Incorporated in 1992, Manappuram Finance Ltd (MGFL) (NSE: MANAPPURAM, BSE: 531213) is the second largest gold loan Non-Banking Finance Company (NBFC) in India. Total branches as on December 2019 stood at 4,623 and the number of live customers was 4.93 million. With an objective to bring stability to balance sheet and reduce business concentration risks, the company kick-started product diversification drive back in 2015 foraying to micro finance, vehicle and housing finance portfolios. Proven operating systems, huge customer base, established brand name, ready business team and robust risk management practices place MGFL favourably to enter next phase of growth led by non-gold business segments.

Gold Lending Business 

MGFL’s core gold lending business is expected to continue its growth story owing to focus on short term loans and digital online gold loan (OGL) business expansion.

	FY16	FY17	FY18	FY19	9MFY20
Gold Loan AUM (INR bn)	101.00	111.00	117.00	130.00	162.00
GNPA (%)	1.00	2.00	0.70	0.50	0.50
NPA (%)	0.70	1.70	0.30	0.30	0.20
Capital Adequacy (%)	24.00	26.10	27.00	24.00	23.40
Customer Base (mn)	1.90	2.10	2.30	2.40	2.60
% share of OGL in Gold AUM	1.00	12.00	32.00	39.00	44.00

The company has taken several strategic decisions to reduce both operational and geographical risks in their gold lending business. To overcome constant price fluctuations, gold loan industry aligned gold loan tenures to LTVs with focus on periodical interest collections. This resulted in portfolio shifts towards relatively shorter tenure products leading to reduction in under recoveries for gold financiers. Higher churn rate and with MGFL focusing on 3-month tenure loans, gold lending business proves to be a highly low levered business releasing internal capital for continued business expansion. By virtue of high churn and short-term collateralized businesses, the company has been able to maintain sufficient liquidity and manage asset liability mismatch (ALM) risks on balance sheet.

MGFL has been gradually shedding its regional business image as gold business in Kerala reached saturation & non-gold requires expansion of portfolios. South based business share declined to 58% in December 2019 from 68%, three years ago.

MGFL’s foray into the digital platform has proved a game changer specially to tap dormant customer that otherwise would impact the gold holdings (tonnage) of the company. With an objective to gradually replace the traditional brick and mortar structure, MGFL launched online gold loan (OGL) in October 2015. Both book recalibration and online gold focus have brought out flexibility in terms of repayment and renewals enabling lower turnaround (TAT), faster disbursals thereby improving productivity allowing MGFL maintain pricing power in gold loan market.

Non-Gold Lending Business

Industry specific challenges (price fluctuations), business volatility (volatile growth and higher interest rates), regional concentration and availability of capital cushion prompted gold financiers to tap opportunities in emerging businesses of micro finance, SME, affordable housing and vehicle finance back in 2015. MGFL has cut-out strategy with respect to capital allocation across key non-gold businesses in-line with the risk factors associated with each.

	FY16	FY17	FY18	FY19	9MFY20
Microfinance AUM (INR bn)	9.98	17.95	24.37	38.40	50.22
GNPA (%)	0.11	4.47	1.73	0.48	1.34
NPA (%)	0.08	1.30	0.00	0.00	0.00
Capital Adequacy (%)	24.80	20.60	15.20	31.70	24.80
Customer Base (mn)	0.60	1.20	1.50	1.80	2.14

The company has the potential to chase growth in non-gold lending business by leveraging existing customer base, aggressive cross selling, marketing push initiatives and through branch expansion and productivity. While gold business initiatives continue to aid steady business traction, MGFL’s diversification into micro finance loans have enabled to build a repeat customer base that is cost effective. While in FY16, 90% branch network stood dedicated to gold loan business, it’s down to 75% in FY19.

	FY16	FY17	FY18	FY19	9MFY20
Housing Finance AUM (INR bn)	1.28	3.10	3.74	5.18	6.01
Vehicle Finance AUM (INR bn)	1.29	3.05	6.25	11.14	13.97

The non-gold book expansion called for increased branch footprint. Asirvad (Microfinance) with 1042 branches boast of wide spread presence across 23 states. Vehicle finance business has observed rapid increase in footprint from 6 states in FY15 to 22 states in Q3FY20. Housing finance business is present in 9 states with 46 branches.

Operational and Financial Performance

	FY15	FY16	FY17	FY18	FY19
Income from operations (INR mn)	19,864.20	23,602.30	33,854.00	34,207.6	41,163.2
Operating Margins (%)	67.71	65.74	70.82	62.43	68.56
Net Profit Margins (%)	13.62	14.98	22.25	19.43	22.24
ROE (%)	10.60	13.18	24.79	18.91	22.43
ROCE (%)	11.98	12.64	17.46	13.44	15.16
ROA (%)	2.42	2.91	5.44	4.23	4.99
Debt to equity	3.27	3.49	3.27	3.33	3.40
Net Interest Income (INR mn)	11,160.00	14,260.00	22,400.00	24,490.00	28,590.00
Net Interest Spread (%)	12.20	13.70	16.62	15.29	13.82

• Income from operations showcased 19.98% CAGR growth in the period FY15-19.
• Consolidated AUM grew at 19.49% CAGR in the period FY15-19. In the same period, Net Interest Income (NII) grew at 26.51% CAGR.
• Earnings per share (EPS) has grown at 37.42% in the period FY16-19.
• Share of new businesses in the consolidated AUM was 32.60% in Q3FY20 as compared to 11.60% in FY16.
• Urban and Semi-Urban areas continue to dominate the Gold AUM at 35% and 32% respectively.
• MGFL’s liability mix has stood fairly stable with 63% overall borrowings emerging from banks including 46% of short-term credit such as cash credit, overdraft and working capital liabilities and remainder 17% from pure long-term bank loans. NCD and bonds carry smaller proportion at 10.9% of overall mix, however, commercial paper (CP) of predominantly 60-90 day stands at 23.6%. Cost of borrowing was 9.10% as on December 31^st, 2019.

The Gold Monetisers

	Manappuram Finance Ltd			Muthoot Finance Ltd
	FY17	FY18	FY19	FY17	FY18	FY19
AUM (INR bn)	136.57	157.65	194.38	272.78	291.42	342.46
AUM Growth (%)	19.45	15.43	23.29	9.38	6.83	17.51
Operating Profit Margins (%)	70.82	62.43	68.56	74.18	76.36	77.08
Operating Profit Growth (%)	54.53	-10.93	32.14	19.37	16.90	14.21
Net Profit Margins (%)	22.25	19.43	22.24	20.33	27.19	27.67
Net Profit Growth (%)	113.56	-10.88	37.50	47.62	52.72	14.06
ROE (%)	24.79	18.91	22.43	19.93	25.69	23.69
ROA (%)	5.44	4.23	4.99	4.06	5.61	5.58
GNPA (%)	2.00	0.70	0.50	2.10	6.90	2.70
Capital Adequacy (%)	26.12	26.98	23.81	24.9	25.49	26.12

Risks and Concerns

• Unsustainable growth in non-gold segments
• Significant increase in credit costs across lending segments
• Event risk in the microfinance business
• Regulatory tightening on margins

Impact of COVID-19

For MFGL, online gold loans now make up 44% of the total gold book, which is a positive as collections/repayments would be insulated from the complete branch-shutdown to a large extent. Extending the same facility to offline gold loan customers should also augur well from an asset quality standpoint. In the Microfinance portfolio (housed under Asirvad), the collections have been halted up to 31st May 2020. However, the company is exploring the online payment solution in case a customer wants to exercise the option of paying.

While a typical higher yielding business like gold and micro finance carry inherent potential to fetch higher returns, it’s the core business efficiency and effective capital deployment that would largely determine the quality of the balance sheet. The second largest gold financier by asset size, MGFL with 67% business concentrated in lending against gold is now transforming into a full-fledged NBFC player. Combatting industry challenges and intense competition, the company has emerged stronger with greater focus on short tenure high churning (3-month product forms 100% of gold loan) and digital gold lending products.

Since the onset of the nationwide lockdown due to covid-19 outbreak and the consequent economic disruption it has caused, the concern is mostly with regards to how the asset quality would play out in the non-gold portfolio, which now forms 33% of the consolidated AUM. While tapping other streams is good from a diversification perspective as it reduces concentration risks, the same can also hurt in times such as now. One could also argue that the non-gold book was put to test at the time of demonetization, but at that the time the non-gold contribution was 19% (FY17). Since then, stakes have increased. As opposed to this, in the current environment, I think Muthoot Finance will be able to hold the fort better as its share of non-gold business is much smaller at 11% (3QFY20). Concerns over MGFL’s non-gold loan book have led to the stock underperforming (42% fall in one month versus 30% for Muthoot).

The company has been showcasing impressive numbers over the years and has taken strategic decisions to grow in a dynamic competitive industry. Even though diversification was done to de-risk the business, the company is currently going through unchartered waters.

With that being said there might be spurt in loan demand after the lockdown period. According to Manappuram’s management, “Our past experience is that in periods of economic crisis, the wider financial services sector is put to stress and lending activity slows down. Gold loans had then become the fall-back option for borrowers denied access to their regular channels.” Keeping this mind, the current scenarios provide an opportunity for long-term investors to enter a good business in an under penetrated market.

MGFL is currently available at a CMP of INR 112.05 (as on April 09, 2020) at a PE of 7.10 and PB of 1.73, which are well below the 10-year median PE of 13.43 and PB of 2.61. Promoters held 35.02% stake in the company as of Dec 2019, which decreased from 35.12% in September 2019.

Team 3C Capitals

Sources

• Value Research Online
• Investor Presentations
• Annual Report 
• Financial Articles