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Intent right, execution amiss

Microfinance (MFI)-led credit cost and business slowdown dragging top line weighed on Manappuram Finance (MGFL IN) Q3FY25 earnings. While embargo on the micro finance (MFI) business has been lifted, the alignment of gold lending business to regulatory requirements, headwinds coupled with operational inefficiency in some aspects of gold and MFI segments continue to play spoilsport. What perturbs us is the continued asset quality deterioration in vehicles, housing and other businesses. Growth strategy has taken a shift toward secured lending wherein execution is key. Beside this, the likelihood of a strategic stake sale continues to loom large on valuation. Given that the near-term outlook is gloomy, we downgrade to Reduce with an unchanged TP of INR 185 on 1.0x FY27E P/ABV

Credit cost weighs on profit; growth strategy recalibrated: Elevated provision, up 113% QoQ and 271% YoY and higher employee & IT cost drove opex, up 1% QoQ and 10.1% YoY, denting Q3 PAT, down 51% QoQ and 52% YoY. Asset quality stress across segments and a slowdown in unsecured lending tempered growth. Credit cost remains high at 4.9% while NIM contracted by 20bp, due to rising borrowing cost. Meanwhile, the RBI lifted restrictions on subsidiary Asirvad, with ongoing discussions signaling a positive outlook. Considering NIM moderation and after factoring in elevated credit cost, ROA may dip to an average of 4% during FY25-27E.

Growth slows amid shift to secured lending: AUM stood at INR 442bn, down 3.3% QoQ but up 9.5% YoY, dragged by Asirvad AUM down 16.7% QoQ and 14.5% YoY, due to climatic disruption, JLG dilution, borrower discipline issues, and external pressures. In response, strict remedial measures were implemented to optimize cost and tighten underwriting under Asirvad. Vehicle finance grew 4.9% QoQ to INR 50.9bn while home loans (HL) rose 5.1% QoQ to INR 17.8bn. Gold share in AUM increased to 55.4% vs 53.3% in Q2 at INR 2.45tn. Growth strategy currently tilts toward secured lending and unsecured to be restricted to <15%. While management continues to target 15% gold loan growth, we expect a 14% consolidated loan book CAGR during FY24-27E.

Asset quality deteriorates across segments; credit cost spikes: NPA spiked 10bp QoQ to 2.5% with a 264bp rise in credit cost to 4.9%, emanating from MFI headwinds, although collections improved this month. MFI NPA spiked to 5.8% from 4.3%, housing to 3.9% from 3.3%, and VF to 5.2% from 4.2% in Q2. Despite this, MFI collection efficiency held steady at 95%. VF NPAs surged, especially in 2W and FE, but saw improvement from January. Higher provisions were due to a corporate borrower, with Stage 3 PCR rising to 59% from 55%, and Stage 2 at 14%. The company has fully transitioned to secured loans, exiting unsecured and digital personal loans. Auctions were at INR 1.2bn for Q3. We sustain 3% GNPA and average 1.2% credit cost in FY24-27E.

Downgrade to Reduce with unchanged TP of INR 185: We lower EPS by 3.6% for FY25 and 3.8% by FY26E to factor in persistent challenges on credit traction and quality. While it did highlight commitment toward business, execution lags with MGFL facing challenges even in the core gold lending business. Return ratios have fallen, with an average ROA of 4% during FY25-27E. We downgrade to Reduce from Accumulate with an unchanged TP of INR 185 on 1.0x FY27E P/ABV.

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