Manappuram Finance - Takeaways from meeting with management - Ambit

MGFL's net profit had declined 22% QoQ in 3QFY13 in the wake of income reversal of ~Rs390mn due to the realizable value of the collateral (gold pledged) being lower than the principal plus accrued interest. Given that gold prices have fallen further by 5% over the last two months, we met Mr Unnikrishnan, ED of Manappuram Finance, to understand the impact of the gold price fall on the interest reversal going forward. Following are the key takeaways from the meeting:

Interest rate reversal could be higher than earlier guidance: During 3QFY13 earnings conference call management had guided towards further under recoveries of ~Rs400-500mn spread over 4QFY13 and 1QFY14 on the higher LTV portfolio originated between Aug'11-Jan'12. However, with gold prices falling by a further 5% over the last two months, the quantum of interest income reversal could increase vs the earlier guidance given by management. Moreover, on some portions of the loan portfolio originated in Nov-Dec'11 the company seems likely to have to stop booking income during the current quarter as the collateral value associated with these loans would be less than principal plus accrued interest.

The portfolio originated between Aug'11-Jan'12 is a source of concern: Before the company started originating loans at ~60%-75% LTVs from Feb'12 onwards (in the wake of the RBI capping LTVs at 60%), a sizeable part of the loans originated between Aug'11-Jan'12 were at 85% LTVs. Around 5%-10% of such loans are still to be repaid. With gold prices remaining flat between 2HFY12 to the current period, the collateral value associated with these loans look likely to be less than the principal and accrued interest hitting the profitability of the company in both 4QFY13 and 1QFY14.

All of that being said, once this legacy portfolio is out of Mannapuram's book, such instances of income reversal should not recur due to lower LTVs and lower interest rates on the loans issued post Feb'12 (unless gold prices fall by more than 10% within a year).

Where do we go from here? While interest income reversals are a part of the gold lending business (because of the agreed tenure of the loans being ~12months and bullet payment nature of the repayments), it's impact has historically not been visible in MGFL's profitability because: (i) the loan book was doubling every year and hence the disbursals made a year ago were a smaller part of the total loan book; (ii) gold prices were rising rapidly and hence were enough to cover the principal and the accrued interest despite higher LTVs; and (iii) the auctioning process was relatively easy for the company (as there were no RBI restrictions applied to the auctioning process).

However, over the past year, MGFL's loan book has been declining (in the wake of the company trying to adjust to the new LTV restrictions imposed by the RBI), gold prices have stagnated, and the RBI has made auctioning more cumbersome. This triple whammy has resulted in the impact of interest income reversals becoming more pronounced.

Given that interest reversal/interest lost on the loan portfolio originated prior to Feb'12 is expected to be higher than earlier estimates, we put our earnings estimates and valuation under review as we try to get further colour from the management on the extent of possible income reversal going forward and the steps taken by the management to improve its risk management practices.

Source : Equity Bulls

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