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You are here : IndiaNotes >> Research & Analysis >> Companies >> Manappuram Finance Ltd. >> Research

Pick of the Week: Buy Manappuram Finance at CMP & add on declines to Rs82-85 band

HDFC Sec | 19 Jun, 2017  | Follow Author | Add to my Favourites 
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Investment Rationale


- Re-engineered business model to de-risk gold loan business


- Huge untapped potential in gold loans


- Competitive advantage over Banks and Moneylenders in gold loans


- Favorable and stable regulatory environment leading to higher profitability


- Strong growth in new businesses


Concerns


- Changes in gold loan regulations


- Gold price fluctuations


- Overdependence on Gold loans


- Delay in scaling up non-gold business segments


- Increase in non-gold NPA


View and Recommendation


Manappuram Finance revised its business model in June 2014 by introducing short-term products with 3, 6, and 9 months' tenure and increasing focus on monthly interest collection and getting new clients, thereby reducing its risks on interest reversals due to delinquent clients. Furthermore, regulatory changes in the gold loan segment between fiscal 2012 and 2014 (such as withdrawal of priority sector benefit for gold loans, capping loan-to-value (LTV) ratio at 75%, restricting privately placed debentures, and stipulating stringent norms for conducting gold auctions) have brought in the much needed stability, while enhancing confidence of lenders and other stakeholders.


Diversification into other segments by MFL will enable faster utilisation of excess capital on its balance sheet and avoid any undesirable treatment from the regulator for being a single-product company. MFL has a capital adequacy ratio in excess of 25% eliminating the need of equity dilution in the near future. With a favorable regulatory environment, stable gold prices and diversification to other segments, MFL’s financial profile is on the way to further improvement and its return ratios are likely to improve. A large RoAA (5.4% for FY17) and a large RoAE (24.8% for FY17) leads us to believe that MFL deserves to trade at a higher valuation. However given the difference in size, Manappuram would typically quote at a discount to Muthoot Finance.


We feel investors could buy the stock at the CMP and add on declines to Rs. 82-85 band (~1.55x FY19E ABV and 6.8x FY19E EPS) for sequential targets of Rs. 105 (1.95x FY19E ABV and 8.6x FY19E EPS) and Rs. 113 (2.1x FY19E ABV and 9.2x FY19E EPS) in 2-3 quarters.

 


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.




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