Manappuram Finance - Under Review - Edelweiss

Manappuram Finance (MGFL) dealt a severe blow to the Street by guiding for much higher stress of INR15bn (loans expected to be auctioned) in Q4FY13/Q1FY14 vis-à-vis INR4bn guided earlier. This will lead to auction under-recoveries of INR2.4bn vis-a-vis INR0.5bn guided earlier. Ergo, the company now stands to post a loss in Q4FY13 contrary to its February 2013 guidance of INR0.9bn profit. Higher auction under-recoveries reflect MGFL's aggressive underwriting policies in Q2/Q3FY12 and its business model's vulnerability to even slight moderation in gold prices. We cut FY13/14E earnings by 40%/34% and remain wary of growth (due to likely funding constraint) and further earnings pressure as stress/under-recoveries will be a function of gold prices. Given management's continuous downward guidance revision and selective disclosures issue, we put our rating 'UNDER REVIEW'.

Aggressive underwriting, delayed auctions spur stress

INR20bn stress (INR3.6bn auctioned in Q3FY13, INR5bn lined up for Q4FY13 and balance over Q1FY14) emanates from the Q2/Q3FY12 disbursements when it loaned gold at 85% plus LTVs at 24-26% yield (INR200bn of which ~10% is already under stress). Later, RBI regulations capping LTV at 60% virtually stopped the roll over culture and the fair practice code delayed auctions by six-nine months. This led to receivables (principal + interest) being higher than the realisable value of the collateral as it continued to accrue income. Auction under-recovery is 10-15% (refer table 1 & 2). Gold price slipping below INR2,750/gram (22k) could further muddy the waters.

Outlook and valuations: Highly vulnerable; 'UNDER REVIEW'

Since stabilisation or slight moderation in gold prices over the past three months, MGFL has disappointed the Street with higher-than-expected stress/under-recoveries, an outcome of its aggressive underwriting policies. Making charges included in value for LTV calculation have limited sanctity given the reported under-recoveries. Current lending at INR2,150/gram at 22% yield leads to an obligation of INR2,620/gram over a year, leaving a paltry 5% cushion in gold price dip. In light of its business model's vulnerability topped with management's continuous downward revision in guidance and selective disclosures issue, we put our recommendation 'UNDER REVIEW'.

Source : Equity Bulls

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