Taking a conservative approach while phasing out NPAs – Manappuram Finance
Update on the Indian Equity Market:
On Thursday, NIFTY ended higher at 16,364 (+0.5%) as it closed near the intraday high level of 16,375. Among the sectoral indices, MEDIA (+2.3%), IT (+1.8%), and PSU BANK (+1.3%) ended higher, whereas PHARMA (-1.1%) and HEALTHCARE (-0.4%) ended lower. Among the stocks, POWERGRID (+6.0%), TECHM (+4.7%), and TATAMOTORS (+3.9%) led the gainers while EICHERMOT (-4.1%), DRREDDY (-0.8%), and CIPLA (-0.6%) led the losers.
Excerpts of an interview with Mr. VP Nandakumar, MD and CEO of Mannapuram Finance (MANAPPURAM) with Economic Times on 11th August 2021:
- The two-third of the company’s primary business is lending against jewellery. The company has seen a sharp correction in the price fluctuation of metal used in jewellery and it believes that it has managed those prices well.
- The company had to phase out its high loan to value (LTV) loans off the book, otherwise it would’ve faced a situation where the loan receivables would’ve overshot than the current price. As the company grows, it is targeting high ticket loans through differential pricing and is hopeful of a growth of around 15% on its gold loan book.
- The gold auctions have been 2% of the disbursals, instead of the expected 3-4%. The expected credit loss (ECL) provisioning reported is low due to that. The company has provided adequately in microfinance and has been very conservative with the write off after 180 days.
- The company has maintained a very high capital adequacy ratio of 35% and it wants to limit its capital allocation for unsecured business to around 15% of the net worth. The company does not have any plan on bringing in capital in at least next 1 year. The right time would be when the company is able to demonstrate that it can manage the MFI book well, better than the market.
Asset Multiplier Comments
- To fight the gold price volatility Manappuram is taking the right steps like decreasing the LTV and has also come up with products/schemes to attract high ticket size customers. Despite the weak performance in quarter one, the company is confident of delivering 15% YoY Gold AUM growth in FY22E and stable NIMs.
- Involvement of less paperwork, availability of flexible schemes and quick disbursements of the loan amount remains the strong points for gold loan companies. Due to the recent gold price decline, the gold loan company is experiencing a rough patch, but given the nature of the business we remain confident on the business model.
Consensus Estimate: (Source: market screener website)
- The closing price of MANAPPURAM was ₹ 167/- as on 12-Aug-2021. It traded at 1.64x/1.32x the consensus book value estimate of ₹ 103/128 for FY22E/FY23E respectively.
- The consensus target price of ₹ 169/- implies a PB multiple of 1.32x on FY23E BVPS of ₹ 128/-.
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