Manappuram:** (MGFL IN, mcap US$1.0bn, BUY)*
*Pankaj Agarwal, CFA,
*Whilst the decline in gold prices can impact both the credit quality and
growth of gold loan companies, our analysis suggests that the impact is not
as linear as the ongoing fall in stock prices are factoring in. This is
because:*
- The average loan-to-value (LTV) of the Manappuram loan portfolio is
70%. Hence the chances of willful default are relatively low as the
borrower is incentivised to pay up and reclaim his jewellery.
- Manappuram calculates LTV without including the value of the precious
stones embedded in the jewelry. Including the value of stones and taking
account of making charges makes it even less likely that borrowers will
willfully default on a loan.
- Manappuram offers loan against jewellery, which households have used
for some time and to which the borrower usually has an emotional
attachment. This further reduces the chances of willful default.
- The average tenure of the loan is ~4 months, so the gold prices have
to decline very rapidly for the borrower to be out of the money and
willfully default on the loan.
Therefore, we expect credit quality trends for Manappuram to remain stable
unless there is a sharp correction (of more than 20% in the gold prices in
rupee terms over the next three months). However, gold prices have never
fallen more than 20% within three months in rupee terms in the past due to
the inverse correlation between international gold prices and the INR/USD
exchange rate. Our sensitivity analysis based on the LTV breakup and
repayment pattern of Manappuram's portfolio shows that if we assume a worst
case scenario of a 40% fall in the gold prices within three months (this
sort of correction has never occurred in rupee terms and has taken place
only once in dollar terms), and we assume all the gold loan borrowers to be
opportunistic borrowers who would default if they are out of the money
(which is not the case looking at ticket size per customer), the total
write-offs after recoveries could be ~4.0% of the portfolio, which could be
absorbed by a year's earnings as the company's RoA is ~4.5%.
We continue to highlight Manappuram as the best play in the NBFC space
given it is least impacted by: (i) proposed regulatory changes on
securitisation, priority sector status, higher capital requirement and
tougher NPA recognition norms; (ii) slowing macro demand and rising cost of
funds, as it demonstrates sustained growth momentum in an asset class which
is rate agnostic at sustained margins and RoAs. We maintain our BUY stance
and target price of Rs72 (22% upside, implied valuation of 2x FY13 BVPS and
9.2x FY13 EPS).
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