Manapurram Finance 140915 - content.indiainfoline.comcontent.indiainfoline.com/wc/research/researchreports/Manapurram... · Manapurram Finance Ltd 3 The gold loan disbursal process

Sector: Financials

Sector view: Positive

Sensex: 25,610

52 Week h/l (Rs): 38.75/19.75

Market cap (Rscr) : 1,848

6m Avg vol (‘000Nos): 1,498

Bloomberg code: MGFL IN

BSE code: 531213

NSE code: MANAPPURAM

FV (Rs): 2

Prices as on Sept 11, 2015

Company rating grid

Low High

1 2 3 4 5

Earnings Growth

RoA Progression

B/S Strength

Valuation appeal

Risk

Share price trend

70

100

130

160

Sep‐14 Jan‐15 May‐15 Sep‐15

Manappuram NIFTY

Share holding pattern

Dec‐14 Mar‐15 June‐15

Promoters 32.2 32.2 32.2

Institutions 44.4 45.1 45.0

Others 23.4 22.7 22.8

Rating: BUYTarget (12months): Rs35

CMP: Rs22

Upside: 60%

Research Analyst: Franklin Moraes

Rajiv Mehta [email protected]

Manapurram Finance Ltd

Company Report

September 14, 2015

This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc. The views and opinions expressed in this document may at times be contrary in terms of rating, target prices, estimates and views on sectors and markets.

Regaining the golden touch A testing period of FY12-14 Manapurram’s dream run of staggering asset growth and super normal profits came to a grinding halt during FY12‐14 marred by tightening of regulatory environment (capping of LTV, higher Tier‐I capital threshold, exclusion from PSL category) and sharp correction in gold prices. The dual headwinds disrupted the business with its pace and intensity leaving the company no time to combat the issues effectively. The result was a 30% decline in AUM and sharp erosion in profitability over FY12‐14.

An effective response during FY14-16 Manappuram has been responding effectively to the new normal. While regulations stabilized, it became critical to mitigate risks from volatility in gold prices. Consequently, company introduced lower tenure products and conservative LTVs on 12‐month loan. The various efforts taken towards branch activation have resulted in steady volume growth. Equally credible has been business diversification into Micro Finance, Mortgages and CV loans and improvement in corporate governance.

A brighter future in FY16-18 In our view, ongoing branch activation efforts should drive a stable 10‐12% pa growth in gold loan portfolio even if prices were to soften gradually. On the other hand, rapid increase in distribution should drive substantial growth in newly introduced products. Their share in AUM is expected to increase from current 5% to 15‐20% by end FY18. A 16‐17% pa consol AUM growth would drive operating leverage, which will improve profitability.

Risk-reward highly favourable for long term investors We believe that street has been too focused on the risks from a sharp gold price decline and thus has not appreciated a) initiatives that have de‐risked the business b) robust capitalization c) improved corporate governance d) ample scope to improve RoEs e) high dividend payout (yield at 8%). Therefore, valuation of 0.6x FY18 P/ABV for a business estimated to deliver 2.5‐2.8% RoA and 14‐15% RoE in the longer term appears highly skewed towards concerns. Re‐initiate coverage on Manappuram with a 12m price target of Rs35.

Financial summary Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Total operating income 1,116 1,319 1,521 1,756

yoy growth (%) 2.8 18.3 15.3 15.4

Operating profit (pre‐provisions) 441 524 622 740

Net profit 271 310 365 432

yoy growth (%) 20.0 14.2 17.7 18.4

EPS (Rs) 3.2 3.7 4.3 5.1

Adj.BVPS (Rs) 30.2 31.3 33.0 35.3

P/E (x) 6.8 6.0 5.1 4.3

P/adj.BV (x) 0.7 0.7 0.7 0.6

ROE (%) 10.6 11.5 12.8 14.0

ROA (%) 2.4 2.5 2.5 2.6

Dividend yield (%) 8.2 8.2 8.2 8.2 Source: Company, India Infoline Research


2

Manappuram Finance – One of the leading gold loan NBFC in India Manappuram Finance originated in 1949 and has since then grown multifold to become one of the leading gold loan NBFCs in India. A report by Cognizant Business Consulting in 2012 had estimated that rural India accounts for about 65% of total gold stock in the country. Gold demand has a regional bias with southern India accounting for ~40% of the gold demand. Owing to the skewed demand geographically, the branch concentration of Manappuram is also tilted in favour of South India with 70% of branches in this region. India – a hugely underpenetrated market India has vast gold reserves (10% of the world’s gold reserves come from India alone). World Gold Council (WGC) estimates privately held gold to be in the range of 18,000 ‐ 20,000 tonnes in India of which just ~6% of the domestic gold stock is collateralized indicating huge scope for further penetration. Of the total gold loan market, the organized players have a market share of ~25% which has gone up substantially over the past decade owing to an improved distribution and lower lending rates. An underpenetrated market along with increasing organized gold lending market share augurs well for Manappuram. Manappuram has oriented its business model to target the rural segment that does not have access to bank funding due to lack of required documents. Their vast experience in the gold loan business over the years has enabled them to build deep relationships with many customers and understand their income sources and spending patterns. They have been able to eat into the market shares of pawn brokers and money lenders, owing to the comparatively lower lending rates they offer.

Manappuram has grown rapidly to become one of the leading gold loan NBFCs in India

An underpenetrated market along with increasing organized gold lending market share augurs well

Business model oriented to target the rural segment

Region wise Gold Demand Manappuram – Region wise Branch Network

40%

60%

South

Rest of India

70%

14%

11%

5%

South

North

West

East

Source: Company, India Infoline Research


3

The gold loan disbursal process Manappuram disburses loans against gold ornaments or jewellery in a very short turnaround time. A lot of modifications have taken place in the LTV guidelines; however, things have stabilized now on the regulatory front. Presently, the LTV is being calculated based on the scrap value of the gold being pledged in accordance with RBI guidelines. The price of gold has also been notified, it being either the price of Bombay Bullion Association or MCX.

The average duration of the current portfolio is five months and average loan ticket size is ~Rs. 30,000. Generally, the company has experienced that ~20% of the loans originated get closed within one month, ~50% get closed within three months and only ~10% are carried till twelve months.

Key factors that led to AUM de-growth and profitability erosion during FY12-14 A) Capping of LTVs – the biggest constraining factor Manappuram witnessed multiple challenges during the period of FY12‐FY14, especially on the regulatory front. Prior to FY12, most gold loan companies were growing their books very aggressively and offering LTVs as high as 85‐90% taking comfort in rising gold prices. Moreover, there was no clarity whether to include making charges in the LTV calculation or not, because of which many companies used to include this in their LTV calculation. This liberal risk management practice was cushioned by increasing gold prices. The super normal growth and fast increasing exposure of the banking system to gold loan companies made RBI wary and hence it capped LTVs at 60%, set a minimum Tier I capital threshold of 12% and prohibited advance against bullion and gold coins in March 2012. At this point in time, banks were at liberty to give loans at any LTVs. This put gold loan companies at big disadvantage and thus the LTV cap stunted growth. B) Revised PSL guidelines wipes out securitization book Another adverse impact was when the RBI revised Priority Sector Lending (PSL) guidelines in July 2012, which stated that the purchase/assignment transactions undertaken by banks with NBFCs, where the underlying asset is loan against gold jewellery, were not eligible for Priority Sector status. Thus, Manappuram’s gold loans could not classify for loan sell‐downs to banks for PSL under this new rule and Rs. 2000cr straight away went out of the AUM of Rs. 11,500cr as of FY12. C) Stricter norms on NCD private placement by NBFCs made funding

difficult via this route Furthermore in June 2013, norms for private placement by NCDs were tightened to cap the number of investors for an issue to 49 and minimum subscription amount for a single investor at Rs. 25 lakhs with multiples of Rs. 10 lakhs thereafter. RBI also prescribed a minimum time gap of six months between two private placements and not extending loans against the security of its own debentures, all these measures leading to funding constraints.

Presently, the LTV is being calculated based on the scrap value of the gold being pledged

Super normal growth and fast increasing exposure of the banking system to gold loan companies made RBI wary

Revised PSL guidelines excluded gold loans from PSL status

Norms for private placement by NCDs were tightened leading to funding constraints


4

D) Gold price fall - adding fuel to the fire Gold price fall during the second half of FY13 led the company to change its accounting policy in Q4 FY13 to better reflect the reality. The company had shifted from accrual based accounting to recognizing income on a mark‐to‐market basis (recognizing income only on loans where Principal and Interest together is in the money after benchmarking it to 95% of the prevailing gold price). This change in policy led to a huge interest reversal and correspondingly a loss being reported in that quarter.

Fall in Gold Prices in H2 FY13 led to further pain

15,000

20,000

25,000

30,000

35,000

Mar‐2010

Sep‐2010

Mar‐2011

Sep‐2011

Mar‐2012

Sep‐2012

Mar‐2013

Sep‐2013

Mar‐2014

Sep‐2014

Mar‐2015

(Rs/10gm) Gold Price

fall in gold prices led to huge interest reversals


Growth collapses, operating metrics deteriorate A confluence of all these factors led to AUM de‐growing sharply from Rs. 11,631 cr in FY12 to Rs. 8,163 cr in FY14. A sharp fall in AUM led to the opex/AUM ratios jumping from 5.7% in FY12 to as high as 7.7% in FY14 as branches started becoming less productive. Correspondingly, AUM/Branch fell to as low as 2.8cr in FY14 from 4cr in FY12. The fall in gold prices also witnessed Gross NPL levels rising from Rs. 63 cr in absolute terms in FY12 to Rs. 100cr in FY14, thereby pushing up credit costs as well during this period. Manappuram suffered on most performance metrics, which reflected in their RoAs and RoE dipping from a handsome 4.9% and 25% respectively in FY12 to just 1.9% and 9% respectively in FY14. Times were tough and business almost came down to a trickle.

The company had shifted from accrual‐based accounting to recognizing income on a mark‐to‐market basis

Confluence of all these factors led to AUM de‐growing sharply, leading to the opex/AUM ratios jumping as branches started becoming less productive


5

AUM witnessed 30% de‐growth over FY12‐14 on regulatory tightening

7,549

11,631

9,956

8,163

9,594

0

2000

4000

6000

8000

10000

12000

FY11 FY12 FY13 FY14 FY15

Rs. cr


RoA and RoE collapsed over FY12‐14

14.6

24.8

8.6 9.2 10.6

3.6

4.9

1.7 1.9

2.4

‐

5.0

10.0

15.0

20.0

25.0

30.0

0

0.9

1.8

2.7

3.6

4.5

5.4


%


Off-late, regulations have been eased for the sector The year 2013 marked the end of regulatory tightening; rather, there has been some regulatory easing for gold loan NBFCs since then. In Jan 2014, the maximum LTV has been increased from the then existing 60% to 75% in view of the sharp moderation in growth of the industry as well as to facilitate monetization of idle gold through the organized sector. On the other hand, the LTV for banks was capped at 75% thus putting gold loan NBFCs on a level playing field with them. The stringent norms on producing of original receipts for verification has also been done away with and replaced with that of a sufficient document to establish how the ownership was determined, thus enabling mortgaging of jewellery, which is inherited and whose original receipts cannot be produced.

The year 2013 marked the end of regulatory tightening; rather, there has been some regulatory easing for gold loan NBFCs since then


6

Multiple steps taken by the company to strengthen business Manappuram has made a series of changes to its existing business model to guard off against business risks, increase AUMs, reduce finance costs and improve overall profitability. It has also strengthened its corporate governance standards, which would improve investor confidence. The steps taken to achieve the above are detailed as under.

A) Reduced Gold Loan duration to mitigate gold price volatility risk In June 2014, Manappuram discontinued its earlier product, which was gold loan of one‐year maturity with 75% LTV and introduced new gold loan products having 3 month, 6 month, 9 month and 1 year duration. The maximum LTV offered for the 3‐month product is 75% and for the 1‐year product is 65%. This was to ring‐fence the business from a sharp fall in gold prices. As of June 2015, 95% of the gold loan portfolio consisted of the new book and the entire portfolio would shift to the new loans by the next quarter. We believe these measures are quite effective in ensuring protection against the volatility in gold prices and thereby reduce the levels of auctions. It will also help improve net yields by at least 100bps in the coming quarters. B) Push approach vs automatic pull earlier Manappuram has also made significant efforts in re‐orienting its sales strategy to ensure branch activation. Earlier, when gold prices were rising, there was not much effort required to reach out as customers themselves would walk into the branch to take new loans or secure top‐up on existing loans. However, with tighter regulations and falling gold prices, customer footfalls into the branch started tapering off. Therefore, since Jan 2014, Manappuram has started making strong efforts to reach out to its customers. The distribution network was well incentivized to bring more customers. A result of all these efforts saw the customer base growing yoy for the first time since FY12 to a record high of 1.8mn thus supporting AUM growth. Continued implementation of this strategy will ensure strong customer additions going into the future as well. Branch activation efforts have increased customer base in FY15

1.2

1.6

1.5 1.5

1.8

1

1.2

1.4

1.6

1.8

2


(mn)


In June 2014, Manappuram discontinued its earlier product, which was gold loan of one‐year maturity with 75% LTV and introduced shorter tenure products

Since Jan 2014, Manappuram has started making strong efforts to reach out to its customers.


7

C) Diversifying into non-gold loan synergistic products Manappuram has begun diversifying its business into non‐gold lending products, which is helping in reducing dependence on a single and volatile product. The company initiated this process in Q4 FY15 with the acquisition of Asirvad Microfinance. It acquired Asirvad Microfinance in Feb 2015, an eight‐year old microfinance institution headquartered in Tamil Nadu. At the time of acquisition, the branches were present only in Tamil Nadu, Kerala and Karnataka but Manappuram has quickly expanded the branch network into Madhya Pradesh, Chattisgarh, Punjab, Haryana and Chandigarh with plans to enter Uttar Pradesh, Bihar and Jharkhand in the coming few months. The number of branches as of June 2015 stood at 151. The diversification into multiple geographies is likely to reduce concentration risk while stimulate growth. The credit rating of Asirvad MFI has already gone up three notches from BBB‐ to A‐ post the takeover by Manappuram, which is driving the cost of funding lower. The MFI AUM grew by robust 30% qoq in Q1 FY16 to Rs. 418cr with handsome RoA of 4.4%. We expect the MFI AUM to witness exceptionally strong 80% CAGR over FY15‐18E on the back of rapid expansion into various geographies.

The Mortgage and CV financing AUM are currently contributing less than 1% to total AUM. Both the businesses were started recently and are being scaled‐up at brisk pace through aggressive branch additions. The required investments in key manpower and processes have already made. In a short span of time, the mortgage AUM has reached Rs. 55cr and is poised to grow exponentially in the coming years with focus on rural and semi‐urban regions of South and West India. The target customers will be the low and middle income group and the affordable housing segment. The CV AUM should also witness rapid growth driven by cyclical turnaround in CVs demand. We expect Mortgage and CV AUM to grow at a brisk CAGR of 150% and 165% respectively over FY15‐18. Manappuram expects the share of non‐gold loan portfolio to increase to 25% over the next three years. The efforts in this direction are already visible with the share of non‐gold loan portfolio going up from 0.6% in Q3 FY15 to 5.1% in Q1 FY16. Most of the regional banks largely operating in Southern India have been de‐emphasizing on gold loans resulting in lower competitive intensity for players likely Manappuram. We expect company’s gold loan portfolio to grow at modest pace of 11‐12% pa over FY15‐18, in line with the management guidance of achieving a 10‐15% CAGR. However, overall AUM is expected to grow at a much faster pace of 17% pa over the aforesaid period buoyed by substantial growth in the non‐gold loan portfolio. The share of the latter in the overall AUM is estimated to increase to 17% by the end of FY18.

Diversification process was initiated with the acquisition of Asirvad Microfinance, an eight‐year old microfinance institution

We expect Mortgage and CV AUM to grow at a brisk CAGR of 150% and 165% respectively over FY15‐18

Company’s gold loan portfolio to grow at modest pace of 11‐12% pa

Overall AUM expected to grow at a much faster pace of 16‐17% pa over FY15‐18 buoyed by robust growth in non‐gold loan portfolio


8

Most regional banks shifting focus away from gold loans

3

‐17 ‐19

‐28

‐40

‐30

‐20

‐10

0

10

20

30

Federal Bank Karur Vysya Bank City Union Bank South Indian Bank

(%) Gold Loan Growth (Q1 FY15 ‐Q1 FY16)


AUM to witness CAGR of 17% over FY15‐FY18E Non‐gold loan AUM share in total AUM to increase

going forward

8,155

9,224

10,239

11,467

12,843 8

370 926

1,621

2,593

0

3,000

6,000

9,000

12,000

15,000

18,000

FY14 FY15 FY16E FY17E FY18E

Rs. cr

Gold Loan AUM Others

96.2% 91.7% 87.6% 83.2%

3.8% 8.3% 12.4% 16.8%

0%

20%

40%

60%

80%

100%

FY15 FY16E FY17E FY18E

(%) Gold Loan AUM Others



9

D) Improved credit profile and consolidation of lenders have helped reduce the cost of funds

Manappuram has been able to bring down its cost of funds meaningfully over the past three years on account of certain strategic changes in its borrowing pattern. It consolidated its lenders from the earlier practice of borrowing from a number of smaller banks to now borrowing from a few large banks, who have the ability of offering better rates. In Feb 2014, CRISIL revised the ratings outlook on long term debt instruments and bank facilities from “Negative” to “Stable” while reaffirming the rating at CRISIL A+, thereby adding further impetus to the downward bias of the cost of funds. Further in March 2015, CARE has upgraded the rating assigned to the NCD issue of Manappuram to AA‐ from A+. A better credit rating along with a lower interest rate environment should bode well for continued reduction in cost of funds in the future. We are factoring in a 150bps reduction in cost of funds from FY15 to FY18E. E) Steps taken to improve corporate governance Manappuram has witnessed positive developments on the corporate governance front as well in the past couple of years. Company inducted Mr. Jagdish Capoor as a separate non‐executive Chairman in 2013. Mr. Jagdish Capoor is a well renowned name in the financial services sector having worked in the past as the Deputy Governor of the RBI and Chairman of HDFC Bank. The appointment of the top reputed auditors (internal and statutory auditors are amongst the Big 4) also ensures that company adheres to strong accounting practices and financial disclosures. The presence of big private equity investors on the Board is helping in formulation of a prudent business strategy, improving corporate governance and resilient performance on profitability.

Manappuram has been able to bring down its cost of funds meaningfully over the past three years

Multiple steps to improve corporate governance include inducting Mr. Jagdish Capoor as a non‐executive Chairman and appointment of top auditors

Cost of funds has persistently trended lower Borrowing mix heavily tilted towards bank borrowing

13.4

12.9 13.0

13.4 13.0

13.1

13.0

12.7

12.6

12.4

12.2

12.0

11.6

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

Q1 FY13

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

%

79%

11%

6%

4%

Bank Finance

NCDs

Commercial Paper

Subordinated Bond



10

Acceleration in AUM growth to help lower Opex/AUM ratio Manappuram has a huge pan‐India branch network of 3,293 branches. In FY12, the company had achieved an average AUM/branch ratio of Rs. 4cr which declined substantially to Rs. 2.7cr in FY15 due to the steep fall in AUM. Company’s effort on branch activation has already started to drive growth in pledged gold stock in existing branches. As this continues, the gold loan AUM per branch should improve materially over the next three years. With planned negligible addition to the branch network, the Opex/AUM ratio should also gradually trend down manifesting the benefits of operating leverage.

The gold loan AUM per branch should improve materially over the next three years

Average AUM/Branch off the 2012 highs, indicating scope for huge operating leverage

No branch addition over the past three years

2.5

4.0

3.3

2.8 2.7

1.5

2.2

2.9

3.6

4.3


2,064

2,908

3,295 3,293 3,293

0

600

1200

1800

2400

3000

3600


(no)


Sluggishness in AUM over FY12‐14 led to opex/AUM inching up

Opex to AUM to steadily drop from current levels as AUM picks up

6.7

6.2 6.1

6.8

7.2

7.3

8.0 8.5 8.4

7.8

7.7

7.5

8.1

0.0

1.5

3.0

4.5

6.0

7.5

9.0

Q1 FY13

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

%

one‐offs due to increase in std. asset prov

7.7

7.6 7.7

7.4

7.1

6.8

7.0

7.2

7.4

7.6

7.8

FY14 FY15 FY16E FY17E FY18E

%



11

NIMs to broadly remain steady over the FY15-18E NIMs have been showing an improving trend since FY13 on the back of lower cost of funds. We expect yields to come‐off going forward owing to competitive pressures and partial transmission of lower cost of funds to the customers. In the near term, the portfolio yield could improve on reduction in the quantum of auctions. We estimate NIMs to inch up marginally to 12.6% in FY16E and then correct gradually in the subsequent two years.

NPL levels to increase on shift to early recognition Asset quality is presently at comfortable levels as it takes just 2‐3 months for the auctioning process as compared to six months for NPL recognition. NPL levels are, however, expected to increase with the shift in NPL recognition to 90 days by FY18 from the current 150 days recognition that Manappuram follows. We expect Net NPLs to inch up to 1.6% from 1% in FY15. Credit costs are also likely to go up as Manappuram will have to increase the standard asset provisioning to 0.4% by FY18 from 0.25% in FY15. It has already shifted to 0.3% in Q1 FY16, thereby resulting in a one‐time provision increase of Rs. 5cr. We have modeled credit cost to double to 60bps in FY18 from FY15 levels.

We estimate NIMs to inch up marginally to 12.6% in FY16E and then correct gradually in the subsequent two years

Net NPLs to inch up to 1.6; credit cost likely to go up also on increase in SA provisioning

Net yields broadly in a range of 22‐24% NIMs to tread in a stable range going forward

27.4

23.8

23.2

12.4

24.1

23.3

23.7

21.6 22.2

24.1

23.4

22.3

22.3

10.0

15.0

20.0

25.0

30.0

Q1 FY13

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

%

impact of changein accounting

policy

13.1

9.5

11.9

12.5 12.6 12.5 12.2

8

9

10

11

12

13

14

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

(%)


Asset quality is comfortable as auctioning happens before NPL recognition

Shift to 90‐day recognition policy will increase NPL levels

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.0

0.3

0.6

0.9

1.2

1.5

FY12

FY13

FY14

FY15

%

Credit Cost (RHS) Gross NPL Net NPL

1.2

1.4

1.7

2.0

1.0

1.2

1.4

1.6

0.0

0.5

1.0

1.5

2.0

FY15 FY16E FY17E FY18E

(%)Gross NPL Net NPL



12

RoA to gradually improve; capital utilization to boost RoE RoA has moderated from a super‐normal level of 5% in FY12 to a sub‐optimal level of 2.4% in FY15. The reported RoAs in MFI and Mortgage businesses for Q1 FY16 stood at 4.4% and 2.5% respectively. Operating leverage should drive RoA higher in the gold loan business while the profitability of other products is expected to remain stable. Thus, overall RoA of the company is expected to move towards a healthy range of 2.5‐3% in the longer run. Manappuram has a very strong capital adequacy of 25% as of Q1 FY16, which is well above 15% mandated by RBI. The capital utilization coupled with RoA improvement would push RoE higher. We expect RoE to improve to 14% by FY18E from the present level of 10%. Valuation attractive for long term investors All the measures taken by Manappuram in the recent past to turnaround its business prospects are extremely positive and should enable the company to deliver healthy earnings CAGR of 17% over FY15‐18E. Improving return ratios, brisk earnings growth, high dividend yield of ~8% and low valuation make Manappuram a lucrative investment for long term investors. We believe that current stock valuation of 0.6x FY18E P/ABV factors exaggerated impact in case of sharp gold price fall. Re‐initiate coverage with 12m target of Rs. 35.

High dividend payout translating to handsome yield

1.20

1.50 1.50

1.80 1.80

1

1.2

1.4

1.6

1.8

2


(Rs)

DPS translates to a dividend yield of 8% on the CMP


Operating leverage should drive RoA higher in the gold loan business while the profitability of other products is expected to remain stable

The capital utilization coupled with RoA improvement would push RoE higher

Improving return ratios, brisk earnings growth, high dividend yield of ~8% and low valuation make Manappuram a lucrative investment

RoA to improve driven by operating leverage RoE to increase on improving RoA and capital utilization

1.7

1.9

2.4 2.5

2.5 2.6

1.5

1.8

2.1

2.4

2.7

3

FY13 FY14 FY15 FY16E FY17E FY18E

(%)

8.6

9.2

10.6

11.5

12.8

14.0

8

9

10

11

12

13

14

15

FY13 FY14 FY15 FY16E FY17E FY18E

(%)



13

Financials Income statement Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Income from Operations 1,986 2,252 2,558 2,917

Interest expense (878) (940) (1,047) (1,172)

Net interest income 1,109 1,311 1,512 1,745

Non‐interest income 7 8 9 11

Total op income 1,116 1,319 1,521 1,756

Total op expenses (674) (796) (899) (1,016)

Op profit (pre‐prov) 441 524 622 740

Provisions (28) (54) (70) (86)

Exceptional Items 0 0 0 0

Profit before tax 413 469 553 654

Taxes (142) (160) (188) (222)

Net profit 271 310 365 432

Balance sheet Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Equity Capital 168 168 168 168

Reserves 2,465 2,597 2,785 3,039

Shareholder's funds 2,633 2,765 2,953 3,207

Minority Interest 15 23 35 52 Pref shares in subsidiary held by Minority shareholders 5 5 5 5

Long‐term borrowings 1,642 1,929 2,257 2,641 Other Long‐term liabilities 109 109 109 109

Long term provisions 1 1 1 1 Total Non‐current liabilities 1,752 2,039 2,367 2,751

Short Term Borrowings 5,300 6,227 7,286 8,524

Trade payables 26 26 26 26

Other current liabilities 1,835 2,156 2,523 2,951

Short term provisions 50 50 50 50

Total Current liabilities 7,211 8,460 9,885 11,552

Total Equities and Liabilities 11,616 13,292 15,245 17,568

Assets

Fixed Assets 207 227 250 275

Non‐current investments 5 5 5 5

Deferred tax assets (Net) 31 31 31 31 Non‐current Recievables under Financing 0 0 0 0 Long‐term loans and advances 158 183 219 263

Other non‐current assets 148 148 148 148

Total Non‐current assets 548 594 653 722

Current Investments 212 212 212 212

Cash and cash equivalents 793 845 781 653 Short‐term loans and advances 9,465 10,982 12,874 15,184

Other current assets 599 659 725 798

Total Current assets 11,068 12,698 14,592 16,847

Total Assets 11,616 13,292 15,245 17,568

Key ratios Y/e 31 Mar FY15 FY16E FY17E FY18E

Growth matrix (%)

Net interest income 3.2 18.3 15.3 15.4

Total op income 2.8 18.3 15.3 15.4

Op profit (pre‐prov) 13.2 18.6 18.8 18.9

Net profit 20.0 14.2 17.7 18.4

Advances 16.7 16.0 17.2 17.9

Borrowings 10.6 17.5 17.0 17.0

Total assets 7.2 14.7 14.9 15.4

Profitability Ratios (%)

NIM 12.5 12.6 12.5 12.2

Non‐int inc/Total inc 0.6 0.6 0.6 0.6

Return on Avg Equity 10.6 11.5 12.8 14.0

Return on Avg Assets 2.4 2.5 2.5 2.6

Per share ratios (Rs)

EPS 3.2 3.7 4.3 5.1

Adj.BVPS 30.2 31.3 33.0 35.3

DPS 1.8 1.8 1.8 1.8

Other key ratios (%)

Loans/Borrowings 109.6 108.3 108.5 109.4

Cost/Income 60.4 60.3 59.1 57.9

CAR 25.7 24.6 22.3 20.4

Tier‐I capital 25.1 23.6 21.3 19.4

Gross NPLs/Loans 1.2 1.4 1.7 2.0

Credit Cost 0.3 0.5 0.6 0.6

Net NPLs/Net loans 1.0 1.2 1.4 1.6

Tax rate 34.4 34.0 34.0 34.0

Dividend yield 8.2 8.2 8.2 8.2

‘Best Broker of the Year’ – by Zee Business for contribution to brokingNirmal Jain, Chairman, IIFL, received the award for The Best Broker of the Year (for contribution to broking in India) at India's Best Market Analyst Awards 2014 organised by the Zee Business in Mumbai. The award was presented by the guest of Honour Amit Shah, president of the Bharatiya Janata Party and Piyush Goel, Minister of state with independent charge for power, coal new and renewable energy.

'Best Equity Broker of the Year' – Bloomberg UTV, 2011IIFL was awarded the 'Best Equity Broker of the Year' at the recently held Bloomberg UTV Financial Leadership Award, 2011. The award presented by the Hon'ble Finance Minister of India, Shri Pranab Mukherjee. The Bloomberg UTV Financial Leadership Awards acknowledge the extraordinary contribution of India's financial leaders and visionaries from January 2010 to January 2011.

'Best Broker in India' – Finance Asia, 2011IIFL has been awarded the 'Best Broker in India' by Finance Asia. The award is the result of Finance Asia's annual quest for the best financial services firms across Asia, which culminated in the Country Awards 2011

Other awards

2012BEST BROKING HOUSE WITH

GLOBAL PRESENCE

2009, 2012 & 2013BEST MARKET

ANALYSTBEST BROKERAGE,

INDIAMOST IMPROVED,

INDIABEST BROKER,

INDIA

2009FASTEST GROWING

LARGE BROKING HOUSE

Recommendation parameters for fundamental reports:

Buy – Absolute return of over +15%

Accumulate – Absolute return between 0% to +15%

Reduce – Absolute return between 0% to ‐10%

Sell – Absolute return below ‐10%

Call Failure ‐ In case of a Buy report, if the stock falls 20% below the recommended price on a closing basis, unless otherwise specified by the analyst; or, in case of a Sell report, if the stock rises 20% above the recommended price on a closing basis, unless otherwise specified by the analyst

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