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Retail Equity Research (South India Focus)

Manappuram Finance Ltd NBFC

BSE CODE : 531213 NSE CODE: MANAPPURAM

BLOOMBERG CODE: MGFL:IN SENSEX : 30,067

Buy

12M Investment Period Rating as per Mid Cap

CMP Rs.101 TARGET Rs.133 RETURN 31% (Closing: 07-04-20)

8th April, 2020

COMPANY UPDATE

Valuations moderated, high upside potential Manappuram Finance (MGFL) is one of the leading gold loan NBFCs in India and is well diversified into other business segments like housing loan, vehicle loan and microfinance, with a branch network size of around 4,623 spread across the country.

Owing to Covid-19 pandemic, we expect MGFL’s interest income to only

fall by 0.6% in FY22E compared to our previous estimate.

Going forward, we expect NIM to remain stable at 15.9% in FY22E as

we expect fast recovery in business growth.

Considering the current slowdown, we have also revised our estimate

for PAT to Rs 1,946cr in FY22E which is largely in line with our

previous estimate of Rs 1958cr.

We value the stock at 1.3x FY22E Adj. BVPS of Rs 102.4 and

recommend BUY rating with a target price of Rs 133.

Company Data

Market Cap (Rs cr) 8,560

Outstanding Shares (cr) 84.5

Free Float 65%

Dividend Yield 2.2%

52 week high (Rs) 195

52 week low (Rs) 75

6m average volume (cr) 6.42

Beta 1.35

Face value (Rs) 2

Shareholding (%) Q1FY20 Q2FY20 Q3FY20

Promoters 35 35 35

FPI’s 45 43 44

MFs/Institutions 4 6 5

Public 16 16 15

Total 100 100 100

Promoter Pledge 1.19 1.19 0.77

Price Performance 3 month 6 month 1 year

Absolute Return -42.5% -26.9% -14.3%

Absolute Sensex -26.3% -20.6% -22.3%

Relative Return* -16.2% -6.3% 8.0%

*over or under performance to benchmark index

Consolidated (Rs Cr)

FY20E FY21E FY22E

NII 3,529 3,920 5,028

Growth(%) 31.0 11.1 28.3

NIM(%) 17.1 15.0 15.9

Provisions 82 92 104

Adj. PAT 1482 1486 1946

Growth(%) 59.5 0.2 31.0

Adj. EPS 17.6 17.6 23.1

Growth(%) 59.37 0.24 30.99

P/E 5.3 5.3 4.0

BVPS 68.6 83.7 104.2

Growth(%) 27.9 21.9 24.5

Adj.BVPS 66.8 82.0 102.4

Growth(%) 25.9 22.7 24.8

P/B 1.4 1.1 0.9

Adj. P/B 1.4 1.1 0.9

ROE (%) 28.7 23.1 24.6

K Jose Francis

Research Analyst

KEY CHANGES: TARGET RATING EARNINGS

Corona update and impact on industry and company

The effect of Covid-19 pandemic is felt across the financial services industry. This is due to announcement of a 3 month moratorium period on all term loans from March to May by RBI. In the current scenario, we expect the slowdown to have its impact only on Q1FY20, following which growth will bounce back by Q2FY21. We also believe that by Q3FY21, total recovery in the business will be seen. Hence, the impact from the pandemic is very limited which is already factored in the price. Even throughout the lockdown periods, the company offers online gold loans to customers and this forms 40% of total gold loan business. Company will face short term headwinds in its Microfinance, Housing finance & Vehicle finance segments but this impact will have an effect over this quarter and is expected to recover by the next two quarters. In terms of liquidity, MGFL has a strong position with sufficient funds of USD 300Mn raised in the last quarter. Company has also met its repayment obligations till March 2020. Due to high prices of gold, the LTV ratio remains very favourable for the company in mitigating risk. Post lockdown, with economic activity resuming once again, we expect growth to come back to all the segments in which MGFL operates.

Estimate Revision

We expect business slowdown in the short term to affect AUM growth of microfinance, Housing finance & Vehicle finance by 2%, 2% & 1% respectively over FY21E. Our estimates for these segments over FY22E remain largely in line with earlier estimates. We expect not much of impact in interest collections in the gold loan business. Hence, our new estimate of Net Interest Income, Rs 5028cr in FY22E is in line with earlier estimate of Rs 5059cr. NIM is expected to remain stable at 15.9% over FY22E. We expect a part of this recovery will be driven by Manappuram’s Online gold loan disbursements. This facility will also partly allow credit flows to households during the lockdown as well. Pre provision profit estimate is revised to Rs 2,734cr over FY22E with small deviation from our previous estimate. Our forecast for Adj. PAT in FY22E also remains unchanged with very marginal reduction, the new value being Rs 1,946cr compared to Rs 1,958cr.

Outlook & Valuation

With RBI’s recent rate cut of 75bps, borrowing costs are expected to come down. With declining borrowing cost, fast recovery in gold loan business, rising gold prices & online gold loan disbursements, Outlook for MGFL is positive at the current valuations. However, owing to Corona virus pandemic and its negative impact on economy, we now value MGFL at 1.3x FY22E Adj. BVPS, with a revised target price of Rs. 133, and recommend BUY rating on the stock.

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MGFL Sensex Rebased

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27th December 2018

Change in estimates

Old estimates New estimates Change %

Year / Rs Cr FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E

Net Interest Income (NII)

3,606 4,252 5,059 3,529 3,920 5,028 -2% -8% -1%

Net Interest Margin (%)

17.5 16.2 15.9 17.1 15.0 15.9 -42bps -119bps -3bps

Pre-Provision Profit 2,035 2,323 2,750 2,085 2,100 2,734 2% -10% -1%

Adj. PAT 1445 1651 1958 1482 1486 1946 3% -10% -1%

Diluted EPS (Rs) 17.1 19.6 23.2 17.6 17.6 23.1 3% -10% -1%

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27th December 2018

PROFIT & LOSS BALANCE SHEET

RATIOS

Y.E March (Rs Cr) FY18A FY19A FY20E FY21E FY22E

Interest Income 3,354 4,012 5,221 6,030 7,622

Interest Expense 1,030 1,319 1,692 2,109 2,593

Net Int. Income 2,324 2,693 3,529 3,920 5,028

Change - 15.9% 31.0% 11.1% 28.3%

Non Int. Income 125 167 261 271 343

Total Income 2,449 2,859 3,790 4,192 5,371

Change - 16.8% 32.5% 10.6% 28.1%

Operating Exp. 1,235 1,386 1,705 2,092 2,638

Pre Prov. Profit 1,214 1,473 2,085 2,100 2,734

Prov. & Conting. 177 46 82 92 104

PBT 1037 1427 2003 2008 2630

Change - 37.6% 40.3% 0.2% 31.0%

Tax 361 498 521 522 684

Tax Rate (%) 35% 35% 26% 26% 26%

Reported PAT 676 929 1482 1486 1946

Adj* 0 0 0 0 0

Adj. PAT 676 929 1482 1486 1946

Change - 37.5% 59.5% 0.2% 31.0%

No. of shares (Cr) 84 84 84 84 84

EPS (Rs) 8.0 11.0 17.6 17.6 23.1

Change - 37.5% 59.4% 0.2% 31.0%

DPS (Rs) 2.00 2.15 2.20 2.20 2.20

Y.E March FY18A FY19A FY20E FY21E FY22E

Profitab. & Return Interest yield (%) 23.4 24.3 25.3 23.1 24.1

Cost of funds (%) 8.7 9.5 9.5 9.4 9.5

Spread.(%) 14.7 14.8 15.7 13.7 14.5

NIM (%) 16.2 16.3 17.1 15.0 15.9

ROE (%) 18.8 22.3 28.7 23.1 24.6

ROA(%) 4.2 5.0 6.3 5.0 5.3

Business Growth (yoy)

Gold Loan AUM (%) 5.5 10.5 17.0 13.0 12.0

Microfinance AUM (%) 35.7 57.6 60.0 33.0 25.2

Total AUM (%) 15.4 23.3 30.0 22.3 20.4

Operating Ratios

Cost to Income (%) 50.4 48.5 45.0 49.9 49.1

Cost to AUM (%) 7.8 7.1 6.7 6.8 7.1

Asset Quality

GNPA (%) 1.0 0.6 0.9 0.8 0.7

NNPA (%) 0.2 0.3 0.3 0.3 0.3

Capital Adequacy

CAR (%) 27.0 23.6 23.9 24.1 24.9

Valuation ratios

P/E (x) 11.6 8.4 5.3 5.3 4.0

P/B (x) 2.1 1.7 1.4 1.1 0.9

Adj. P/B (x) 2.1 1.8 1.4 1.1 0.9

Y.E March (Rs Cr) FY18A FY19A FY20E FY21E FY22E

Cash 484 840 1,277 1,450 2,073

Loans & Advances 15,244 17,812 23,497 28,744 34,613

Investments 5 174 177 216 261

Gross Fixed Assets 329 440 557 680 811

Net Fixed Assets 269 312 351 385 413

CWIP 0 1 1 1 2

Intangible Assets 6 18 29 36 37

Def. Tax (Net) 110 89 83 78 103

Other Assets 912 1,207 1,410 2,012 2,423

Total Assets 17,030 20,454 26,825 32,924 39,923

Deposits 0 2 3 3 4

Debt Funds 12,607 15,295 20,212 24,726 29,775

Other Liabilities 564 577 751 1,052 1,257

Provisions 45 55 70 86 104

Equity Capital 169 169 169 169 169

Reserves & Surplus 3,645 4,356 5,620 6,887 8,615

Shareholder’s Funds

3,813 4,525 5,789 7,056 8,784

Total Liabilities 17,030 20,454 26,825 32,924 39,923

BVPS (Rs) 45.3 53.7 68.6 83.7 104.2

Change - 18.6% 27.9% 21.9% 24.5%

Adj. BVPS (Rs) 43.8 53.1 66.8 82.0 102.4

Change - 21.2% 25.9% 22.7% 24.8%

Consolidated Financials

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Source: Bloomberg, Geojit Research.

27th December 2018

Dates Rating Target 15 July 19 Buy 154 19 November 19 Accumulate 185 03 February 20 Accumulate 208 08 April 20 Buy 133

Definition:

Buy: Acquire at Current Market Price (CMP), with the target mentioned in the research note.

Accumulate: Partial buying or to accumulate as CMP dips in the future.

Hold: Hold the stock with the expected target mentioned in the note.

Reduce: Reduce your exposure to the stock due to limited upside.

Sell: Exit from the stock.

Not rated : The analyst has no investment opinion on the stock.

Recommendation Summary (last 3 years)

Investment Criteria

CERTIFICATION

I, K Jose Francis, author of this Report, hereby certify that all the views expressed in this research report reflect our personal views about any or all of the

subject issuer or securities. This report has been prepared by the Research Team of Geojit Financial Services Limited, hereinafter referred to as Geojit.

COMPANY OVERVIEW

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Ratings Large caps Midcaps Small caps

Buy Upside is above 10% Upside is above 15% Upside is above 20%

Accumulate - Upside is between 10% - 15% Upside is between 10% - 20% Hold Upside is between 0% - 10% Upside is between 0% - 10% Upside is between 0% - 10% Reduce/sell Downside is more than 0% Downside is more than 0% Downside is more than 0% Not rated -

To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and ‘Reduce’ as Sell.

The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis.

It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/

return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or

downgraded to a HOLD, REDUCE or SELL.

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27th December 2018 FUNDAMENTAL DISCLAIMER

We have prepared this report based on information believed to be reliable. The recommendations herein are based on 12 month horizon, unless otherwise

specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium

term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. The

stocks always carry the risk of being upgraded to buy or downgraded to a hold, reduce or sell. The opinions expressed are subject to change but we have no

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