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Research
Manappuram Finance - Risk-reward favourable; upgrade to BUY - Religare
Posted On : 2013-09-11 21:37:10( TIMEZONE : IST )
We upgrade MGFL to BUY (from HOLD) with a TP of Rs 25/sh (0.8x FY14 BV). In our view, the sharp increase in gold prices has mitigated asset quality risks. Moreover, lower LTVs originated in the last 12 months will reduce credit costs from Q4FY13/Q1FY14 levels. While the company's AUM growth will remain subdued in the near term, the long-term demand potential remains intact. Valuations are cheap at 0.55x FY14 BV given the likely improvement in ROEs to 13% by FY15 and dividend yields of 9%.
Asset quality risks much lower: MCX gold prices have increased from a low of Rs 2,518/gram on 28 Jun'13 to Rs 3,048/gram on 10 Sep'13. Current prices are above the FY13 avg. gold prices of Rs 3,012/gram. We also note that LTVs of gold loan portfolios originated in FY13 are low at 60-75%, and gold loan NBFCs have sharpened focus on loan and interest recovery. MGFL's credit costs were high at 5% of average AUM in the last two quarters due to higher NPLs/interest income reversal. While interest income reversal (due to a change in accounting norms) will continue, higher gold prices should restrict overall credit losses to 2.5-3.0% of AUM.
AUM growth to revive from H2FY14; NIMs to improve from Q1FY14 levels: While lower disbursements could lead to an AUM decline in Q2FY14, we remain positive on the long-term growth potential of gold loans - a function of emergency funding requirements (and not gold prices). We expect MGFL's Mar'14 AUM to stay at Jun'13 levels of Rs 92bn and grow at a 15% CAGR over FY14-FY16. As per our discussion with management, liquidity is comfortable and MGFL's unutilised credit lines can be used for growth. NIMs are likely to improve from 12% in Q1FY14 to ~13% in FY14 on lower incremental provisions for interest income reversal.
Risk-reward favorable: While a sharp correction in gold prices remains a risk, we believe that lower LTVs and an enhanced focus on early collection of interest should reduce credit risks in the long term. Regulatory risks too have come down post the KUB Rao Committee recommendations, Upgrade to BUY.
