[T.S.R:18325] Manappuram Finance-Golden Opportunity (Edelweiss)

EdelCap

Manappuram Finance-Golden Opportunity

Use the dip to back-up and fill in the truck. At FY12 e EPS of Rs 7 and Cum Dividend 0.50 p share till Feb14, this is the cheapest NBFC available in the market.

Key takeaways

With respect to deposit issue raised by RBI, management clarified that after being classified as a non-deposit taking NBFC in 2011, Manappuram Finance

(Manappuram) has not been issuing any public deposit and pending public

deposits of INR12.5mn was lying in escrow with PNB. RBI has raised an issue with respect to INR3mn issued by Manappuram Agro Foods and it will issue clarification in this respect.

The company will be more focused on RoA profile. It will pass on operating leverage and funding cost benefit to customers in terms of lower yields to be equally competitive.

Management is maintaining its guidance of INR135bn-140bn AUM by FY12 driven by improved productivity of branches added in the past one year and

disbursements per branch can be ramped up to INR50mn as branches mature.

It terms of customer profile, ~30% of gold loans used for agri, 14% as bridge loans for housing, 10% to education and marriage each and 15% to working capital needs.

Average LTV is 71%; minimum is 50% and maximum is 85%. If there is a decline in gold prices, customers may probably shift to higher LTV products thereby protecting yields to some extent.

Investment conclusion

While we remain positive on its niche business model of collateralised lending, generating RoEs of 4% plus, we believe RoEs will be vulnerable to increased competition, margin pressure, volatility in gold prices and most importantly, regulatory risk.

Key risks

Competition intensity in gold loan financing is bound to rise . Demand and asset quality of gold loans is susceptible to price fluctuations of underlying collateral (gold).

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