Go Gold: Investments In Manappuram May Continue To Glitter

Manappuram Finance is one of the largest gold loan companies in India. It is the second largest listed player in the gold loan segment with an AUM of Rs 10,080.63 crore (FY2016). It has a strong pan-India presence through its strong branch network, spread across 23 states and four Union territories. Apart from the traditional business, the company now has diversified its business into micro-financing, housing finance and commercial vehicles loans business.

The business operation of Manappuram Finance is largely based on gold. The company provides instant loan against gold, as the commodity can easily be accepted as a collateral. The year 2016 has been a good year for gold as compared with the last couple of years. The prices of gold are extremely important for the company as it gives loan against gold. The prices of gold corrected significantly after falling from Rs 31,000 per 10 grammes at the end of 2013 to less than Rs 25,000 in mid-2015, and began rising since then. As on December 4, the gold has gained 14 per cent since the mid-September 2015 level. However, the company has delinked its business from the global gold prices which is one of its strategies of derisking. However, the gold prices still remain important to determine the LTV ratio (loan to value).

Although banks such as SBI, ICICI Bank do provide loans against gold, with Mahindra Finance also foraying into the business. Muthoot Finance is the only major competitor of Manappuram Finance enjoying largest market share in the industry with more than 4,265 branches across India.

The non-banking finance companies (NBFCs) grew better than banks in FY2016. However, the NPL phenomenon in NBFCs was the same as that of NPAs of banks. NBFCs predominantly operating in rural areas such as tractor financiers and commercial vehicle financiers faced more challenges as compared to the overall industry. Housing finance companies (HFCs) and microfinance companies were relative outperformers. HFCs continued to witness healthy growth rates, while loan book growth and earnings growth continued to be robust in the microfinance segment. In terms of financial assets, NBFCs recorded healthy growth—CAGR of 19 per cent over the past few years and now account for 13 per cent of the total credit, which is further expected to reach nearly 18 per cent by 2018–19.

Demonetisation will not affect Manappuram Finance adversely. Although the company has diversified its business operations, more than 90 per cent of the income of the company is still derived from gold loans.  Manappuram Finance non-gold business is just 15 per cent and hence the impact of demonetisation on the company will be negligible. Although the volatile gold prices are a risk, however the gold prices have surged significantly after Trump’s win in the US presidential election.

On the financial front, gross sales of Manappurram Finance in the financial year ended March 2016 stood at Rs 2360.23 crore, an increase of 19 per cent YoY. PBIDT increased 15 per cent and stood at Rs 1551.55 crore. The company’s PAT was Rs 355.16 crore, an increase of 31 per cent as compared with the financial year ended March 2015. The net worth increased by five per cent and reserves and surplus too increased five per cent in this fiscal. In Q2FY17, Manappurram Finance posted strong results. Its net sales stood at Rs 751.50 crore, showing an increase of 45.87 per cent YoY. The PBIDT increased 65.19 per cent and stood at Rs 546.93 crore, while the PAT stood at Rs 179.70 crore, a whopping increase of 203.44 per cent.

Manappuram Finance has a market cap of Rs 6084.86 crore. The stock is providing a good dividend yield of 3.11 per cent and the company maintains a healthy dividend payout ratio of 54.47 per cent. The trailing 12-month P/E stands at 11.06 which is low as compared with the industry P/E of 21.47. The ROE of the company in the last three years was 10.81 per cent. Its ROA stood at 2.91 per cent whereas ROCE was 12.64 per cent. The company’s EPS stood at Rs 4.01 per share. In the last six months, the share price has surged 46 per cent. In the last one year, the scrip has been more than a multi-bagger, surging 2.92 times. The stock’s 52-two week high/low stands at Rs 106.75/24.60.

The financials of Manappuram Finance are strong and are expected to remain strong in the upcoming quarters. On the other hand, the company is not dependent on gold loans as it has diversified its operation. The company has been graceful in adopting technology in its business. The company has launched the Online Gold Loan (OGL) service, wherein taking gold loans has been made as simple as using a credit card. The service has been enabled through web, smartphone and SMS platforms. Customers depositing gold automatically become eligible for gold loan to the extent of Loan to Value (LTV) limit. Meanwhile, the RBI increased the LTV ratio for gold loans by NBFCs to 75 per cent from 60 per cent and this is bound to increase the demand for gold loans further. Delinking the global business from gold prices, which is one of the current business strategies of the company, has helped Manappuram Finance in maintaining a stable asset quality. In Feb 2015, Manappuram Finance acquired Asirvad Microfinance Pvt. Ltd. with AUM a little short of Rs 300 crore. Just in a year the company’s AUM has tripled to Rs 1000 crore, which is an example that the company can churn a non-gold business into profits. Overall, the fundamentals of Manappuram Finance are strong and hence we recommend are reader-investors to BUY the stock. 

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1.What role will  NBFCs play when the economy has taken step towards being cash-less?

Demonetisation and the push towards a cashless economy is likely to kick-start a long term trend of shift in business away from the informal and unorganised players towards the organised sector. It will certainly help the banks as also NBFCs like ours.

In fact, I believe NBFCs stand to gain more as they have greater last mile reach and better connect with the low income groups. Banks that are burdened by higher operating costs would not find it remunerative to deal with this section.

There is inevitably some short term pain for everyone involved. The disruption caused by the sudden withdrawal of higher denomination notes has affected business but we believe this will be a short term phenomenon, and that normalcy will be restored once the supply of new currency notes improves. In the meantime, we are encouraging our customers to use alternative channels like online repayments using net banking, debit cards and e-wallets or by use of cheques.

I am confident, however, that the long term impact will be quite positive for gold loan NBFCs, especially the tech-savvy companies. The squeeze on cash will shift business from the informal, unorganised players to the organised sector and spur online transactions. Moreover, with the influx of deposits into the banking system, there is greater likelihood of cuts in interest rates going forward, which will benefit NBFCs.

We do not foresee any increase in NPAs. The initial difficulties that customers faced while making repayments have largely been sorted out. As regards earnings, the impact, if any, will be short term and is unlikely to last beyond a quarter or so.

Our understanding is that the RBI is yet to agree to this request.

Basically, there were two immediate issues we faced post demonetisation. Firstly, some of our customers faced problems in making repayments as we had to stop accepting old notes all of a sudden. Secondly, with regard to loan disbursements, we faced issues regarding availability of cash when disbursing small value gold loans (i.e. less than Rs.1 lakh) where borrowers are keen to get the amount in cash. 

In response, as I mentioned earlier, we are encouraging our customers to use alternative channels like online repayments using net banking, debit cards and e-wallets or through cheques.

We have recently diversified into microfinance, vehicle and housing finance, and SME lending and have made a very good start. Overall, non-gold businesses now contribute about 15 percent of the total business and we expect this to increase to 25 per cent by 2018.

The correction in property prices, if any, is likely to affect the property market, primarily in metros and other Tier I cities, especially in the premium segment where property prices are already at a high. Our target segment is in the affordable property market in the Tier II and Tier III cities, and no major impact in the price line is anticipated in these locations. In the long run, the demonetisation will bring in more transparency in the property market, and is likely to positively impact the business.