loss of INR2.7b (vs. loss of INR6.2b in 4QFY25).
* MGFL shared that MFI credit costs should decline by 30-40% in the coming quarters and the company guided that it can deliver a profit in its MFI business by 4QFY26.
Highlights from the management commentary
* MGFL is in talks with banks to explore co-lending partnerships, with a focus on the gold loan segment. The company intends to leverage its gold loan branches under Asirvad to enable these collaborations and may gradually introduce gold loans in select Asirvad MFI branches to further broaden its product reach.
* Asirvad has resumed MFI disbursements with stricter underwriting norms, prioritizing lending in centers with stronger collection performance.
* Deal with BAIN Capital announced earlier this year is progressing as planned, with the CCI approval already in place. The company is currently awaiting RBI approval, which is expected by next month.
Valuation and view
* MGFL reported a soft operational performance for the quarter, with asset quality weakening across segments. The only bright spot was strong growth in the gold loan portfolio, though this was tempered by significant (~150bp QoQ) yield compression. Asirvad MFI’s net loss narrowed sequentially, driven mainly by lower credit costs; however, the MFI portfolio continues to experience a substantial run-down.
* MGFL trades at 1.4x FY27E P/BV, and we believe that there could be a near-term impact on profitability and growth due to the lingering stress in the MFI, MSME and CV segments accompanied by overall weakness in macroeconomic activity. Gold loans will continue to exhibit healthy growth with an AUM CAGR of ~24% over FY25-27, but at the cost of compression in yields. Reiterate our Neutral rating on the stock with a TP of INR280 (based on 1.5x Mar’27E consolidated BVPS).
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