Manappuram Finance - Near-term earnings to remain under pressure - Religare

We recently interacted with the MGFL management. While the company remains confident on underlying demand, near-term growth is likely to disappoint on funding challenges. NIMs could remain under pressure in Q3FY13 as well due to re-pricing of high LTV loans. We cut our FY13/FY14 earnings estimates by 8%/10% due to lower NIMs and AUM growth. While valuations are inexpensive at 0.9x FY14 BV, higher growth visibility and NIM stability would be the key for re-rating. Maintain HOLD.

- AUM could decline in Q3FY13: As per the management, the company continued to face funding challenges in November and early December. Consequently, disbursements are unlikely to pick up significantly in Q3FY13. While some improvement in bank borrowings is seen in the last few weeks, AUM could still decline in FY13. We remain confident on the underlying demand potential for gold loans for niche NBFCs like MGFL given the lower organised penetration among low-income households. We expect loan growth to pick up in FY14 to 18-20%.

- NIMs could fall marginally in H2FY13: MGFL reported a sharp 250bps NIM compression in Q2FY13 due to re-pricing of high LTV loans which were disbursed at higher rates. While lower cost of funds is positive for NIMs, we expect NIMs to still drop by ~50bps in Q3FY13 (and stabilise in Q4FY13) due to further re-pricing of its high-yielding portfolio (only 60-70% of portfolio has been re-priced till Sep'12).

- In-expensive valuations to limit downside but we wait for more clarity on profitability: MGFL's ROEs are likely to decline from 27.5% in FY12 to 18% in FY13 and 17% in FY14. We believe that a pick-up in credit growth is the key for improvement in ROEs as the business has a high operating leverage. While absolute downside from current levels is limited given the healthy underlying demand and strong asset quality, a pick-up in growth and stability in NIMs are imperative for any significant re-rating. Maintain HOLD with a TP of Rs 38 (1.0x FY14 BV).

Source : Equity Bulls

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