YES Securities is bullish on Manappuram Finance has recommended buy rating on the stock with a target price of Rs 225 in its research report dated July 29, 2020.
YES Securities' research report on Manappuram Finance
Q1 FY21 was a mixed bag for MGFL wherein the dismal performance by non-gold loan businesses (CV, MFI and Housing Finance - 30% of AUM) was covered-up by improved profitability in the mainstay gold loan business. Earnings in the gold loans business were strong, driven by healthy value-led AUM growth (4.5% qoq/33% yoy), substantial shift towards on-line gold loans (63% of book) and sustained cost reduction. However, 4-5% qoq decline in gold holdings and active customer base was disappointing. In MFI business (20% of AUM), loan portfolio contracted 8% qoq with improved collections in June (55%) and no disbursements. The subsidiary reported a loss despite cost reduction due to absence of assignment income and higher provisions (Rs750mn for Covid - total at 2.4% of FY20 book). Collection in July has improved to ~70%. In vehicle finance (5% of AUM), AUM declined by 6% qoq. Gross NPLs spiked further in Q1 FY21 to 10% and significant provisions were made to contain Net NPLs at 4%. Collection recovered to 75% in June; expected at 85% in July. Collections in housing finance (2.5% of AUM) improved to 80% in July and moratorium in NBFC portfolio is negligible. Management commentary on growth - a) demand for gold loans is down 20-25% b) limited benefit of gold price rise as customers are curtailing pledged quantity or taking lower exposure (portfolio LTV fell to 57%), c) no notable increase in competition from NBFCs/Banks.
Outlook
We Retain BUY. See MGFL reporting strong profitability in coming quarters despite elevated provisioning, driven by tailwinds in gold loans business. Notwithstanding stock’s recent outperformance, valuation is still inexpensive at 1.8x FY22 P/ABV in context of high profitability and capitalization.
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