Manappuram Finance - FY13: A year of consolidation - Edelweiss

Manappuram Finance's Q4FY12 PAT of INR1.87bn came ahead of our expectations driven by: 1) NIM (calc) expansion of ~100bps QoQ to 16% even while cost of borrowing increased 130bps as disbursements were channelled towards high yielding products; 2) opex decline of 13% QoQ, bringing down Opex/Assets to 5.4% (6.3% in Q3FY12); and 3) almost nil credit costs. Considering the tough operating environment for the company February 2012 onwards (due to fund raising issues post regulatory action in Manappuram Agro), disbursements, AUM, gold stock and number of customers declined 47%, 6%, 6% and 1% QoQ to INR55bn, INR116bn, INR65.6mn and INR1.6mn. This was, however, expected given funding constraints. We believe regulatory actions will keep growth and return ratios muted as the business undergoes consolidation. Driven by Q4FY12 NIM and Opex performance we upgrade FY13E PAT by 7%.

AUMs and disbursements decline on expected lines

Post the regulatory backlash for accepting public deposits on behalf of Manappuram Agro (a promoter related entity) from Manappuram Finance branches in February 2012, the company went slow on incremental disbursements. This reflected in a 47% QoQ decline to just INR54.5bn, pulling down AUMs 6% and business/branch by an even higher 11% to INR39.6mn. Going forward, we believe AUM growth will be muted as disbursements adjust from 75% LTV of pre regulatory rigmarole era to the 60% LTV cap now. We are building in marginal growth of 10% in AUM in FY13 considering it being a consolidation phase, with growth returning to 20% levels once the situation stabilizes. A silver lining will be newly added branches, which will scale up. Of the 2908 branches currently, 30% have been added over the past one year.

Outlook and valuations: Consolidation ahead; maintain 'HOLD'

Recent regulations have materially altered the return dynamics of the business. Even though the model retains substantial merit (being a strong player in the niche business of collateralized lending), return ratios will be muted over FY13-14E as the business undergoes consolidation. We expect ~3.5%/18% on RoA/RoE, driven by AUM growth at 16% CAGR over FY13-14E. We remain watchful of how gold financiers manage recent regulatory change and the RBI constituted KUB Rao Working Group's report on gold loan companies expected by July 2012. We maintain HOLD with target price of INR 28.

Source : Equity Bulls

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