Buy Manappuram Finance; target of Rs 225: YES Securities

YES Securities' research report on Manappuram Finance

MGFL delivered stronger-than-expected earnings performance in Q2 FY21 driven by sustained strong growth momentum in gold loans (flat tonnage qoq was a better show than the larger peer), funding cost decline and portfolio mix shift led margin expansion and lower-than-expected provisions (management’s expectation of sustained improvement in collection efficiency in non-gold businesses). However, we see the billing collection trends (w/o arrears and foreclosures) in MFI and CV portfolio as being weaker than peer companies in these segments. Thus, we retain our conservative loan loss outcomes in microfinance (7.5%), vehicle finance (6%) and housing finance (4%) businesses. Notwithstanding this, we estimate MGFL to deliver 5% RoA in the current year on the back of solid profitability in gold loans.

Outlook

As credit cost would be much lower in non-gold segments during FY22, the consol. RoA could climb above 5.5%. RoE delivery would be sturdy at 24-25% in FY21/22 with improving capitalization levels (AUM growth substantially lower than RoE). In this context, stock’s valuation is attractive at 1.6x P/ABV and 7x P/E on our FY22 estimates. Re-iterate BUY with an unchanged 12m TP of Rs225.

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