Recommendation From Finance Sector

Consistent dividend paying company

Manappuram Finance is one of India’s leading gold loans NBFCs focusing on customers who do not have access to formal banking system, with strong presence in semi urban and rural markets. This NBFC has AUM of Rs 10,579 crore with around 3,293 branches spread across the nation.

Due to adverse regulation and price fluctuations, it has been struggling during the FY12-14, now regulation stabilising and the company has re-aligned its business model to de-risk it from volatility in gold prices by a) introduction of shorter tenure products of 3-6 months (12 month product earlier) and recalibrated loan to value (LTVs) to link it to product tenure – this has safeguarded against decline in gold prices, (b) adopted push approach instead of pull earlier – started reaching out to customers through enhanced marketing and branch activation efforts – this has resulted in 10 per cent AUM growth in 9MFY16, and (c) linked employee incentives to sourcing business, timely recovery and default rates. Also, it is encouraging to note that management is focused to de-risk the business and reduce dependence on gold loan finance, through diversification in micro finance, mortgage and CV loans. Currently, these new businesses constitute around 9 per cent of total AUM.

On financial front, the company has reported growth of 25 per cent YoY at Rs 100 crore in PAT which was led by healthy NII growth by 33 per cent at Rs 378 crore backed by strong advance growth and improvement in NIMs by 100bps YoY to 14.5 per cent. AUM growth for Q3FY16 was at 20 percent at Rs 10,579 crore and management maintained their guidance to take their non gold portfolio to 25 per cent of AUM in next 3 years. Asset quality remained largely stable with auctions came down to Rs 390 crore in Q3FY16 as against Rs 804 crore in Q2 FY16. For nine months ended December 31, 2015, the company reported 10.62 per cent growth in consolidated net profit of Rs 222.66 crore. Also, capital adequacy is healthy at 25.4 per cent compared to the minimum 15.0 per cent stipulated by RBI for NBFCs.

In FY17, the company expects around 15 per cent AUM growth in gold. In other areas, all put together would be around Rs 2,500-3,000 crore. Bottom-line expects to grow at a rate of 20-25 per cent. Due to de-risking of the loan portfolio and diversification in non-gold product lines boost to regain growth and reduce asset quality stress. The company has also a track record of paying healthy dividend.

On Valuation front, the stock traded at 1.11 times price to adjusted book value on TTM basis with adjusted book value of Rs 31 per share. Therefore we feel investors can enter this counter at current market price with an expectation of 30 per cent return in the next one year.