[T.S.R:17146] Manappuram Finance-Road To Eldorado

Whilst the recent RBI clarification removing gold loans from the priority sector will decrease funding for the sector, we are positive on the long term prospects of gold loan NBFCs because of: (i) the unavailability of formal debt finance for a large part of the Indian population and the abundant availability of gold as collateral; (ii) the quick and hassle free loan delivery provided by NBFCs vs banks; and (iii) the increasing reach and acceptability of this form of finance. Manappuram is the best play on this theme given its branch strength, strong brand name, well developed gold appraisal skills and strong risk management. We initiate with a BUY. 

Despite short term funding concerns, our positive stance on the sector and the main NBFC in this segment Manappuram is driven by: 

Demand of credit and availability of collateral:

India's credit:GDP ratio is one of the lowest globally at ~4% due to the unavailability of formal banking services for a large part of the population. Banks and NBFCs have tried to tap into this potential in the past by offering unsecured personal loans but thoseinitiatives did not succeed due to heavy defaults on these portfolios (even in benign economic conditions). Loans against gold jewelry have therefore emerged as a major alternative to tap this latent credit demand as Indians have about 18K tones of gold (~10% of total world gold stock) mostly in the form of jewelry worth ~$800 bn.

Increasing market share of NBFCs:

Whilst the total estimated gold loan market is ~$50-60 bn, the entire organized lending sector put together has only ~25% market share in this business and specialized NBFCs have ~8% market share in this business. We expect the market share of NBFCs to grow further at the expense of banks and moneylenders as: (i) NBFCs have quick and hassle free loan delivery vs banks because of their specialized gold appraisal skills; (b) NBFCs charge lower interest rates and have a better image than moneylenders; and (c) NBFCs are acquiring a new set of borrowers via the rapid expansion of branches and heavy advertising fronted by well known movie stars.

Initiate with a BUY on Manappuram (MGFL.IN, $1.0 bn mkt cap, 36% upside): Whilst the recent RBI clarification removing gold loans from the priority sector is likely to impact the growth and NIMs of Manappuram, the company has adequate sources of funding to grow its loan book at a healthypace of ~38% CGAR between FY11-13 and maintain its ROAs (as an improvement in operational efficiency would largely mitigate the adverseimpact of NIM compression). Over the last 2 months the stock price has corrected by ~45% from its peak and at 1.9x FY12 P/BV we believe that all thenegatives are priced in. We initiate with a BUY.

External factors are the major risks: A sharp decline in gold prices by 40% or more (similar to what happened in the early 1980s) and further regulatory and political intervention are the major risks for the sector and for Mannapuram.
 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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