Manappuram Finance - 3QFY13 results - Income reversal hits profitability - Ambit

Results overview: Manappuram Finance's 3QFY13 net profit declined 22% QoQ and 48% YoY to Rs844mn, 21% below our and consensus estimates. The QoQ decline in net profit was entirely driven by a 14% QoQ decrease in net interest income, which was the result of a ~150bps QoQ compression in NIMs. A ~100bps decrease in the lending yields was the primary driver behind the drag on NIMs. The management attributes the decline in lending yield to interest income reversal of ~Rs350mn during the quarter on a delinquent loan portfolio, where the proceedings from the auction of jewelry was not enough to cover the principal and accrued interest on this portfolio (a shortfall of R350mn); the management expects another hit of ~Rs350mn during the next quarter from this legacy portfolio.

The loan book further declined by ~3% QoQ to ~Rs100.3bn, and the cost of funds further increased by ~20bps during the quarter to ~13.05%, because the pressure on the liability side continued. However, operating efficiency further improved during the quarter, with operating expenses declining by 6% QoQ and the opex/average loans ratio declining by ~24bps during the quarter to 5.54%.

Where do we go from here? Rather than the extent of the negative earnings surprise, it is the source of negative surprise (i.e. interest income reversal) which is slightly out of order and needs further explanation from the management. We may reduce our earnings estimates by 5%-10% which could result in similar reduction in our target price for the company post our discussions with the management. However, we would maintain our BUY stance on the stock, because at 1.3x current BVPS, the risk-reward is favourable. Despite the pressure on lending yields, the company has the potential to deliver RoEs of 18-20%, once the liability side eases and loan growth returns. Note that Manapurram Finance's (MGFL) current cost of borrowings is ~200bps higher than similar sized NBFCs, and its opex-to-averageasset ratio at ~5.6% is around ~170bps higher than its competitor Muthoot Finance due to lower loans per branch. In addition, MGFL has a low financial leverage of only 4.8x as at 3QFY13. Moreover, yesterday's final report on gold loan NBFCs published by the RBI is incrementally positive for the company. The Committee has recommended cheque transactions and PAN card requirement for loans above Rs0.5mn (vs Rs0.2mn in the draft report) and has asked the RBI to look at opening alternative sources of borrowings (securitisation, ECB borrowings, etc.) for gold loan NBFCs. Our earnings estimates and target price in this note are our last published estimates on the stock.

Other key takeaways from the results

- Added ~100 branches during the quarter, taking its total branch count to 3,140.

- Further reduced its employee count by 500 people during the quarter, thereby completing the rationalisation of its employee base.

- Raised ~Rs3.2bn during the quarter through privately placed debentures and this is the first instance over the past one year during which the company has been able to raise liabilities other than the banking system.

Source : Equity Bulls

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