Manappuram General Finance & Leasing - Initiating Coverage 14dec09

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Initiating Coverage 14 December 2009

Initiating Coverage 14 December 2009
NBFC – Positive
CMP TARGET RATING RISK

Manappuram General Finance & Leasing
Rs 573 Rs 682 BUY MEDIUM
Tapping into a golden opportunity
Manappuram General Finance & Leasing (MAGFIL) operates in the niche business
of lending against gold collateral, primarily to low-income customers. Its client
profile and niche expertise support higher interest rates, resulting in best-in-class BSE NSE BLOOMBERG
margins of 13–15% and an ROE of 30–35%. MAGFIL’s ongoing expansion drive 531213 NA MGFL IN
will help it tap into the large section of Indians not considered ‘bank-worthy’, but
who own the gold assets necessary to secure small loans. We expect its AUM to
triple to Rs 59bn by FY12 as its distribution network expands. With a model that
is scalable and highly profitable, we initiate coverage on MAGFIL with a Buy. Company data
Loans backed by gold tailor-made for India: Access to affordable credit services Market cap (Rs mn / US$ mn) 9,913/213
by India’s low-income segment remains limited, as small-ticket loans entail higher Outstanding equity shares (mn) 17.3
operating costs and a higher perceived risk. Lower income households are still Free float (%) 55.2
heavily dependent on moneylenders who charge exorbitant rates. Substitution of Dividend yield (%) 0.7
these loans with gold-based lending by NBFCs holds tremendous potential due to 52-week high/low (Rs) 689/97
the safety of gold as collateral and large accumulated gold stock among Indians 3-month average daily volume 12,223
households. MAGFIL is a key player in this segment with strong expertise and
credibility in loan disbursal and jewellery valuation, particularly in South India.
Robust AUM growth to continue: The Manappuram group (MAGFIL and sister
Stock performance
company MAFIT) has reported strong business growth during FY06-FY09, with
Returns (%) CMP 1-mth 3-mth 6-mth
gold loan assets under management logging a 125% CAGR due to aggressive
branch expansion and easy availability of funds. The group has ramped up its MAGFIL 573 6.1 45.5 152.8
distribution network from 291 branches in FY07 to 765 in H1FY10 and is Sensex 17,119 1.6 5.6 12.3
expected to double its presence in the next three years. We expect this expansion
drive to aid a 67% CAGR in AUM to Rs 59bn over FY09-FY12.
Best-in-class NIMs of 13–15%: With clients who have little recourse to bank Valuation matrix*
credit and short-term funding needs, MAGFIL earns a high yield on advances of
(x) FY09 FY10E FY11E FY12E
24–30%. At the same time, improved access to institutional funds supports easy
P/ABV @ CMP 6.6 4.7 2.4 1.8
availability of capital at a rate of 10–12%. As a result, MAGFIL reported NIMs of
P/ABV @ Target 7.8 5.6 2.8 2.1
13–15% over FY07-FY09, which we believe are sustainable given its high pricing
P/E @ CMP 20.7 16.7 9.7 6.1
power. With stable margins, we expect NII to log a 72% CAGR over FY09-FY12.
Merits premium valuation: We believe that MAGFIL represents an opportunity to

invest in a highly profitable business model with strong growth potential. We
expect the company to maintain an ROE of 33–35% over the next three years,
with a PAT CAGR of 93% over FY09-FY12. With its superior return ratios and
asset quality (delinquencies at only 0.2% of AUM in the gold segment), we
believe the stock should trade at a premium to other NBFCs. We initiate
coverage with a Buy rating and target price of Rs 682, based on 2.8x FY11E ABV.
Financial highlights* Profitability and return ratios*

(Rs mn) FY09 FY10E FY11E FY12E (%) FY09 FY10E FY11E FY12E
NII 1,651 2,891 5,379 8,345 Net interest margin 13.0 13.0 14.8 15.4
Growth (%) 95.1 75.2 86.0 55.1 Cost/Inc Ratio 47.6 44.6 38.2 36.3
PPP 909 1,654 3,384 5,386 RONW 30.9 33.8 34.6 33.8
Growth (%) 96.1 81.9 104.6 59.1 ROA 3.8 4.7 5.9 6.3
FDEPS (Rs) 27.7 34.3 59.0 94.1 Gross NPA 1.9 0.9 0.6 0.4
Growth (%) 9.1 24.0 71.9 59.4 Net NPA 1.1 0.5 0.3 0.2
* MAFIT financials consolidated with MAGFIL
Ishank Kumar Abhishek Agarwal RHH: Winner of LIPPER-STARMINE broker award for “Earnings Estimates in Midcap Research 2008”
(91-22) 6766 3467 (91-22) 6766 3466 “Honourable Mention” in Institutional Investor 2009 1
ishank.kumar@religare.in abhishek.a@religare.in RHH Research is also available on Bloomberg FTIS <GO> and Thomson First Call
Manappuram General Finance & Leasing Initiating Coverage 14 December 2009
Investment rationale
Niche expertise in a large, under-served market
Immense scope for financing India’s Gold-backed lending represents a potential goldmine for non-banking finance
low-income segments via gold-secured companies (NBFC) in India due to the anaemic penetration of bank credit among lower
loans income households and considerable accumulated gold stock in India. The informal
sector (local moneylenders) continues to originate more than 25% of the loans among
the low-income group, charging an exorbitant interest rate of 36% p.a. These can be
substituted by cheaper, gold-secured loans from NBFCs. In spite of rapid growth in the
gold loan segment in the last three to four years, its penetration in India remains under
1%. Manappuram General Finance & Leasing (MAGFIL), with longstanding expertise in
gold loan financing, is well placed to capitalise on the latent market opportunities.
Loans against gold the key to servicing weaker segments

Indians have a prodigious appetite for India is the largest consumer of gold due to the strong preference for gold jewellery
gold jewellery among Indian households and its widespread use as a savings instrument. MAGFIL
estimates that accumulated gold stock in India exceeds 20,000tonnes or 10% of the
global stock. Only a small proportion of this stock is held by the Reserve Bank of
India (RBI).
In spite of rising gold prices, demand in India has held firm owing to the country’s strong
economic growth and rising disposable incomes. In 2008, India remained the leading
consumer of the precious metal and accounted for 23% of global gold jewellery
demand. As per industry estimates, South India is the largest market accounting for 40%
of the country’s demand, followed by the western region at 25% and northern region
at 20–25%.
Rural India has large accumulated gold A large proportion of the gold stock is held by rural India as gold is viewed as a secure
stock – can be used as loan collateral and easily accessible savings vehicle, apart from its ornamental status. This gold stock
can be used as collateral for securing loans to meet financial and emergency needs.
NBFCs and other financial institutions will undoubtedly lend against gold due to the
lower perceived risk of the collateral.
Fig 1 - India constitutes ~23% of world gold demand

(tonnes) Annual consumer demand of gold % of world demand (R) (%)
900 30
720 25
20
540
15
360
10
180
5
0 0
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
Source: Bloomberg
2
MAGFIL has carved a niche for itself

MAGFIL specialises in providing small- Based in Kerala, MAGFIL is a deposit-taking NBFC primarily engaged in providing loans
ticket loans against used gold jewellery against used gold jewellery. Its target customer base consists primarily of lower income
households and self-employed workers, who are largely excluded from the banking net
due to a lack of credit history and relatively small loan requirements. A bulk of
MAGFIL’s lending comprises small-ticket loans – only 14% of FY09 disbursals were for
loans over Rs 100,000 – with tenure of less than one year.
Over the years, the company has developed strong expertise in gold-backed loan
disbursal and jewellery valuation. The average loan to value (LTV) of the loans disbursed
is ~75%; however, a small proportion of disbursals are granted at an LTV of 90–100%.
With clients that have limited access to the banking system and emergency financial
needs, average contracted lending rates are generally high at 24%. The average yield
enjoyed by the company is ~200–250bps higher than the average contracted rate due to
the shorter loan duration (average tenure of only three months). This has allowed
MAGFIL to report best-in-class NIMs of 13–15% on its loan portfolio and an ROE of
30%-plus over the past three years.
Fig 2 - Ticket size of disbursements – FY09 Fig 3 - Loan outstanding by tenure – H1FY10
> 18 Month
> Rs 12-18
0.3%
1,00,000 < Rs 10,000 Month
< 1 Month
14.0% 14.0% 8.2%
22.5%
6-12 Month
Rs 50,000 - 16.4%
1,00,000 Rs 10,000 -
19.0% 25,000
26.0%
1-3 Month
Rs 25,000 - 3-6 Month 26.7%
50,000 25.9%
27.0%
Source: Company Source: Company
Fig 4 - Average LTV of loans outstanding – H1FY10 Fig 5 - Loan outstanding by interest rate charged – H1FY10
90-100%
18 - 21%
0.0% < 70%
> 30% < 18% 1.9%
12.0% 7.9%
23.6% 21 - 24%
9.4%
80-90%
45.3%
24 - 27%
14.4%
70-80%
42.6% 27 - 30%
42.8%
3
Better positioned than banks in small loan segment…

We believe that banks will find it difficult to compete in the smaller loan segment where
MAGFIL and other NBFCs are currently active. Key reasons for higher competitiveness
are as follows:
Swift loan disbursal with minimal Expertise in valuing household jewellery: MAGFIL has been providing loans against
documentation gives MAGFIL an edge household jewellery for the last five decades and has developed strong expertise in
over banks the valuation of gold assets.
Higher LTV: NBFCs typically provide an LTV of 80%-plus as against 60% by banks.
Minimal documentation: Documentation required by NBFCs is typically less

comprehensive than that sought by banks. NBFCs work on referrals and knowledge
of local markets and require only basic documents such as address or identity proof,
whereas banks insist on full compliance with KYC (know your customer) norms. As
the targeted client segment is largely illiterate, lengthy documentation is not
favoured by them.
Lower processing time and higher rollover flexibility: With less documentation and
paperwork, NBFCs are able to disburse loans far faster than banks. MAGFIL
generally disburses loans within 15 minutes as against three to four days taken by
banks. It also provides a facility for rollover of loan repayment without any extra
processing fee.
Interest rate ceiling imposed on banks: RBI norms mandate that banks must provide
small loans (up to a credit limit of Rs 200,000) at an interest rate not higher than the
benchmark prime lending rate (BPLR). Given the higher fixed cost involved in
processing and disbursal of smaller loans (operating cost to assets can be in the
range of 5–7% of total assets), lending to these segments proves unprofitable for
banks. As a result, banks prefer to participate in the gold loan through securitisation
route or to extend loans to gold-financing NBFCs.
…but micro-finance institutions and other NBFCs could pose a threat

Moneylenders provide 25% of loans in We believe that competition in the gold loan segment will intensify over the next few
low-income segments, implying ample years as other NBFCs and micro-finance institutions are lured by the higher lending rates
scope for substitution by gold loans and lower delinquencies in the segment. Micro-finance institutions are currently lending
at ~24% to a similar client base and already have a large distribution network and
customer base in some states. Some NBFCs like Muthoot Finance and Shriram City
Union Finance are already active in gold loan financing and are aggressively expanding
their distribution networks.
Nonetheless, low penetration of the gold loan business suggests that there’s ample
enough of the pie for everyone. MAGFIL estimates that gold loan penetration in India is
less than 1%. Local moneylenders continue to originate more than 25% of the loans
among earners with an annual income of less than Rs 100,000, according to a 2007
survey by Invest India Income and Savings (discussed in greater detail on Pg 10). The
average interest rate on these loans is 36%, much higher than the 24% charged by
NBFCs and micro-finance institutions.
Merger with MAFIT to strengthen presence and competitive edge

In order to strengthen its position in the gold loan financing space, MAGFIL is in the
process of merging its sister company, Manappuram Finance (Tamil Nadu) or MAFIT,
with itself. MAFIT is a non-deposit-taking NBFC with a major presence in Tamil Nadu,
which has been active in the gold financing business since 2003. Approvals for the
merger have been obtained from the stock exchanges and market regulator; court
approval is expected shortly. Post merger, MAGFIL will have a stronger balance sheet
and distribution network. Our estimates factor in the successful merger between both
companies (henceforth, MAGFIL refers to the combined entity).
4
Aggressive expansion of branch network

Expansion in branch network from 291 Over the last three to four years, MAGFIL has rapidly scaled up its distribution network
in March ’07 to 765 at end Sep ’09 in order to better explore the gold loan financing opportunity and to enhance its scale
and visibility vis-à-vis rivals. Its branch network has swelled from 291 in March ’07 to
765 at the end of September ’09. Close to 90% of the new branches were opened in the
South Indian states of Kerala, Andhra Pradesh, Karnataka and Tamil Nadu, as the
average gold stock and acceptability of gold loans is higher in the south. As on 30
September 2009, Kerala housed ~35% of the company’s branches whereas other
southern states housed 53%.
The company plans to open 250 branches every year in order to take its network to tally
to more than 1,600 by FY13. With an established presence in South India, MAGFIL will
now focus on the western, northern and eastern regions and has plans to open more
than 50% of its new branches in these states.
Fig 6 - Distribution network

(No.) Kerala Andhra Pradesh Karnataka Tamil Nadu Maharashtra Others
Plans to have 1,600 branches by FY13, 900
diversifying away from South India 800
700
600
500
400
300
200
100
0
FY07 FY08 FY09 H1FY10
Source: Company
Branch expansion and higher productivity to drive AUM

12-fold growth in AUM from FY06 to MAGFIL has witnessed strong growth momentum in the last three years, with assets
Rs 17.8bn at end-H1FY10 under management (AUM) growing more than 12-fold from Rs 1.5bn in FY06 to
Rs 17.8bn at the end of H1FY10 – a 100%-plus CAGR. This growth was driven by rapid
expansion of its distribution network, higher gold prices and better access to funds.
Fig 7 - Robust growth in AUM Fig 8 - Gold prices on the rise

(Rs bn) AUM % of Gold loans (R) (%) (US$ /oz)
20 95.6 100 1,300
96.0
89.5
16 87.4 17.8 90 1,140
80.7 12.5
980
12 80
7.8 820
8 5.4 70
660
4 1.5 60
500
Apr-06
Aug-06
Aug-07
Aug-08
Aug-09
Dec-06
Apr-07
Dec-07
Apr-08
Dec-08
Apr-09
Dec-09
0 50
FY06 FY07 FY08 FY09 H1FY10
Source: Company Source: Bloomberg
5
We believe that the strong growth momentum in AUM will continue over the next few
New branches typically take a couple of years driven by the expanding distribution network and a steady ramp-up in productivity
years to mature at newer branches. As shown in Figure 6, MAGFIL has opened ~70% of its current
branch network in the last 30 months, where productivity is significantly lower than that
at its established centres. At the end of September ’09, average loans outstanding per
branch totalled Rs 23mn. For branches opened in FY06, this figure doubles to ~Rs 50mn
while those launched before FY05 boast an average of ~Rs 90mn–100mn.
Average loan productivity of branches in Kerala at the end of H1FY10 is low at Rs 18mn
Kerala branches have tripled over FY06 (as against Rs 23mn–32mn for other southern states) due to a rapid expansion in branch
to H1FY10 – now set for operational network in the last 30 months – the company’s Kerala footprint has tripled from 89
ramp up branches in FY06 to 267 in H1FY10.
Fig 9 - Average loan outstanding per branch – H1FY10

(Rs mn/Branch)
35
30
25
20
15
10
0
Kerala Andhra Karnataka Tamil Nadu Maharashtra Others
Pradesh
Source: Company
Lending concentration in South India to We expect outstanding loans per branch to improve by 70–80% from the current level
decline to 75–80% in FY13 in the next three years, which will pump up AUM. Currently, loans originated in South
India constitute ~90% of MAGFIL’s total outstanding portfolio. However, with a majority
of its incremental branches being planned in northern, eastern and western India, we
expect the southern market share to climb down to 75–80% by FY13.
Fig 10 - AUM state-wise – FY09 Fig 11 - AUM state-wise – H1FY10
Maharashtra Others Maharashtra Others

6% 5% 5% 5% Kerala
Kerala
Tamil Nadu Tamil Nadu 27%
34%
20% 20%
Karnataka Andhra Karnataka Andhra

17% Pradesh 23% Pradesh
18% 20%
6
Easy availability of funds fuels growth

Banks are now more open to financing Rapid growth in AUM was also aided by easy availability of funds from banks and other
well-managed NBFCs financial institutions. The flow of credit to higher-rated NBFCs has improved
significantly in the last three to four years, with easier access to term loans, commercial
paper and securitisation. MAGFIL has therefore increasingly turned to banks and the
capital market to meet its funding needs. Borrowing from institutional sources
constitutes ~80–82% in H1FY10, with securitisation constituting more than 35% of total
borrowings. Equipped with better access to equity capital, MAGFIL now plans to keep a
larger proportion of loans on its books. It also intends to tap the commercial paper
market to lower its cost of funds from the current 12–12.5% to 11% by FY12.
Fig 12 - Borrowing profile – FY09 Fig 13 - Borrowing profile – H1FY10
Others
Commercial
1.0% Retail
paper Retail
Bank loans 18.6%
3% 19%
22.3%
Bank loans
42%
Securitization
Securitization
36%
58.1%
Raised equity of Rs 1.8bn in last two years to fund growth

In order to expand its distribution network and meet the regulatory requirements of its
fast-growing business, MAGFIL raised Rs 1.8bn in equity capital over 2007 and 2008.
The issue comprised compulsorily convertible preference shares to four private equity
investors and warrants to promoters. While all the preference shares have been
Aggressive growth plans call for capital converted into equity, warrants issued to promoters will be converted this fiscal.
infusion – we factor in 20% equity
At present, MAGFIL is adequately capitalised with a capital adequacy ratio (CAR) of
dilution in FY11
~30% at the end of September ’09 (as against the regulatory requirement of 15%).
However, with its aggressive growth plans and targeted leverage of 7x tier-I capital, the
company is likely to soon require a fresh infusion of equity. We are factoring in 20%
equity dilution in FY11 at Rs 550/share.
Fig 14 - Equity capital raised to fund growth

Date Investors Price (Rs) Amount raised (Rs mn)# Method of dilution
10 December, 2007 Hudson Equity Holdings 142.5 700 Compulsorily convertible
Sequoia Capital preference shares
4 November 2008 Hudson Equity Holdings 166.6 708 Compulsorily convertible
Sequoia Capital preference shares
AA Development Capital
GHIOF Mauritius
4 November 2008 Promoters 166.6 372 Warrants
Source: Company #Amount raised includes capital raised in MAFIT
7
Asset quality to improve as percentage of gold loans rises

Gross NPA in the gold loan segment is MAGFIL is currently running down its hypothecation loan portfolio where gross NPA
low at 0.2–0.3% rose rapidly in FY08 and FY09 to 18% and 38% respectively. The proportion of
hypothecation loans has declined from 18% in FY06 to only 2% in H1FY10. At the
same time, the share of gold loans has increased from 81% to 96%. We expect it to rise
to over 99% by FY12.
Asset quality in the gold loan segment remains healthy with gross NPA hovering in the
0.2–0.3% range over FY06-FY09. However, higher slippages in the hypothecation
segment resulted in an increase in overall gross NPA from 0.6% in FY07 to 2.2% in
FY08 and 1.9% in FY09. With a draw-down of this portfolio, we expect gross NPA to
decline to 0.4% by FY12.
Fig 15 - Composition of assets Fig 16 - Composition of gross NPA

(%) Gold Loan HP/Hypothecation Others (%) Gold Loan HP/Hypothecation Others
100 100
80 80
60 60
40 40
20 20
0 0
FY06 FY07 FY08 FY09 H1FY10 FY06 FY07 FY08 FY09
Fig 17 - Asset quality set to improve

(%) Gross NPA Net NPA Gold loans in AUM (R) (%)
2.5 100
2.0 95
1.5 90
1.0 85
0.5 80
0.0 75
FY07 FY08 FY09 FY10E FY11E FY12E

Source: Company, RHH
8
MAGFIL – Right place, right time

Most of India’s population still does not Financial inclusion remains a distant dream in India. Although the banking sector has
have access to the banking system flourished over the past ten years, the growth has been underpinned largely by higher
income households and corporate sector. Among earners with an annual income of less
than Rs 50,000, only 34% of the urban population and 27% of the rural populace have
a bank account. Moreover, only 8 out of every 100 persons have a credit account with
scheduled commercial banks (SCB). Factors like the absence of credit history, inability
to meet documentation norms, and higher fixed costs per loan deter the banking sector
from servicing lower income groups. This gap in the services net can be bridged by
niche players like MAGFIL.
India’s financial services sector has leapfrogged ahead…

Over the past decade, India’s financial services sector has witnessed explosive growth.
Gross bank credit has increased at a 25% CAGR over FY03-FY09 driven by strong GDP
growth and rising aspirations of Indian households. Increasing prosperity, buoyant
capital markets and aggressive expansion of retail distribution networks by banking as
well as non-banking financial service companies have bolstered retail awareness and
participation in various financial products such as credit, equity and insurance.
…but access is limited to higher earners

Growth in India’s financial services sector has primarily been driven by higher income
households and corporates. In spite of several initiatives taken by the government and
the RBI over the last three or four decades, access to safe, easy and affordable financial
services by the poor (both in urban and rural areas) remains limited.
Government efforts at financial In order to enhance financial inclusion, the government has followed a strategy of rapid
inclusion have met with mixed results expansion of scheduled commercial banks (post their nationalisation in 1969) and
formation of special purpose institutions (such as regional rural banks and cooperative
banks) to provide loans to the agricultural and weaker segments. In a bid to encourage
banks to lend to these segments, the RBI has defined sectors such as agriculture and
small scale industries as ‘priority sectors’ and mandated lending targets of 40% of net
bank credit for domestic commercial banks and 32% for foreign banks to these sectors.
However, the success of these efforts has been mixed.
Over 60% of India’s earning population has no bank account

Only 27% of rural earners (<Rs 50,000 As per a 2007 survey conducted by Invest India Market Solutions (IIMS), only 45% of
p.a.) have bank savings accounts total earners (defined as a person who is aged between 18 and 59 years and earning
some cash income) have bank accounts. Penetration of banks in the lower income
households is even weaker in both urban and rural areas. Among earners with an annual
income of less than Rs 50,000, only 34% of the urban population and 27% of the rural
populace have a savings account. The study also revealed that a large proportion of
agricultural and unskilled/semi-skilled wage labourers, micro-entrepreneurs and low-
salaried workers are currently excluded from the banking system.
Fig 18 - Earners holding a bank account

Annual Income Urban Rural Total
< Rs 50k 34.1 26.8 28.3
Rs 50 - 100k 75.5 71.2 73.0
Rs 100 - 200k 91.8 87.4 89.9
Rs 200 - 400k 95.5 93.6 94.9
> Rs 400k 98.0 96.3 97.6
Total 61.7 38.0 44.9
Source: IIMS, 2007; RBI’s Report on Currency and Finance 2006-08
9
Fig 19 - Annual income and bank account by occupation group

A v e ra ge A nnua l Inc o m e ( R s .) P e rc e nt wit h B a nk A c c o unt
A gricultural wage labo ur 21,295 A gricultural wage labo ur 14
Wage labo ur - no n-agriculture 31,676 Wage labo ur - no n-agriculture 25
Own acco unt wo rker 33,100 Own acco unt wo rker 25
Street vendo r 37,300 Street vendo r 39
Other self emplo yed wo rkers 59,687 Self-emplo yed in primary pro ductio n 45
Self-emplo yed in primary pro ductio n 60,078 P art time earner 49
P art time earner 64,507 Other self emplo yed wo rkers 50
Sho pkeeper 100,044 Sho pkeeper 67
P rivate salaried wo rkers 105,670 P rivate salaried wo rkers 68
Go vernment salaried wo rkers 140,001 Self-emplo yed pro fessio nals 86
Self-emplo yed pro fessio nals 319,555 Go vernment salaried wo rkers 90
B usinessman 478,985 B usinessman 95

Source: IIMS, 2007; Prof. Raghuram Rajan committee report on financial reforms
Institutional credit out of reach for most

35% of low-income earners rely on Availability of credit from banks and other institutional sources is even more limited. As
local moneylenders per data submitted to the RBI, only 8 out of every 100 persons have a credit account
with scheduled commercial banks (SCBs) in 2007. As per the IIMS survey in 2007,
informal sources remain the dominant source of funds for lower income households.
About 35% of earners with annual income below Rs 50,000 rely on local moneylenders
for their credit needs. Even some of the higher income households are dependent on
local moneylenders as banks fail to meet their emergency needs.
Fig 20 - Credit accounts with SCBs – region-wise (per 100 persons)

Rural Urban Total
2001 2007 2001 2007 2001 2007
Northern 4.7 5.6 7.4 10.0 5.6 7.1
North-Eastern 2.6 4.1 3.7 5.5 2.8 4.3
Eastern 3.5 4.5 4.6 6.2 3.7 4.8
Central 3.6 4.3 3.4 5.0 3.6 4.4
Western 4.1 4.8 4.8 18.9 4.4 10.5
Southern 9.6 14.4 7.2 21.6 8.8 16.8
All - India 4.9 6.5 5.5 13.1 5.1 8.3
Source: RBI
Fig 21 - Sources of loans by income group (as a % of indebted earners)

Annual income range < Rs 50k Rs 50 - 100k Rs 100 - 200k Rs 200 - 400k > Rs 400k Total
Loan agencies
Institutional Sources 27.5 46.0 59.4 60.2 70.5 32.8
- Banks 13.0 34.5 49.3 51.6 62.8 19.1
- Co-operative Societies 4.9 6.7 8.6 3.6 4.1 5.3
- Micro - Finance Institutions 1.1 1.0 0.7 0.5 2.4 1.1
- Self - Help groups 8.5 3.9 0.8 4.5 1.2 7.3
Non-institutional Sources 72.5 54.0 40.6 39.8 29.5 67.2
- Relatives / Friends 35.1 32.1 26.5 22.2 22.1 33.9
- Moneylenders 34.9 19.6 12.0 11.8 5.5 30.8
- Others 2.5 2.3 2.1 5.8 1.9 2.5
Total 100.0 100.0 100.0 100.0 100.0 100.0
Source: IIMS, 2007; RBI’s Report on Currency and Finance 2006-08
10
Poor institutional penetration drives up interest rates

Moneylenders are flexible on loan As mentioned, lower access to credit from banks and other institutional sources has led
terms; but their flexibility comes at a to higher reliance on moneylenders for the low-income group. Moneylenders are willing
price to finance the emergency needs of these sections without much documentation and are
flexible on the loan amount, duration and repayment schedule; but, their flexibility
comes at a price. As per the IIMS survey 2007, more than 40% of India’s population in
the lowest two income quartiles generally avail of loans at an annual rate of 36%
or more.
Fig 22 - Lending rates by income group (% of indebted earners)

% of population in income quartile who have taken loans from
Income quartile sources in the last two years
<=12% pa 12 - 24% pa 24 - 36% pa >36% pa
Lowest Income quartile 16.0 16.9 18.7 48.4
Second Income quartile 22.8 18.8 18.7 39.7
Third income quartile 29.1 26.1 18.7 26.2
Highest income quartile 40.4 24.5 11.7 23.4
Total 22.6 19.4 17.7 40.4
Source: IIMS, 2007; Prof. Raghuram Rajan committee report on financial reforms
Why government efforts at financial inclusion have stumbled

In its 2009 report titled “A Hundred Small Steps”, the committee on financial sector
reforms, chaired by Prof. Raghuram Rajan, discussed the reasons behind the mixed
results of government initiatives towards financial inclusion. Some of the key reasons
outlined in this report are:
Broad definition of priority sectors gives Broad nature of priority sector norms: As mentioned, the RBI has mandated that
banks scope to selectively grant credit domestic and foreign banks lend at least 40% and 32% of their respective bank
credit to certain priority sectors. However, the broad definition of eligible priority
sectors (for example – 18% required in the agriculture segment) gives banks the
leeway to focus on bankable customers within the sector (viz. rich farmers). Banks
also aggressively push housing loans to meet the desired norms as home loans
below Rs 2mn have priority-sector status.
Unprofitable nature of lending: As per the RBI mandate, banks must provide small
loans (up to a credit limit of Rs 200,000) at an interest rate not higher than the
BPLR. This interest rate ceiling deters banks as smaller loans generally involve
higher operating cost and have higher perceived risk. Thus, low-income applicants
Interest rate ceiling on such loans deters are generally denied loans – one of the reasons why a higher number of rural and
banks semi-urban branch inaugurations by banks (especially PSU banks) has failed to
increase the availability of credit to the weaker sections.
Cumbersome documentation: Stringent documentation and collateral requirements

for bank loans also hamper the passage of bank credit to weaker segments. A large
proportion of the low-income group is illiterate and has no financial history, leaving
them unable to fulfil the documentation requirements. Further, since their
borrowings are typically induced by medical and financial emergencies, NBFCs and
informal sources like moneylenders are preferred for quick processing of loans.
Failure of co-operative banks: Regional rural banks and co-operative banks, set up
by the government to widen the credit net, have failed to make a mark. Most of
these institutions are mired in serious financial troubles due to poor corporate
governance and lax loan assessment and monitoring policies.
11
Financial overview
AUM expected to log 67% CAGR over FY09-FY12
MAGFIL has reported strong business growth during FY06-FY09 with total assets under
management in gold loans increasing at a 125% CAGR (including MAFIT). This growth
has been driven by an aggressive expansion of branch network (9-fold increase to 645
branches over the period) and easier availability of funding from banks.
Expect a 67% CAGR in AUM over In order to sustain its growth momentum, MAGFIL intends to open 250 branches each
FY09-FY12 as newer branches ramp up year, scaling up to 1,400 by FY12 and over 1,600 by FY13. It has already rolled out 120
branches in H1FY10, taking its overall tally to 765. As operations at newer branches
mature, we expect a considerable increase in gold loans outstanding per branch from
Rs 19mn in FY09 to Rs 42mn in FY12. This will aid a 69% CAGR in gold AUM over
FY09-FY12 to Rs 58.6bn. Total AUM is expected to be marginally higher at Rs 58.9bn
(67% CAGR), as the contribution of other products such as business loans and
commercial vehicle (CV) loans climbs down to less than 1%.
Fig 23 - Branch network to double over FY09-FY12 Fig 24 - Average loans outstanding per branch to increase
(No.) (Rs mn/Branch)
1,600 45
1,400 40
1,200 35
30
1,000
25
800
20
600 15
400 10
200 5
0 0
FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Source: RHH, Company Source: RHH, Company
Fig 25 - AUM set for 67% CAGR over FY09-FY12 Fig 26 - …as disbursement ramps up
(Rs mn) (Rs mn)
60,000 250,000
50,000
200,000
40,000
150,000
30,000
100,000
20,000
10,000 50,000
0 0
FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY06 FY07 FY08 FY09 FY10E FY11E FY12E
NIMs to remain in 13–15% range

Firm yields and a reduction in cost of We believe that penetration of banks and co-operatives in lower income households
funds would ensure best-in-class NIMs will remain low in the short to medium term, leaving credit requirements of this segment
to be met by NBFCs like MAGFIL, micro-finance institutions and local moneylenders. As
a result, we expect contracted yields for the company to remain strong at 23–24%. With
lower loan tenure, the average yield realized will be higher at 25–27%. We expect the
cost of funds to decline by ~100bps in FY11 as MAGFIL will raise more commercial
paper to fund incremental disbursement. Thus, the net interest margin (NIM) should
remain in the 13–15% range, supporting net interest income (NII) growth of 72% over
FY09-FY12 to Rs 8.3bn.
12
Fig 27 - NIMs to remain among the best in industry Fig 28 - NII to grow by 72% CAGR over FY09-12E
(%) Yield on assets Cost of funds NIMs (R) (%) (Rs mn)
30 16.0 10,000
23.7 23.4 24.0 23.8 15.5
25 15.4 8,000
15.0
20 14.8 14.5 6,000
15 12.7 12.4 14.0
11.5 10.8
13.5 4,000
10
13.0
5 2,000
13.0 13.0 12.5
0 12.0 0
FY09 FY10E FY11E FY12E FY08 FY09 FY10E FY11E FY12E
Higher operating leverage will augment profitability

PAT to log a 93% CAGR over FY09- MAGFIL’s operating expenses are primarily fixed in nature. Consequently, with higher
FY12 to Rs 3.4bn branch productivity (loans outstanding per branch), we expect the cost/income ratio to
decline from 48% in FY09 to 36% in FY12 and operating expenses/assets ratio to
decline from 6.5% to 5.7%. We are also factoring in credit losses of ~0.3% of total
outstanding gold loans. Provisioning expenses are estimated to decline from FY09 levels
due to a run-down of the CV portfolio where delinquencies are higher. With operating
efficiencies and lower provisioning expenses, we expect PAT to log a 93% CAGR over
FY09-FY12 to Rs 3.4bn. ROE is likely to improve from 31% in FY09 to 33–35% in the
same period despite assumed 20% equity dilution in FY11.
Fig 29 - Operating leverage to improve Fig 30 - PAT CAGR pegged at 93% over FY09-FY12
(%) Cost to income ratio (%) (Rs mn)
Opex to asset ratio (R) 3,500
50 47.3 47.6 9.0
44.6 3,000
8.5
45 2,500
8.0
7.8
40 38.2 7.5 2,000
36.3
7.0
1,500
35 6.5 6.5
6.0 1,000
5.8 6.0
30 5.7
5.5 500
25 5.0 0
FY08 FY09 FY10E FY11E FY12E FY08 FY09 FY10E FY11E FY12E
13
Valuation
Highly profitable business model with strong growth potential
We believe that gold-based financing can provide immense opportunities for NBFCs in
India due to the lower penetration of credit among less-privileged households and the
large amount of accumulated gold stock in India. In addition, we expect banking
penetration in the weaker sections to remain low in the near to medium term, which
will keep lending rates high (at ~24%) and support the current ROE of 30%-plus for
NBFCs operating in this segment. MAGFIL, with its expertise in lending against gold to
the weaker sections, provides an opportunity to invest in a highly scalable and profitable
business model.
Initiate coverage with Buy rating and target of Rs 682

Lower-risk business and high ROEs The MAGFIL stock has appreciated sharply in the last six months due to rising investor
warrant premium valuations interest and is currently trading at 2.4x FY11E ABV (assuming 20% equity dilution in
FY11 at Rs 550/share). We believe the stock should trade at a premium to other NBFCs
due to the lower risk involved in the gold-based financing business and the company’s
superior ROE trajectory of 35%-plus in the next three to four years. We have valued the
stock at 2.8x FY11E ABV based on the residual income model (cost of equity of 15%
and stable ROE of 24%), which gives us a target price of Rs 682. We initiate coverage
on MAGFIL with a Buy rating.
Fig 31 - Price to 1-yr forward book value
(Rs)
800 4.0x
600 3.0x
400 2.0x
200 1.0x
0
Jan-09
Apr-08
May-08
Jul-08
Sep-08
Nov-08
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Source: RHH, Company
Fig 32 - Comparative valuations

Price Mcap P/BV (x) NIMs (%) RoE (%) EPS growth (%) Gross NPA (%)
(Rs) (Rs mn) FY10E FY11E FY09 FY10E FY09 FY10E FY11E FY09-11E CAGR FY09
MAGFIL# 573 17,475 4.7 2.4 13.0 13.0 30.9 33.8 34.6 65.6 1.9
Shriram Transport Finance 466 98,756 3.2 2.5 7.8 7.6 29.6 28.8 28.8 25.9 2.3
M & M Finance* 315 30,548 1.8 1.6 ~12.0 NA 20.5 16.8 17.5 21.3 8.7
Shriram City Union* 401 18,391 2.0 1.7 ~11.0 NA 15.4 21.5 20.5 34.1 2.1
Source: Company, RHH, * Bloomberg # Consolidated financials and market cap, Assuming 20% equity dilution in FY11;
14
Key concerns
Sharp decline in gold prices
~45% of outstanding loans are Gold loans constitute more than 96% of MAGFIL’s total advances. The average LTV on
vulnerable to a drop in gold price its loan portfolio is only 75%; however, ~45% of outstanding loans have an LTV of
80–100% and may be considered as risky assets. As more than 75% of the loans are
repaid within six months, credit losses will increase only if gold prices decline sharply
within a 6–12 month period. Higher replacement cost and emotional attachment to
jewellery pledged with the company provide further comfort on asset quality.
Regulatory risk
Providing loans to the weaker sections of society is a politically sensitive issue. While
we believe that the regulator or government will not try to control the interest rate
charged on gold loans due to the continued thrust on improving financial inclusion (by
encouraging banks and NBFCs to enter into this segment), any attempt to regulate the
lending rates can significantly impact the company’s profitability. Currently, NBFCs are
excluded from the Moneylenders Act; however, any change in regulation to bring
NBFCs under the purview of this act will adversely impact growth and profitability.
Competition risk
NBFC and micro-finance institutions are We believe that competitive pressure in the gold loan financing segment will increase
more of a threat than banks significantly in the next few years, primarily from other NBFC and micro-finance
institutions, due to higher ROE potential and lower perceived risk with gold as
collateral. We do not expect banks to play a major role in this segment due to the
ceiling imposed on small loan interest rates. While we believe that MAGFIL will remain
a key player in this segment given the scale, technology and expertise acquired over
several decades, higher competition can lead to a decline in NIMs enjoyed by the
company.
Fraud and reputation risk

MAGFIL stores all the pledged jewellery in a strong room located in every branch. Any
theft of jewellery can significantly impact the company’s reputation. MAGFIL insures the
whole value of these assets (gold loans plus making charges) with Oriental Insurance
Company and therefore monetary losses will be insignificant in the case of theft.
However, given the emotional attachment of the jewellery pledged, any theft will
adversely impact client confidence.
15
Company profile
Incorporated in 1992, Manappuram General Finance & Leasing (MAGFIL) is a Kerala-
based deposit-taking NBFC. The company is primarily engaged in providing loans
against used jewellery (generally made of gold). Its customer base consists of the lower
income segments which are currently not serviced by banks and other co-operatives,
and are therefore mainly dependent on NBFCs, micro-finance institutions, relatives or
moneylenders for their credit needs.
Highly profitable business model

Since its client base has limited access to the banking system and short-term emergency
financing needs, MAGFIL’s lending rates are generally high (24%-plus). This has allowed
the company to report best-in-class NIMs of 13–15% on its loan portfolio and an ROE of
30% plus. The average tenure of loans is only three months and credit losses are very
low at 0.2–0.3% of total AUM, due to an average LTV of ~75% and the use of gold as
collateral. The company was also active in the vehicle loan segment; however, due to
higher delinquencies in this space, it is currently running down this portfolio.
Merger with sister company underway

MAGFIL is in the process of merging its sister company, Manappuram Finance (Tamil
Nadu) or MAFIT, with itself. MAFIT is a non-deposit-taking NBFC with a major presence
in Tamil Nadu, active in the gold financing business since 2003. Approvals for the
merger have been obtained from the stock exchanges and market regulator; court
approval is expected shortly. Current promoter shareholding in MAGFIL is 33.7% which
will increase to 44.8% post the merger with MAFIT.
Fig 33 - Shareholding Patten

MAGFIL MAFIT MAGFIL (merged)
Public
Public
4%
Public Promoters Promoters 22% Promoters
33% 34% 63% 45%
PE Investors PE Investors PE Investors

33% 33% 33%
Source: Company
Expanding in a big way

The Manappuram group (MAGFIL and MAFIT) has witnessed strong growth since 2005
due to easy availability of funds from banks and other financial institutions through term
loans and securitisation. The group has rapidly expanded its presence from only 71
branches as on 31 March 2006 to 765 branches as on 30 September 2009. Total AUM
has increased more than 12-fold to Rs 17.8bn during the same period. After
consolidating its position in Kerala, the group is now expanding in other southern states
(Andhra Pradesh, Karnataka and Tamil Nadu) as well as western and northern India. It
plans to open 250 branches in each of the next three years and increase its AUM to Rs
100bn by FY13.
16
Consolidated financials*
Profit and Loss statement Key ratios
Y/E March (Rs mn) FY09 FY10E FY11E FY12E Y/E March (Rs mn) FY09 FY10E FY11E FY12E
Interest earned 2,999 5,212 8,738 12,927 Valuation ratios (x)
Interest expended 1,348 2,321 3,359 4,582 P/E 20.7 16.7 9.7 6.1
Net interest income 1,651 2,891 5,379 8,345 P/BV 6.6 4.7 2.4 1.8
Non-interest income 83 91 101 113 P/ABV 6.9 5.0 2.4 1.8
Net revenue 1,734 2,983 5,480 8,457 Return ratios (%)
Operating expenses 825 1,329 2,096 3,072 Interest spread 10.9 11.0 12.5 13.0
Pre-provisioning profits 909 1,654 3,384 5,386 Net interest margin 13.0 13.0 14.8 15.4
Provisions & contingencies 181 57 99 149 Yield on assets 23.7 23.4 24.0 23.8
PBT 729 1,596 3,285 5,236 Cost of funds 12.7 12.4 11.5 10.8
Income tax, Interest tax 251 549 1,130 1,801 Non-int Inc/ Total income 4.8 3.1 1.8 1.3
Net profit 478 1,047 2,155 3,435 Opex cost/ Total income 47.6 44.6 38.2 36.3
ROE calculation (%)

Balance sheet
Net interest income/Assets 13.0 13.0 14.8 15.4
Y/E March (Rs mn) FY09 FY10E FY11E FY12E
Non interest income/Assets 0.7 0.4 0.3 0.2
Cash and bank balances 2,677 1,742 2,231 2,452
Net revenue/Assets 13.7 13.4 15.0 15.6
Loans and advances 12,596 25,539 40,492 58,937
Operating expense/Assets 6.5 6.0 5.8 5.7
Other current assets 857 1,043 1,764 2,619
Provision/Assets 1.4 0.3 0.3 0.3
Investments 11 11 11 11
Taxes/Assets 2.0 2.5 3.1 3.3
Net block (inc CWIP) 336 526 676 794
ROA 3.8 4.7 5.9 6.3
Total assets 16,477 28,862 45,173 64,813
Equity/Assets 12.2 13.9 17.1 18.8
Share Capital - Equity 228 305 365 365
ROAE 30.9 33.8 34.6 33.8
Preference share capital 40 40 40 -
Growth ratios (%)
Options/warrants/others 30 - - -
Net interest income 95.1 75.2 86.0 55.1
Reserves & surplus 2,260 3,380 8,394 11,224
Total income 97.1 72.0 83.7 54.3
Net worth 2,518 3,685 8,759 11,589
Pre-provisioning profit 96.1 81.9 104.6 59.1
Secured loans 4,711 10,399 16,314 24,799
Profit 71.2 119.1 105.8 59.4
Unsecured loans 896 4,641 8,071 14,409
EPS 9.1 24.0 71.9 59.4
Assignments 7,765 8,930 10,046 11,051
Book value 169.6 38.8 98.6 32.3
Current liabilities & provision 561 1,180 1,957 2,979
Adjusted book value 210.0 38.1 104.1 32.7
Deferred Tax liability (14) (14) (14) (14)
Asset quality (%)
Total liabilities 16,477 28,862 45,173 64,813
Gross NPA 1.9 0.9 0.6 0.4
Per share data
Net NPA 1.1 0.5 0.3 0.2
Y/E March FY09 FY10E FY11E FY12E
Shares outstanding (mn) 28.9 30.5 36.5 36.5 Business growth (Rs mn)
FDEPS (Rs) 27.7 34.3 59.0 94.1 Disbursements 47,372 100,440 160,425 234,360
DPS (Rs) 1.5 4.1 8.9 14.1 Growth (%) 72.6 112.0 59.7 46.1
Book value (Rs) 87.0 120.8 240.0 317.5 AUM 11,977 25,110 40,106 58,590
Adjusted book value (Rs) 83.5 115.4 235.4 312.5 Growth (%) 72.6 109.6 59.7 46.1
* MAFIT financials consolidated with MAGFIL
17
Quarterly trend
Particulars Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10
NII (Rs mn) 411 442 526 613 709
YoY growth (%) NA NA NA 89.8 72.5
QoQ growth (%) 27.1 7.5 19.1 16.5 15.6
Total income (Rs mn) 413 451 528 627 718
QoQ growth (%) 25.4 9.2 17.3 18.7 14.5
PPP (Rs mn) 160 210 217 267 404
QoQ growth (%) 14.0 31.2 3.3 22.9 51.3
Adj net profit (Rs mn) 105 141 140 175 266
QoQ growth (%) 12.9 34.6 (0.4) 25.1 51.7
Company profile Shareholding pattern *
Established in 1992, Manappuram General Finance & Leasing (%) Mar-09 Jun-09 Sep-09
(MAGFIL) is the flagship of the Kerala-based Manappuram Group. Promoters 60.0 61.0 61.0
MAGFIL provides loans against gold and primarily targets the non- FIIs 3.7 3.7 3.7
bank-worthy borrower segment which offers higher margins. To
Banks & FIs 3.7 3.6 5.4
gain scale and strengthen its distribution network, the company has
approved a scheme of amalgamation with its sister company Public 32.6 31.7 29.9
Manappuram Finance Tamil Nadu (MAFIT) and is currently *Shareholding pattern of MAGFIL (Standalone)
awaiting regulatory approval. The merged entity will have an
extensive distribution network of over 750 branches and a
450,000-strong customer base.
Recommendation history Stock performance

Date Event Reco price Tgt price Reco
650
14-Dec-09 Initiating Coverage 573 682 Buy ● Buy
600
550
500
450
400
350
Sep-09 Oct-09 Nov-09 Dec-09
18
Coverage Profile
By recommendation By market cap (US$)
(%) 61 (%)
58
60 60
40 35
40 32
20 20
7 7
0 0
Buy Hold Sell > $1bn $200mn - $1bn < $200mn
Recommendation interpretation
Recommendation Expected absolute returns (%) over 12 months
Buy More than 15%
Hold Between 15% and –5%
Sell Less than –5%
Recommendation structure changed with effect from March 1, 2009
Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a
12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary
mismatch between upside/downside for a stock and our recommendation.
Religare Capital Markets Ltd

th
4 Floor, GYS Infinity, Paranjpe ‘B’ Scheme, Subhash Road, Vile Parle (E), Mumbai 400 057.
Disclaimer
This document is NOT addressed to or intended for distribution to retail clients (as defined by the FSA).
This document is issued by Religare Hichens, Harrison & Co Plc (“Hichens”) in the UK, which is authorised and regulated by the Financial Services Authority in connection
with its UK distribution. Hichens is a member of the London Stock Exchange.
This material should not be construed as an offer or recommendation to buy or sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or
the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action or any other matter. The material in this report is based
on information that we consider reliable and accurate at, and share prices are given as at close of business on, the date of this report but we do not warrant or represent
(expressly or impliedly) that it is accurate, complete, not misleading or as to its fitness for the purpose intended and it should not be relied upon as such. Any opinion
expressed (including estimates and forecasts) is given as of the date of this report and may be subject to change without notice.
Hichens, and any of its connected or affiliated companies or their directors or employees, may have a position in any of the securities or may have provided corporate finance
advice, other investment services in relation to any of the securities or related investments referred to in this document. Our asset management area, our proprietary trading
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“Religare Enterprises Limited proposes, subject to receipt of requisite approvals, market conditions and other considerations, to make a rights issue of its
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19

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Initiating Coverage 14 December 2009

CMP TARGET RATING RISK

Merits premium valuation: We believe that MAGFIL represents an opportunity to

Financial highlights* Profitability and return ratios*

Loans against gold the key to servicing weaker segments

Fig 1 - India constitutes ~23% of world gold demand

MAGFIL has carved a niche for itself

Source: Company Source: Company

Source: Company Source: Company

Better positioned than banks in small loan segment…

 Minimal documentation: Documentation required by NBFCs is typically less

…but micro-finance institutions and other NBFCs could pose a threat

Merger with MAFIT to strengthen presence and competitive edge

Aggressive expansion of branch network

Fig 6 - Distribution network

Branch expansion and higher productivity to drive AUM

Fig 7 - Robust growth in AUM Fig 8 - Gold prices on the rise

Source: Company Source: Bloomberg

Fig 9 - Average loan outstanding per branch – H1FY10

Fig 10 - AUM state-wise – FY09 Fig 11 - AUM state-wise – H1FY10

Maharashtra Others Maharashtra Others

Karnataka Andhra Karnataka Andhra

Source: Company Source: Company

Easy availability of funds fuels growth

Fig 12 - Borrowing profile – FY09 Fig 13 - Borrowing profile – H1FY10

Source: Company Source: Company

Raised equity of Rs 1.8bn in last two years to fund growth

Fig 14 - Equity capital raised to fund growth

Asset quality to improve as percentage of gold loans rises

Fig 15 - Composition of assets Fig 16 - Composition of gross NPA

Source: Company Source: Company

Fig 17 - Asset quality set to improve

MAGFIL – Right place, right time

India’s financial services sector has leapfrogged ahead…

…but access is limited to higher earners

Over 60% of India’s earning population has no bank account

Fig 18 - Earners holding a bank account

Fig 19 - Annual income and bank account by occupation group

Institutional credit out of reach for most

Fig 20 - Credit accounts with SCBs – region-wise (per 100 persons)

Fig 21 - Sources of loans by income group (as a % of indebted earners)

Poor institutional penetration drives up interest rates

Fig 22 - Lending rates by income group (% of indebted earners)

Why government efforts at financial inclusion have stumbled

 Cumbersome documentation: Stringent documentation and collateral requirements

Source: RHH, Company Source: RHH, Company

Source: RHH, Company Source: RHH, Company

NIMs to remain in 13–15% range

Source: RHH, Company Source: RHH, Company

Higher operating leverage will augment profitability

Source: RHH, Company Source: RHH, Company

Initiate coverage with Buy rating and target of Rs 682

Fig 31 - Price to 1-yr forward book value

Fig 32 - Comparative valuations

Fraud and reputation risk

Highly profitable business model

Merger with sister company underway

Fig 33 - Shareholding Patten

PE Investors PE Investors PE Investors

Expanding in a big way

ROE calculation (%)

* MAFIT financials consolidated with MAGFIL

Minimal documentation: Documentation required by NBFCs is typically less

Cumbersome documentation: Stringent documentation and collateral requirements