December 4, 2015 Manappuram Finance (MANGEN) |...

December 4, 2015

ICICI Securities Ltd | Retail Equity Research

Management Meet Note

Legacy issues over; stable growth ahead… We recently met the management of Manappuram Finance (MFL) to get a better insight into its business model and growth outlook. Originating in 1949, MFL is engaged in the gold finance business, focusing on customers who do not have access to the formal banking system. It has a presence across the country with ~3293 branches with a loan book at | 10220 crore as of September 2015. Post rapid growth prior to FY12, the industry, as a whole, and MFL, in particular, has its share of problems in terms of a decline in AUM and, thereby, profitability led by tightening of regulatory norms. With regulation stabilising now, the management is focusing on risk mitigation of the gold loan book and diversification in non-gold lending and expecting AUM to grow at 16-18% CAGR by FY16-19E. Higher traction is expected in non-gold products with their share seen increasing from the current 7% to 20-25% in FY19E. Intense management effort to de-risk, revive business MFL has witnessed rapid growth in AUM from | 1891 crore in FY10 to | 11631 core in FY12, owing to aggressive lending and increase in gold prices. However, a reversal in the gold price trend and regulatory tightening including cap on LTV (60%), higher Tier I capital and exclusion from PSL put the brakes on growth (decline at 16% CAGR in FY12-14). With regulatory stabilisation, efforts are made to de-risk the gold loan business from price fluctuations by introduction of shorter tenure products. Branch activation has led to volume growth (12% YoY growth in AUM, despite 5% decline in gold prices). Diversification in micro finance, mortgage and CV loans is undertaken to reduce dependence on gold loan finance. Going ahead, the management expects the loan book to grow at 16-18% CAGR in FY16-19E, led by higher traction in non-gold book. Growth in gold loan may remain steady at 10-12% in FY16-18E. Stable NIM, operating leverage to improve profitability MFL enjoyed NIMs at 16%+, prior to FY12, led by higher yields. NIMs, however, declined from 16.7% in FY11 to 10% in FY13 due to incremental NPAs led by a slide in gold price, which later stabilised at ~12%. Diversification in non-gold products is expected to put some pressure on margins. However, the decline in incremental slippages will offset the negative leading to stable NIM. Operating efficiency also got impacted (opex/AUM-7.7% in FY14 vs. 6.4% in FY13) led by a decline in AUM, expected to revive with an increase in AUM. Sustainable performance needed for re-rating De-risking of the loan portfolio and diversification in non-gold product lines allows MFL to regain growth and reduce asset quality stress. With robust capitalisation (25.3% in Q2FY16), high dividend payout (5-8% yield) and RoE expected to sustain at ~2.5%, the valuation looks skewed towards concerns.

Exhibit 1: Financial Performance Financial Peroformance FY12 FY13 FY14 FY15

NII (| crore) 1,545.0 1,027.8 1,043.2 1,085.3

PAT (| crore) 591.5 208.4 226.1 270.8

EPS(|) 7.0 2.5 2.7 3.2

P/E 3.9 10.8 10.0 8.4

P/ABV 1.0 1.0 0.9 0.8

RoA 6.0 1.6 1.9 2.4

RoE 27.5 7.9 9.2 10.6

Source: Company, ICICIdirect.com Research; H1FY15 ratios and EPS are annualised

Rating matrix Rating : UnratedTarget : NATarget Period : NAUpside : NA

Key Financials | Crore FY12 FY13 FY14 FY15NII 1,545 1,028 1,043 1,085 PAT 592 208 226 271 EPS 7.0 2.5 2.7 3.2

Valuation summary

FY12 FY13 FY14 FY15P/E 4 11 10 8 P/ABV 1.0 1.0 0.9 0.8 RoA 6 2 2 2 RoE 27.5 7.9 9.2 10.6

Stock data Particulars Amount Market Capitalisation | 2292 CroreGNPA (Q2FY16) | 986 CroreNNPA (Q2FY16) | 813 CroreNIM (Q2FY16) 12.0 52 week H/L 38/19.75Equity Capital | 168Face value | 2DII Holding (%) 3.2 FII Holding (%) 38.5

Price movement

0

10

20

30

40

50

60

Dec-

12

Apr-1

3

Aug-

13

Dec-

13

Apr-1

4

Aug-

14

Dec-

14

Apr-1

5

Aug-

15

0

2000

4000

6000

8000

10000

MANGEN (LHS) Nifty (RHS)

Research analyst

Kajal Gandhi

[email protected]

Vishal Narnolia [email protected]

Vasant Lohiya [email protected]

Manappuram Finance (MANGEN) | 27


Financial highlights

Exhibit 4: NIM trending towards stability

16.7 16.4

1012 12.5 12.2 12

22.9

27.3

21.723.2 23 22.3 21.8

0

5

10

15

20

25

30

FY11 FY12 FY13 FY14 FY15 Q1FY16 Q2FY16

(%)

NIM Yield CoF

Source: Company, ICICIdirect.com Research

Exhibit 5: Operating leverage to improve profitability

7.6

7.1

6.4

7.77.6

6

7

8

FY11 FY12 FY13 FY14 FY15

(%)


Exhibit 2: Gradual revival in AUM from FY15 onwards

87 83 75 70 68 67

7 811 13 13 11

3 5 8 10 11 14

3 4 6 7 8 8

7549 11631 9956 8163 9594 10220

0

20

40

60

80

100

120

FY11 FY12 FY13 FY14 FY15 2HFY16(%

)

0

2000

4000

6000

8000

10000

12000

14000

South North West East Series5

Source: Source: Company, ICICIdirect.com Research

Exhibit 3: Loan book break-up (H2FY16)

Others0.1%

HL0.4%

LAP0.4%

CV0.6%MFI

5.3%

Gold93.2%

Source: Source: Company, ICICIdirect.com Research


Exhibit 7: NPA to remain broadly stable after pick-up in FY13

0.3

0.6

1.11.2 1.2

1

0.1

0.3

0.7

1 1

0.8

0

0.3

0.6

0.9

1.2

1.5

FY11 FY12 FY13 FY14 FY15 2HFY16

GNPA (%) NNPA (%)

ro


Exhibit 6: Improvement in RoA seen led by operating leverage

5.5

1.6 1.92.4

622.3

7.99.2

10.6

27.5

0

1

2

3

4

5

6

7


(%)

6

11

16

21

26

31

RoA RoE


Exhibit 8: High dividend yield bodes well

1.21.5 1.5

1.8 1.8

0

0.5

1

1.5

2


(|)



Exhibit 9: Adequately capitalised for future growth

29.1

23.4 22.7

27.725.7 25 25.3

0

5

10

15

20

25

30

35

FY11 FY12 FY13 FY14 FY15 Q1FY16 Q2FY16(%

)


ICICIdirect.com coverage universe (NBFCs)

CMP M Cap(|) TP(|) Rating (| Cr) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E

LIC Housing Finance (LICHF) 459 545 Buy 23,181 27.5 33.4 41.2 16.7 13.8 11.2 3.1 2.4 2.0 1.3 1.4 1.4 18.1 18.7 18.6Reliance Capital (RELCAP) 443 515 Buy 10,770 39.6 33.6 38.0 11.1 13.1 11.5 1.0 1.0 0.9 2.0 1.5 1.6 7.8 6.3 6.8HDFC (HDFC) 1,179 1,410 Buy 185,987 38.0 42.7 50.2 31.0 27.6 23.5 6.1 5.5 5.0 2.5 2.5 2.5 20.3 20.7 22.0PTC India Financial Services(PTCIND) 40 51 Buy 2,282 2.9 6.6 5.3 14.0 6.1 7.5 1.6 1.5 1.2 2.6 4.8 3.4 11.5 23.7 16.9CARE (CARE) 1,295 1,700 Buy 3,755 48.4 45.9 56.9 26.8 28.2 22.8 10.4 9.6 9.0 43.2 44.9 50.4 38.9 33.9 39.5Bajaj Finserv (BAFINS) 2,014 2,155 Buy 32,071 106.2 129.2 160.3 19.0 15.6 12.6 2.9 2.5 2.1 2.0 2.1 2.3 16.7 17.1 17.9Bajaj Finance (BAJAF) 5,570 6,000 Buy 80,176 179.9 228.6 282.0 31.0 24.4 19.8 5.8 4.0 3.4 3.1 3.1 3.1 20.4 19.6 18.9

RoE (%)Sector / Company

EPS (|) P/E (x) P/ABV (x) RoA (%)



RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]


Disclaimer

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