February 15, 2010
Potholes on the road to El Dorado
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 those initiatives 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 healthy pace of ~38% CGAR between FY11-13 and maintain its ROAs (as an improvement in operational efficiency would largely mitigate the adverse impact 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 the negatives 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.
Pankaj Agarwal, CFA
Tel: +91 22 3043 3206 firstname.lastname@example.org
Tel .: + +91 22 3043 3205 email@example.com
Tel: +91 22 3043 3216 firstname.lastname@example.org
CMP: Target Price (Period): Upside (%) EPS (FY11E):
Change from previous (%) Variance from consensus (%)
Rs106 Rs143 36 Rs7.6
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: Rs44bn/US$963mn Rs190/62 Rs215mn/US$4.7mn 0.7x 18,105 5,426
Stock Performance (%)
1M Absolute Rel. to Sensex 3M 12M YTD -21.2 -41.3 -17.2 -31.1 50.9 -29.6 38.8 -18.3
25,000 20,000 1 5,000 1 0,000 1 5-Feb-1 0 8-Jul-1 0 Sensex 26-No v-1 0 M anappuram Gen. Fin. 200 1 50 1 00 50
Source: Bloomberg, Ambit Capital research
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Indian Gold Financing- The Road to El Dorado with some potholes
Gold financing has come of age…
Gold financing has been a popular form of financing in India for many decades due to the unavailability of formal financing options for a large chunk of the Indian population. Industry sources peg the size of the total gold loan market to Rs. 2.53.0 trn (implying ~10% of the value of the total gold in the hands of the Indians). However, historically this has been a fragmented market largely catered to by small moneylenders and pawn-shops (~75% market share). Over the last five years, the gold financing market has caught the fancy of organised lenders, especially NBFCs, who are not only increasing their market share at the expense of unorganized sector, but are also expanding the market by expanding into new geographies, introducing innovative products and spending heavily on marketing. The gold loan portfolio of organised players has increased at a CAGR of ~48% between FY07-10. Within this segment, specialized NBFCs (e.g. Manappuram, Muthoot) have grown their loan books at a much faster pace (~70%) during FY07-10.
Exhibit 1: Growing size of the organized gold loan market ( Rs bn) Exhibit 2: Increasing market share of NBFCs in the organized sector FY07 Public Sector banks Pvt Sector banks NBFCs Co-operatives 52% 15% 18% 15% 100% FY09 51% 14% 24% 12% 100% FY10 47% 12% 32% 10% 100%
600 500 400 300 200 100 0 FY02 FY07 FY09 FY10 25 120 250
Source: Manappuram using ICRA data, Ambit Capital
Source: Manappuram using ICRA data, Ambit Capital
… and has the legs to grow further
Despite growing their portfolio at a CAGR of ~48% over FY07-10, we believe that organised players are well placed to continue growing at a similar pace over the next 3-4 years. Our optimism is based on three factors:
An increase in the total potential market size due to increased gold holdings: As per the World Gold Council, Indians hold about 18k tones of gold (~10% of total world gold stock) worth $800 bn. Just as importantly, Indians add ~700 tonnes to their gold portfolio every year and ~75% of these gold holdings are in the form of jewelry. Historical data suggests that the demand for gold in India has been relatively inelastic to gold prices and inspite of gold prices growing at a CAGR of 13% over the last decade, the demand for gold has been robust. Hence looking at historical trends and India’s healthy GDP growth rate and savings rate, we believe that the total gold stock available (in volume terms) can continue to rise at a CAGR of ~5% for the next decade. Moreover, although we do not have a view on the evolution of the price of gold, it is reasonable to assume that gold prices can continue increasing at a 5% CAGR based on the last 90 year history of gold prices (2000-10 CAGR of gold prices is 13%). Hence we estimate that the total value of gold holdings in India can increase at a 10% CAGR over the next 5 years. Increased penetration from organized players: Organized players would not only benefit from this increased market potential as explained above but also from the increased penetration of the industry driven by:
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462 0. Bn) Organised loan industry as a % of total value of gold holdings Organised gold loan industry (Rs.8% 797 60% 478 2.000 32. Increased reach: Organized sector players (especially NBFCs) are rapidly expanding their reach by opening new branches in their existing and new geographies (e.586 2. 4. This we believe can bring a new set of borrowers to the industry. specialized NBFCs like Manappuram and Muthoot are better placed than banks and their loan portfolio will grow faster than banks in this segment because of:
Better reach to customers: NBFCs are quickly growing their branch network in the key catchment areas.). Moreover.2% 375 32% 121 1.400 44.179 70% 825 47% 26% FY10-15E CAGR 4% 10%
Exhibit 3: Potential Size of the Indian gold loan market
FY02 Gold holdings (in Tonnes) Gold Holdings in (Rs.669 1. Reliance Capital. Anecdotal evidence to support this point can be found from global trends as well where banks’ reluctance to advance unsecured loans post the Lehman crisis led to the growth in pawnbroking in both the US and the UK.000 17. Moreover the organized players score over local moneylenders in terms of quick disbursals and higher confidence in the lender’s ability to keep the borrower’s gold safely. Cholamandalam Finance etc.000 36. given the small ticket size (~Rs.260 1. Bn) Share of NBFCs (%) Total Gold AUM of NBFCs (Rs.300 19.000 25. this difference in interest cost is not particularly apparent to the borrower.0% 120 18% 24 FY09 FY10 FY11E FY12E FY13E FY14E FY15E 21.100 53. Increased acceptability of the product: Furthermore. Hence we believe that within the organized segment.g. ICICI Bank.286 48.0% 974 65% 633
Source: Historical estimates from Manappuram using ICRA estimates. Manappuram expanded its branch network ~7x over the last four years).700 18.4% 515 50% 264 1. and (ii) it takes time for banks to fully operationalise a branch given the infrastructure needed to open a bank branch.4% 25 NA NA FY07 na 11. Better rates and services: Whilst we believe that the demand for the gold financing product is not interest rate sensitive.g.60% 644 55% 354
19. Bn) na 6.
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. 2.715 1. Since then the organised sector has become wary of unsecured financing. Banks find this difficult to replicate as: (i) banks get limited branch licenses from the RBI which they would prefer to use keeping in mind their overall growth strategy rather than just the needs of the gold finance segment.Indian Gold Financing. This should help the gold financing segment.The Road to El Dorado with some potholes
1. banks and NBFCs are offering gold loans at much lower rates than the unorganized players (12%-24% vs ~36%-60% by local moneylenders and pawnshops). India Infoline.600 40.0% 250 24% 57 1. 30K) and low duration of the product (~100 days). the organized sector is not only eating into market share of unorganized players but also trying to shed the stigma attached to pledging jewelry. thanks to heavy advertising through the print and electronic media using movie stars and sports personalities. Ambit Capital research
NBFCs are better placed than banks
Whilst banks provide lower interest rates than NBFCs (~13%-15% vs 18%-24% by NBFCs). Unsecured financing drying up: Between FY09-11 banks and NBFCs suffered substantial losses on their unsecured loan portfolios (e. 3.2% 1.700 20. banks like HDFC are increasingly offering these products through an increasing number of branches.
However. Quality of products and services: Given that gold loans are meant to provide short term financing. for newer NBFCs in this segment (like India Infoline. Moreover.
Sources of Competitive Advantage
Whilst on the face of it gold financing business looks like any other financing business with no visible competitive advantages.
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. given the need for experienced staff who can appraise the gold jewelry and provide robust operational risk management. NBFCs have advantage on these parameters as they have experienced gold valuers in all their branches (in-fact all the new hires at these NBFCs go through extensive gold appraisal training before they join a branch). deeper scrutiny points to the following key competitive advantages in this sector:
Reach/distribution channel: Given that gold loans are generally liquid loans where the borrower is in urgent need of funds and given the borrower’s unwillingness to travel beyond a certain distance from his home (due to the risk and cost associated with travelling long distances). burglary and fraud (i.Indian Gold Financing. he wants to pledge the minimum amount of jewelry to get the desired amount. taking spurious gold as collateral). they have been able to develop multiple check and balances to accurately appraise the quality of gold quickly. they are at risk of employee theft. Banks on the other hand are at a disadvantage here due to their weaker domain knowledge and hence are not able to offer higher LTV loans.. NBFCs are also spending on risk and safety measures by regularly auditing the gold stock at all branches. local branch based distribution is a key competitive advantage. This has helped them in building a product portfolio with interest rates ranging from 12%-24% depending on LTV and the type and quality of gold. etc. banks’ longer track record in providing locker facilities also helps. Banks have a natural advantage over NBFCs on this parameter given their long operating history and a general reputation for safety. Trust and brand name: Once the lender is near the customer. quick and hassle free delivery of gold loans is a key competitive advantage.e. Karvy. the lender then needs the customer’s trust in his ability to safely store the pledged gold. However. Decades of experience in these businesses have helped specialised NBFCs like Manappuram and Muthoot develop systems and procedure to counter these risks. the ability to provide higher LTV loans and quick disbursal of the same is a key competitive advantage. installing safety vaults and CCTV cameras. However. NBFCs like Manappuram and Muthoot score over banks on this parameter as due to their decades of experience in this business.) the lack of such experience and knowledge will be an obstacle to scale up their operations and compete with established players. NBFCs have an advantage over banks on this front as due to their low operational cost in running a branch.The Road to El Dorado with some potholes
Better products and service: Due to the very nature of this loan product (a short term liquidity product for borrowers with ~100 days average duration). NBFCs seem to have acknowledged this and are spending heavily on brand building by hiring popular movie stars and sports personalities (advertising expenses for Manappuram were 14% of its net revenues in FY10 vs 9% in FY08). Instead banks for the most part sell a single standardized gold loan product with an LTV of less than 65%. The key to provide higher LTV and quick disbursal lies in accurately and quickly appraising the quality of the gold. they are able to add branches faster than banks. Managing Operational risk: As lenders handle a large amount of cash and gold on a daily basis in branches scattered across the country. it is not easy for a new entrant to roll out branches rapidly. Moreover. since the borrower normally pledges his family jewelry. This helps them to quickly and accurately value the pledged jewelry and hence helps them quickly disburse the loan (in 10 minutes as per the personal experience of the author of this note) and provide higher LTV (up to 85%) to the customers.
Established NBFCs because of their decades of experience have been able to develop the systems to deal with operational risk effectively.The Road to El Dorado with some potholes Exhibit 4: Competitive assessment of the various players in the gold financing industry
Parameter Specialised NBFCs like Manappuram and Muthoot Banks New NBFCs who are entering the Local money segment (e.Relatively Strong. For new NBFCs.
Average. NBFCs because of their ability to quickly appraise the value of the gold and swiftly disburse the loan have an advantage over banks.
Reach and distribution channel Brand name and trust Products and services Ability to manage operational risk
Source: Ambit Capital research
. IIFL) Comments Due to aggressive branch expansion.Indian Gold Financing.g. However. Banks score well on this parameter because of their long operational history. dealing with operational risks whilst scaling up their operations would be a challenge. established NBFCs have a strong brand name in southern India and are trying to build pan-India brands through heavy advertising. . lenders Karvy.Strong. New NBFCs only have presence in limited geographies and moneylenders are confined to their respective localities. -
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. Banks because of their internal checks and procedures are able to adequately manage operational risk. established NBFCs have better reach than banks as banks don’t offer this product through all their branches.
Indian Gold Financing. Gold had a losing streak of 18 months where it lost 43% and it took another 18 months to reach at previous levels. a closer look suggests that things are not as simple as that. Bloomberg. They calculate the LTV on the scrap value of the gold. there have been multiple instances in the past where gold prices have declined sharply and languished for a long period of time
Exhibit 5: Periods of declining gold prices
Period Fall in gold Maximum 3 prices No. It took around 80 days for the gold to reach its previous levels A sharp decline of 43% in less than 2 months. After declining 18% in 3months the prices went back to earlier levels within 3 months. This improves the margin of
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. and (ii) NBFCs provide up to ~85% LTV on gold jewelry.The Road to El Dorado with some potholes
How do gold prices affect this sector?
Given that: (i) ~30% of the growth in the loan portfolio of the major NBFCs over the last four years has been driven by the increase in gold prices.
Impact of a price correction on credit quality
Due to limited listing history of gold loan companies. It took gold 25 years to return to its pre. Given that specialized NBFCs have an average LTV of around ~75% on their gold loan portfolio and have around 25% of their portfolio at ~85% LTV. A sharp decline of 19% within 16 days.decline prices! 44% decline over 2 year period took close to 35 months to reach the peak prices
From Aug’73Dec’73 From May’74 Aug’74 From Feb’75Aug’76 From Oct’78Nov’78
From Sep’80Jun’82 Feb’83-Feb’85 Feb’90-Jun’90 Feb’97-Jan’98
740 days 130 days 315 days
44% 18% 23%
16% 14% 16%
19% na 17%
28% Na Na
Source: Ambit Capital research. we believe that the impact would be lower than what one might instinctively expect it to be.
LTV is calculated on the scrap value of the gold: NBFCs normally provide loans against household used jewelry and not against gold bars. of days month during the decline period 120 days 21% 21% Maximum 6month decline na Maximum 1 year decline Comments After correcting by 21% in 4 months. Whilst gold has been steadily rising over the last decade. Whilst the gold bounced back 20% in the next 9 months. a drop in gold prices can impact both the credit quality and growth of the sector. However. it took 28 years for the gold to reach the peak that it hit in Jan’80. However. prices went back to the earlier levels within a month.
The last 90 years of data on historical gold prices show that there have been nine instances when gold prices have fallen more than 15% within a 3 month period and two instances when they have fallen more than 25% within a 3 month period. Lost ~57% in 21 months. a straight forward conclusion would be that a 25%+ correction in the gold price can be catastrophic for the sector. we do not have data on impact of a sharp gold price correction on gold financers’ credit quality.
lenders are unlikely to sell the pledged gold to mitigate default risk as they are likely to loose that customer forever and suffer reputational damage. Hence the sector is insulated to a significant extent from a gradual decrease in gold prices. Hence the replacement cost of the jewelry for the borrower is much higher than the scrap value and this makes willful default less likely even if the gold price corrects. prices have to fall by at least 35%-40% for borrowers to willfully default on their loans. That being said. and c) the lender has right to enter in to gold options on behalf of the client to hedge the gold price risk. a structural decline in gold prices similar to the 1980s could seriously impact the growth of the sector as the average tenure of the loan is only ~100 days.
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Emotional quotient: Normally the borrowers pledge their family jewelry and hence have some emotional attachment to the jewelry.The Road to El Dorado with some potholes
safety for them in the event of a fall in gold prices as the value of the jewelry is normally ~15-20% higher than the scrap value of the gold as it includes the making charges of the jewelry and the valuable stones embedded in the jewelry. Only 15% of the loans go beyond 180 days. write-offs for the Manappuram would be ~4% of the loan book. We believe that this adds an additional ~5% margin of safety for the lender.
Hence we believe that whilst from the lender’s perspective the average LTV is 75%. and (ii) a steep fall in gold prices can shut out marginal customers who do not have sufficient amount of gold to meet their loan requirement. Lenders have option to make margin call and enter into options contracts: Some lesser know features of gold financing contracts mitigate to a great extent the NPA risk in the event of sharp decline in gold prices: a) the lender has right to make a margin call if the LTV falls below their comfort level. This could be absorbed by the company within a single year since the company has an ROA of ~5%. Hence a decline in gold prices can bring down the loan growth as the: (i) loans get repriced at lower rates and the potential market size decreases with the value of the gold.
Impact of a price correction on loan book growth
The data suggests that ~30% of the loan growth of major NBFCs over the last 5 years has been driven by the increase in the gold prices (which increased at a CAGR of ~19% between FY06-11). Hence the borrowers have an emotional incentive to repay even if they are slightly out of money. Whilst the monthly volatility in gold prices could have a limited impact on growth.Indian Gold Financing. Shorter duration of the loans: The average duration of the jewelry loans is around ~100 days and around ~65% of the loans are repaid within 90 days and 85% within 180 days. Hence even in the worst case scenario based on historical trends (when gold prices fell 40% within 2 months in 1980). including making charges of the jewelry and some margin of safety due to the borrower’s emotional attachment to the jewelry. b) the lender has the right to sell the pledged gold even before the completion of loan tenure in case the LTV crosses 90%.
Hence Indian banks. we believe that in the medium-to-long term the company would tide over this obstacle as healthy profitability.5x (assuming ~20% loans off the books).
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.Indian Gold Financing. the banks were happy to advance loans to these NBFCs without breaching their sectoral advance caps to NBFCs. This means that the NBFCs’ ability to leverage would go down. 2011 the RBI said that gold loans no longer be classified as priority sector loans.6x. However. Constrained credit availability in turn could affect its growth for some time. who need to advance 40% of their advances to priority sectors. Hence the NBFCs will have to set aside the mandatory regulatory capital of 15% for these loans. This could now come down to ~6. on 3rd February. stable credit quality (NPAs less than <1. NBFCs could have effectively leveraged up 8. For Manappuram. This was not only a cheaper (~150-200 bps lower cost of funds on these advances) but also a easily available source of funding for gold NBFCs (~55% of Manappuram’s funding was through this route) as banks were happy to lend to gold loan NBFCs under the priority sector category without breaching their sectoral cap on NBFCs. This new guideline will impact the growth and profitability of the sector as:
Source: Company.The Road to El Dorado with some potholes
Removal of priority sector profitability and growth
Exhibit 6: Financials of typical gold loan NBFCs
Parameter NIMs Operating Margins PAT margin RoA RoE (%) ~15% ~55% ~30% ~4%-5% ~25%-30%
Until recently a major portion of loans originated by gold financing NBFCs were classified as ‘priority sector’ advances. removal of priority sector status would increase the cost of funds for gold NBFCs. Ambit Capital research
Increase in cost of funds: Since the cost of funds which came through the priority sector were ~150-200 bps cheaper than normal bank borrowings. We believe this could be a short term challenge for Manappuram given the current tight liquidity environment. However.0%) and comfortable capital adequacy (~25% at FY11E) should give enough confidence to credit providers to continue lending to the company. we expect the cost of funds to go up by ~110 bps as 55% of its funding came from banks through priority sector loans. Now NBFCs will not be able to sell their portfolio to banks and will have to keep this portfolio on their books. Availability of funds: Since loans to gold NBFCs were classified as priority sector. Increased capital adequacy: Gold financing companies were selling ~25% of their loan portfolio to banks for which they were not required to set aside equity capital. under the new regime. However. met some portion of this requirement by buying loan portfolios from gold NBFCs and advancing loans to them. gold NBFCs would have to compete with other NBFCs as well as other sectors to secure funding from banks. Prior to these guidelines. This means that keeping everything else constant. this would decrease ROE of the NBFCs by 8%-12% depending on their respective ROAs (see table below for explanation).
As explained in the previous section. Ambit Capital research* Please not that above analysis is only for illustration purpose and not our estimates for the company.
Source: Manappuram. These 55% funds will get repriced at 200 bps higher rates resulting in ~110 bps increase in cost of funds.02% 6. In the new regime the company will have to set aside capital adequacy of 15% for entire portfolio of Rs.33
10. there are fears of further regulatory intervention.92% 6.32%
25. which deals with customers who are very poor and do not have access to formal bank credit.The Road to El Dorado with some potholes
Exhibit 7: Impact analysis of RBI removing gold loans from priority sector (taking Manappuram 3QFY11 financials)
As a % of average assets Yield on advances Pre RBI guidelines 23. Hence the need to cap interest rates presumably does not arise.
Regulatory/political risk – is there more to come?
The Indian specialty finance sector has been at the wrong end of regulatory and political intervention in the recent past:
Andhra Pradesh’s state ordinance on microfinance institutions (MFIs) in Oct’10 has led to mass default by borrowers in that state.33 times in the optimal conditions as they were required to set aside 15% capital adequacy only for the 80% of loans which were on the books reducing effective capital requirement to only Rs.69% 3.46% 6.17% Post RBI guidelines 23. 80 on book loans). 100 of AUM (i. Two major risks which investors are anticipating are:
The RBI capping rates charged by gold financing companies. on 1st February. and State government intervention in the gold financing sector along the lines of what the Andhra Pradesh state ordinance did to MFIs.46% 5.77% 0. gold financing companies cater to more middle class people and small businessmen (who use gold financing
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In light of this.66
Operational expenses and credit quality do not get impacted by the new rule Impact of 70 bps on ROA ROE is a function of leverage and prior to new guidelines Manappuram could have leveraged up to 8.e. we believe that the probability of the RBI capping interest rates charged by gold financing companies is low:
The RBI removing gold loans originated by NBFCs from priority sector effectively means that the RBI does not think that these loans are going to the poorer/credit starved section of the society. a committee set up by the RBI on microfinance institutions (the Malegam Committee) proposed capping the interest rates charged by MFIs and imposing many other restrictions on their business operations.17% Comments The RBI guidelines does not impact lending rates ~55% of borrowed funds of Manappuram were through priority sector route where Manappuram was getting these funds at ~200 bps cheaper than normal borrowings.77% 0.
Cost of funds Spreads Opex Loan loss provisions Pre Tax ROA Post Tax ROA Assuming optimal leverage
9.5 for Rs. 12.79% 4.75% 6.15% 14.Indian Gold Financing.
Will RBI cap the interest rates?: Whilst it is difficult to anticipate the RBI’s
policy making regarding gold financing companies. Different customer Profile – small businessmen and the middle class: Unlike the microfinance sector.25% 12. 15. 100 implying capital adequacy requirement of Rs. the RBI removed priority sector status on gold loans originated by NBFCs. In Jan’11. 15% of Rs.
However. IIFL.Porter analysis of Indian gold financing industry
Bargaining power of suppliers High Given that the industry is still at a nascent stage and requires continuous debt and equity capital.
Further state government intervention?: Whilst gold financing NBFCs are
regulated by the RBI. its comforting that one of the technical committees set up by the RBI on this issue recommended that NBFCs should not come under State Money Lender’s Act and the recent Malegam Committee report on microfinance also endorsed this view. caps interest rates charged by moneylenders at 2% above the rates charged by banks. Reliance Capital. Whilst the final decision on this matter is still pending with apex court of India. However. time and advertising expense. Hence it is difficult to calculate the financial impact of applicability of Kerala Moneylender’s act applying on gold loan NBFCs. Bargaining power of buyers Medium Given that alternative sources of borrowing is limited for such borrowers and there are very few alternate avenues to get financing at such a short notice. scaling up operations needs substantial capital. as the existing players gain substantial scale and build a trustworthy brand name in major catchment areas. some state governments including Kerala (the state accounts for the biggest proportion of the loan portfolios of Manappuram and Muthoot) want to regulate these NBFCs under the State Money Lenders Act. the bargaining power of customers is low. they have scale down their unsecured loan books and have altogether exited from this segment (e. However. Cholamandalam etc. we cannot but feel that the gold financing sector is well placed to grow rapidly. given the under-penetration of credit in India and given the abundant availability of gold as collateral.g. The act. Hence the political or social need to intervene is more muted.
Threat of substitution LOW Microfinance loans and unsecured personal loans from banks and NBFCs are the two other major substitutes for the borrowers.The Road to El Dorado with some potholes
to meet their short term liquidity requirements). the bargaining power of capital suppliers (both equity and debt) is high. operational knowledge. however does not explain which bank rate to be taken for this calculation as banks charge anywhere between 8%-20% on different loan products.
Exhibit 8: Conclusion . Competitive intensity Medium The competitive pressure facing specialised gold NBFCs is not high given their unique offering of better service than banks and lower interest rates and better safety than moneylenders.
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. post recent developments in the microfinance sector in India we believe that the availability of finance from this route would be limited. The Kerala State Money Lenders Act. Industry
Whilst a sharp decline in gold prices and regulatory changes could impact the growth and profitability of the sector. as banks and NBFCs burnt their hands in unsecured personal loans.
Barriers to entry MEDIUM Whilst barriers to entry is not very high to start small scale operations. competition within NBFCs will intensify with the entry of more NBFCs in to the sector. amongst other things. it would be tough for a new player to break in. Moreover.)
Improving Unchanged Deteriorating
Source: Ambit Capital research.Indian Gold Financing.
TP Rs 143. The company’s loan book and profitability has grown at a CAGR of more than 100% over the last 4 years which has resulted in a ~30x increase in its share price over the same period. 36% upside):
Manappuram is the second biggest gold loan NBFC in India after Muthoot Finance and it is the only listed pure play gold loan NBFC.0bn.
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. The stock has corrected ~50% from its peak over the last 2 months and at 1. We initiate with a BUY.The Road to El Dorado with some potholes
Manappuram General Finance
(MGFL IN. mcap US$1. the company has adequate sources of funding to grow its loan book at a healthy pace of ~38% CGAR between FY1113 and maintain its ROAs as improvement in operational efficiency would largely mitigate the impact of margin compression. . Whilst the recent RBI clarification removing gold loans from priority sector would impact the growth and NIMs of Manappuram.Indian Gold Financing. BUY.9x FY12 P/BV we believe that all the negatives are already priced in.
1% 1.865 7.6 38.410 4.com
The genuine article
Whilst the recent RBI clarification (which removed gold loans from the priority sector) could impact loan book growth and NIMs.426
Stock Performance (%)
1M Absolute Rel.0% 22. Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports.3
. CPs. Mannpuram is the lender with the most well developed competitive advantages in the gold financing market. Valuation In a country where personal lending from the banks has almost stopped and where gold is a commonly available form of collateral.6% 24.143 implying 36% upside (implied FY12 P/B of 2.: + +91 22 3043 3205 email@example.com 4. gold financing looks well placed to continue growing rapidly. the remaining 65% were credit lines from banks at slightly lower rates due to the priority sector tag.6 5. Ambit Capital research
Tel .413 2.561 7. As a result.9
FY10 3. following the recent correction (which was in part driven by a regulatory change from the RBI).2% 10.8% 5.6% 21. only 35% was from selling loan portfolios to banks (a source of credit which seems likely to dry up).8 -18. NCDs). We initiate with a BUY.1 5.3% 23. Even within priority sector borrowings.6% 30.000 1 0.884 9. Manappuram has adequate sources of funding to grow its loan book at a CAGR of 38% between FY11-13 and maintain its ROAs as improvement in operational efficiency would mitigate the impact of NIM compression.274 674 302 2. CFA
Tel: +91 22 3043 3206 firstname.lastname@example.org FY12 P/BV all the negatives seem priced into Mannapuram’s share price as: Funding concerns are overdone: Whilst the RBI guidelines will impact the availability of funding to some extent.608 11. Loan book grow should be healthy: Whilst loan book growth seems likely to slow down from its historical rate (120% CAGR between FY07-11). Our “excess return model” (using a cost of equity of 15% and perpetuity growth of 5%) values the firm at Rs. However.000 200 1 50 1 00 50 8-Jul-1 0 Sensex 26-No v-1 0 M anappuram Gen.300 15. Investors should consider this report as only a single factor in making their investment decision. Over the last 2 months. to Sensex 3M 12M YTD -21.0 4.018 1.6
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: Rs44bn/US$963mn Rs190/62 Rs215mn/US$4. all the negatives appear to be priced in. investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report.9 -29. Even after a 45% correction over the past 3 months.963 6.105 5. 2010
Bloomberg: MGFL Equity
INITIATING COVERAGE Analyst contacts
Please refer to disclaimer section on the last page for further important disclaimer. we still expect it to be healthy at 38% CAGR over the next 2 years driven by increased business from the branches were opened in the last one year (52% of the branches) and the further roll out of ~1000 branches over the next two years.2 -41.9
FY13E 16.0 4.BFSI-Specialty Finance
February 15.5x and FY12 P/E of 13.5
1 5-Feb-1 0
FY09 1.000 20.9x FY12 P/BV.5% 1.com
Tel: +91 22 3043 3216 poonamsaney@ambitcapital. we do not see funding drying up for Manappuram as at 3QFY11 ~45% of its debt funding is from the non-priority sector route (bank credit lines. the increased operational efficiency (opex as of % average assets declining by ~120 bps by FY13) should mitigate the impact on ROAs.2 3.000 1 5. the stock has corrected ~45% from its peak and at 1.3
Exhibit 9: Key financials
Year to March Net Revenues Operating Income Net Profits Diluted EPS (Rs) RoA (%) RoE (%) P/B (x)
Source: Company. Fin. at 1.4% 2.com
CMP: Target Price : Upside (%) EPS (FY11E):
Change from previous (%) Variance from consensus (%)
Rs106 Rs143 36 Rs7.836 2.7mn 0. (c) slight decrease in lending rates.7x 18.3 -17.1 50.2 -31. Increased operating efficiency to mitigate margin compression: Whilst we expect NIMs to compress by ~260 bps between FY11 and FY12 driven by (a) system wide rates rising (b) priority sector liabilities being repriced upwards by ~110bps. Manappuram’s share price is up ~30x over the last four years driven by a CAGR of 135% in net profits between FY06-11.296 4.
646 FY12E 23.7 21.541 403 5.8% FY11E 14.7
1.301 403 3.
Rs.4% FY12E 12. revenue and net profit growth
320% 280% 240% 200% 160% 120% 80% 40% 0% 298% 173% 98% 88% 55% FY08 95% 91% 43% FY09 FY10 FY11E 168% 188% 178% 162%
ROE decomposition (as a % average assets)
Net Income NII Fee Income Operating Expenses Employee Expenses Other opex Operating Income Depreciation Loan loss provisions Pre Tax ROA Tax ROAA Average Leverage(x) ROAE FY10 15.7% 0.888
Profit and loss account
Rs.6% 5.306 5.914 4.0 Funds BVPS (Rs)
569 1.Manappuram General Finance & Leasing
Company Financial Snapshot
Year 1992 1996 1999 2007 2008 2009 2010 2010 2010 Event Company established Company goes public via an IPO Commencement of gold financing business PE funding of Rs.5%
Ambit Capital Pvt Ltd
.835 3.561 12.410 8.450 93.434 31.9
1.395 536 859 2.3% 0.2% 5.682 25.351 2.8% 15.6% 14.871 1.274 169 5.106 25.5% 6.8% 2. 1bn to promoters Raised Rs. a strong brand name and the ability to swiftly appraise gold.296 6.3% 6.5% 8.407 2.~70 bn.4% 0.7% 0.4% 0.197
4.7% 3.392 20.5 22.545 104.5% 7.888 56.030 4.6% 4.265 2.765 3.90% 2.0% 4.962 4.574 1.5% 5.1
FY11E 8.159 83. 10 bn through another QIP
Manappuram is India’s second largest gold loan provider with a loan book of Rs.5% 4.2
Loan.516 161 3.948 74.5 30.249 11.437 116.010 31.5% 12.608
Application of Funds Fixed Assets Investments Cash and Bank balances Net Loan book Net Current Assets Total Applications of 11.3% 8.3% 4. 700 mn from Ashmore and others Acquired sister company MAFIT from promoters Raised Rs. 700 mn from Sequoia and others PE funding of Rs.646 46.488 64.44% 2.6
FY12E 12.045 107 1.5% 2.0% 9.460 7.805 2.300 2. 2.3% 0.3% 0.836 4.3% 2.413 3.9% 5.1% 0.666 8.539 FY11E 19. make a lending decision and then structure a loan for the retail or SME borrower.3% 7.158 83.2% 2.4% 0.818 1.539 17.018 1.865
7.47% 2.544 2. The company provides loans against household jewelry and has grown its loan book at a CAGR of 120% over the last 4 years driven by its expanding branch network. mn Net Income Net Interest Income Interest Income Interest Expense Fee Income Expenditure Employee Cost Other expenses Operating Profit Profit Before Tax Net Profit Diluted EPS (Rs) FY10 3.3% 6. Mn Sources of Funds Shareholders' Funds Loan Funds Total Sources of Funds FY10 6.5 bn through a QIP Preferential issue of Rs.437 116.
The brand is relatively unknown outside south India. For new NBFCs.800 branches spread across India. . Strong risk management architecture to shield the company from employee thefts.Manappuram General Finance & Leasing Exhibit 10: SWOT analysis
Strong branch network of ~1. However. Strong brand name in the gold financing in south India Ability to quickly disburse gold loans based on the gold appraisal skills developed over decades. burglaries and the use of spurious gold as collateral. City Union Indiainfoline Finance Comments Manappuram and Muthoot have a wider distribution reach from ~2000 branches compared to City Union Finance (~600 branches) and new players like Karvy and IndiaInfoline (who have a negligible branch presence). Bloomberg. Both Manappuram and Muthoot have been in the industry for decades and are the better known brands in the segment. A sharp correction in gold prices could lead to NPAs rising and/or reduce the potential size of the gold loans market. Lack of a broad based funding base and heavy dependence on banks for funding. State governments intervening in the operations of gold lenders like Mannapuram. the company is trying to build its brand through heavy advertising.
Opportunity to grow its underpenetrated north India.Relatively Strong. dealing with operational risk whilst scaling up their operations would be a key challenge.
Ambit Capital Pvt Ltd
Relatively weak. Manappuram scores over Muhtoot on brand recognition as the Muthoot brand name is more generic in nature (there are already three big gold financing firms by the name of Muthoot which could lead to cannibalization and confusion). the removal by the RBI of gold loans from the priority sector somewhat reduces this risk.
Reach and distribution channel
Brand Name and trust
Ability to manage operational risk Overall
Source: Ambit Capital research
Exhibit 11: Competitive assessment of the various players in the gold financing industry
Parameter Manappuram Muthoot Finance Muthoot FinCorp Shriram Karvy. However. Industry. Because of their decades of experience in the industry.
. Manappuram and Muthoot have developed systems to deal with operational risks effectively.Strong.
There is a potential regulatory threat that the interest rates charged by gold lenders like Mannapuram could be capped.
Opportunity to diversify in the related businesses like selling gold coins and bars and financing these purchases. Ambit Capital research.
.000 FY07 FY08 FY09 FY10 9MFY11 YoY Growth (%) Net Profits (Rs.0 0. In this section we expand on these conflicting forces. the increase in gold prices (21% CAGR between FY07-11). mn)
Source: Company. Manappuram has emerged as one of the top wealth creators in the country over the last 4 years with its stock price increasing by ~30x over the last 4 years despite the recent 50% correction.but EPS growth has been lower due to dilution
350% 300% 250% 5.000 2.000 1.
Exhibit 12: Robust loan growth…
70 60 50 40 30 20 10 FY07 FY08 FY09 FY10 9MFY11
YoY Growth (%) Outstanding loan book (Rs.795 now). Ambit Capital research
Exhibit 14: Healthy net profit growth…
6. From being one of the thousands of small cap companies listed on the exchanges..000 3. further branch expansion and improved efficiency in the branches.000 1. Ambit Capital research
Exhibit 15: . the drying up of personal loans from banks since the Lehman crisis and continuous funding from both debt and equity providers has helped Manappuram to grow its loan book and revenues at a ~120% CAGR over FY07-11. Ambit Capital research
173% 86% 84% 27% 62%
150% 100% 50% 0%
168% 98% 43%
200% 150% 100% 50% 0%
YoY Growth (%)
…and now has a bright future
We expect Manappuram to show continued growth in its top and bottom line (although at a slightly lower pace than it has done over the past five years) due to the increased productivity of its recently opened branches (52% of the branches currently under operation were opened in the last one year). mn)
Source: Company.0 3. bn)
Source: Company. 70 bn in loan assets.000 3.000 5.0 1.0 FY07 EPS
Source: Company.000 5.000 FY07 FY08 FY09
88% 95% 174%
200% 150% 100% 50% 0%
FY10 9MFY11 YoY Growth (%)
Net Revenues (Rs.000 4.Manappuram General Finance & Leasing
Mannapuram has come of age…
Manappuram is India’ second largest gold loan NBFC with ~Rs. Ambit Capital research
Exhibit 13: …with a proportional increase in revenues
173% 91% 55%
200% 150% 100% 50% 0%
Ambit Capital Pvt Ltd
.000 4. These positive forces should largely mitigate the negative impact of NIM compression (arising from the increased cost of funds and the decrease in lending yields due to increased competition). Rapid branch expansion (from 291 branches in FY07 to 1.000 2.0 4.
Our discussions with bankers suggest that whilst funding through the securtisation route (which accounts for ~20% of Mannapuram’s funding) might dry up.195 55% This is the part most impacted by the RBI 26% policy change as it is no longer attractive for banks to buy these portfolios Interest cost likely to increase on these 29% liabilities by ~150-200 bps This is unlikely to be affected as these are 33% normal working capital loans.000 913 25 54. 20 bn
Source:Company. the company has two more sources of funding which it has not fully explored as yet: The Company has the highest credit rating available for Commercial Paper (CP)/NCDs.242 15. Moreover. 3% 2% 2% 0% 100% Company has the highest rating for raising CPs.694 88% 29. Non Priority Bank funding Non bank Funding NCDs Subordinated bonds Subordinated debt CPs Others Total Amount % contribution Comments (Rs. However. uncertainty regarding the evolution of gold prices (which has driven ~40% of the loan growth between FY07-11) and lower business from the new branches due to lower availability and willingness to pledge gold in the rest of the India vis a vis south India. the direct bank funding under priority sector (which accounts for 35% of Mannapuram’s funding) would still continue but at slightly higher rates (100-200 bps). It can raise ~Rs. Can raise upto Rs.
Exhibit 16: Funding mix for Manappuram at the end of 3QFY11
Funding Source Bank Funding (a+b) a.887 6. we believe that even with constant gold prices and with a slight improvement in branch productivity. Rival Muthoot 5% Group gets 50% of its funding through this route.20 bn in CPs but has so far utilised only 5% of this limit.628 1.501 2. the company can achieve loan growth of 38% CAGR between FY11-13 (implying average loan book CAGR of ~58% between FY11-13 as the growth was back-ended in FY11): (i) Funding to become more expensive but not dry up: Whilst funding is likely to become expensive post the recent RBI guidelines removing gold loans from priority sector. Mn) 47. ~55% of the funding for Manappuram was coming through priority sector and only ~20% of the funding was through assignment of the portfolios (see table below). should also be able to avail of NCD funding. Ambit Capital research
Ambit Capital Pvt Ltd
. However.Manappuram General Finance & Leasing
Loan book to grow at a CAGR of 38% Mannapuram’s loan book has grown at a CAGR of ~120% between FY07-11 and management is guiding the market towards loan growth at ~80% CAGR between FY11-13.934 1. Only ~5% of the funding for Manappuram comes from retail NonConvertible Debentures (NCDs). Through Priority Sector Assignments Working capital loans from banks b. Manappuram’s competitor Muthoot Finance gets ~50% of its funding through this route suggesting that Mannapuram. 12% Can access this route. a larger and more established firm.565 17. we are skeptical about management’s ability to meet this guidance because of our concerns regarding the abundant availability of the funds following the recent policy change by the RBI which removed gold loans from the priority sector (~55% of the borrowings of Manappuram were priority sector).807 14. we cannot see funding drying up for Manappuram completely.
017 52.2 71.3 48.0 656 3.372 1.5% by FY13 as: (i) Cost of funds for Manappuram are likely to increase by 100-150 bps as the double whammy of system wide interest rates rising kicks in and the removal by the RBI of gold loans from priority sector bites (leading to ~55% of Mannapuram’s liabilities being repriced at ~200 bps higher).4 18.2 51.
Source: Company.2 223.771 2. net profit for Manappuram grew at a 128% CAGR which is higher than the loan book CAGR of 120% during the same period as: (i) cost of funds decreased for Manappuram (from ~11. and
Ambit Capital Pvt Ltd
.8 145.660 22.0 68.3 FY12E 104.145. Going forward we expect net interest margins to decline to ~13.2 41.9 549.2% in 3QFY11) due to improved credit ratings. Over and above that.189 9.500 42.966.000 47.000 37.9 35.) Gold Stock (MT) Gold pledged per customer (grams) No.09 48.942 1.740 192% 70% 106.2 19. going forward we expect net profits to grow at slightly lower rate (~48% CAGR between FY11-13) than the growth in average loan book (~58% CAGR between FY11-13) as it seems likely that there will be some compression in net interest margins due to: (i) the cost of funds increasing by ~100-150 bps due to the RBI removing gold loans from priority sector. (ii) the decline in the lending yields as competition increases in the gold loan sector in the wake of new players entering the market.9
1.5 22. Ambit Capital.5 FY13E 141.914 55% 45% 10. *Including securtised/assigned loans
Profitability is likely to fall Between FY07-11.811 1. However.Manappuram General Finance & Leasing
Exhibit 17: Increasing branch productivity
Year FY07 FY08 FY09 FY10 3QFY11 Portfolio per branch (Rs.0 FY10 25.5 613 2.845
Source: Company. Mn)* Loan Growth (YoY) LTV Value of the gold stock (Rs.6 FY11E 74. 10 mn whereas in the older branches. enhanced operational efficiency will offset to a significant extent the adverse impact of fallings NIMs. Mn) Average Ticket Size per customer ('000) 48% 6. the average loan portfolio is in the range of Rs. Going forward we expect the business from the new branches to increase as they become mature as they benefit from heavy advertising and marketing by Manappuram.8
(ii) Branch expansion and improved branch productivity: ~52% of the branches in Manappuram have been opened over the last one year.176 FY08 4.510 35% 70% 202.8 335.531.156 520 645 25.4 46. Mn) Average Gold prices per gram (Rs. Mn) 13.8% in FY08 to ~9.158 2017 100.452 13.039 512 436 19.5 40. Ambit Capital research
Exhibit 18: Loan growth analysis for Manappuram
FY07 Total Gold loans (Rs. In these branches the average portfolio is still below Rs.946 2017 74.172 546 1. the addition of ~1000 more branches over the next 2 years should further add to loan book growth. and (ii) operational efficiency improved between this period as opex as a % of average assets fell from 7.2 21.279 573 2.8% in 3QFY11.4 65. 40-150 mn.9 46. However.5 25.9 28. of customers Customer per branch Number of branches Portfolio per branch (Rs.592 930 7.005 35. Manappuram has maintained net interest margins in the range of 15%-18%.0% in FY08 to 6.589 173% 69% 37.3 39. We describe these dynamics in more detail in this section.0 FY09 9.267 1. NIMs to decline but still stay healthy: Between FY08-11.9 3.2 1.962 40% 70% 149.381 91% 48% 19.371 500 291 18.
6% FY12E FY13E FY08 FY09 FY10 24.0%
27.8% 10. Clearly.8%
10. going forward we expect operational expenses to decrease further to 5. These expenses have increased at a CAGR of 162% between FY06-11 as company has heavily spent on brand building by hiring well known movie stars. they are likely to come down as a % of average assets. Ambit Capital research
8.4% 7.0% 23. Whilst some of the expenses related to branches (eg. Even if assume Manappuram maintains its advertising expenses.5%
Credit quality to remain stable with a sharp decline in gold prices being the main concern: Credit quality trends have been stable for the company in the past with NPAs in the gold loan business being less than ~1% over the last two years. Ambit Capital
Cost of funds (%)
Improved operational efficiency to compensate for NIM erosion: Whilst Manappuram’s operational efficiency have improved marginally between FY08-11 with operating expenses as a % of average assets decreasing from 7% in FY08 to 6. rent and electricity) will increase with inflation and employee expenses are likely to rise up with competition heating up in the sector.4% 23. these expenses are totally discretionary in nature.0% 16.2% of average AUM) in FY10 and FY11.9% 15.6% of average assets by FY13 as: ~64% of the firm’s branches have been opened in the last two years and are yet to reach their optimal capacity.9% 25.9%
Yield on advances (%)
Source: Company.Manappuram General Finance & Leasing
(ii) Increased competition from other NBFCs (like Shriram City Union. the increase in such expenses will be outpaced by the loan book growth that these branches will show as they move towards optimal capacity (see Exhibit 17 on page 17).9% 5.6% 10.7%
8.0% 17.0% 6.5%
13.) which have recently entered the gold loans market leads to a 100-150 bps decline in lending yields.5% 29.0%
Exhibit xx: NIMs to decline but still at healthy level
30% 20% 10% 0% FY11E FY12E FY13E NIMs (%) 5.8% 6. Karvy. Manappuram’s superior credit quality is driven by the following factors:
Ambit Capital Pvt Ltd
. India Infoline. Advertising expenses for Manappuram have been ~33% of total expenses (~1. etc.8%
Exhibit 19: Operating efficiency to improve further with scale
10% 9% 8% 7% 6% 5% 4% 3% FY08 FY09 FY10 Q3FY11 Q4FY11E Opex as a % of avg assets (%)
Source: Company.8% in Q3FY1.6% 14.
Therefore. Mannapuram calculates LTV without including the value of the precious stones embedded in the jewelry. To factor in making charges and the emotional quotient. this lender’s CAR would be above the mandatory 15% until FY13. This further reduces the chances of willful default. we expect credit quality trends for Manappuram to remain stable unless there is a sharp correction in the gold prices.4%. the recent RBI notification that gold loans should not be classified as priority sector loans means that ~20% of Manappuram’s loan book (which the company had assigned to banks in bilateral transactions) would now stay on its books.Manappuram General Finance & Leasing
The average loan to value (LTV) of the Manappuram loan portfolio is ~70%.
Exhibit 20: LTV breakup of the portfolio
% of loans 4% 10% 1%
Exhibit 21: Sensitivity of Mannapuram’s NPAs to a gold price fall
3 month fall in gold prices 40% fall Portfolio write offs* in the case of willful defaults 4. However. Manappuram offers loan against jewelry which households have used for some time and to which the borrower usually has an emotional attachment. we have reduced ~15% from disclosed LTV to arrive at effective LTV and have assumed that ~35% of the borrowers who are due after 3 months will default below their effective LTV. based on our loan growth projections (FY11-13 CAGR of 38%). The key question then becomes “What if gold prices correct sharply?”. Gold prices have been continuously rising over the last decade. Hence even in the cases of default. Even then. Including the value of stones and taking account of making charges makes it even less likely that borrowers will willfully default on a loan. Ambit Capital research
Source: Company. Ambit Capital.
Ambit Capital Pvt Ltd
. Our sensitivity analysis based on the LTV breakup of Manappuram 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 not happened in the last 30 years). The write-off numbers are calculated after factoring in sell of pledged gold at scrap value. Manappuram did a QIP in Nov’10 (~$250m) which boosted its CAR to ~32.0% of the portfolio which could be absorbed by a year’s earning as company’s ROA is ~5% (see table below explaining the maths). Manappuram has been able to recover its loans and interest by selling the pledged jewelry. the total write-offs after recoveries could be ~4.0% NA NA
30% fall 20% fall 10% fall
<50% 81%-85% 51%-60% 86%-90% 61%-70% 91%-95% 71%-80% >95%
Source: Company.5%. Hence the chances of willful default are relatively low as the borrower is incentivised to pay up and reclaim his jewelry. This would reduce Manappuram’s CAR to ~25.0% 1.
Comfortable capital adequacy: Manappuram is a registered NBFC with the RBI and hence needs to meet the RBI guidelines of 15% capital adequacy ratio (CAR) by Mar’12.
6% 19. the P/B multiple would be much higher than what we are assigning to the company in the valuation section of this note. Ambit Capital research
However. if the loan book growth is higher than our expectations (and is nearer to the management guidance of ~80% between FY11-13).
Ambit Capital Pvt Ltd
.7% 29.Manappuram General Finance & Leasing Exhibit 22: Capital adequacy to remain above regulatory levels
44% 40% 36% 32% 28% 24% 20% 16% FY08 FY09 FY10 FY11E FY12E FY13E 31. this dilution would not necessarily be bad for the shareholders because if management is able to meet its guidance.7% 40. Mannapuranm would have to raise more equity by late FY12 or early FY13. Clearly.3% 22.8%
Capital Adequacy Ratio
Source: Company.3% 17.
510 8.608 11.668 4.1
FY11-13 CAGR of 38% vs FY09-11 CAGR of 182%.452 48% 27.296 4.9 1.3 101 82 181
40.0% 10.561 2.660 69% 29.2 152.410 4. FY11-13 CAGR of 42% vs FY09-11 CAGR of 157%.0% 10.2 175.66% 6.Manappuram General Finance & Leasing
Key assumptions & estimates
Exhibit 23: Key assumptions and estimates for Mannapuram (all figures in Rsmn unless otherwise mentioned)
FY09 Assumptions Number of branches Customers per branch 645 520 1.865 4.018 1.8 1.5% 11.274 674 302 2.865 7.608
% change 6% -4% 7% 1%
Ambit Capital Pvt Ltd
.0% 10.2 2.232
In line with general salary rise in India In line with inflation
9.5% 8.152 2.94% 8. of employees per branch Expense per employee (Rs’000) Rent per branch (Rs’000) Advertising expenses (Rsmn) Other expenses (Rsmn) Key Outputs (YoY growth) Loan Book Net Revenues Operating Income Profit After tax EPS
Source: Ambit Capital research
51. FY11-13 CAGR of 48% vs FY09-11 CAGR of 208%.884 9.1
74.413 2.740 104.000 573 2.6 162 482 243
46.78% 6.005 546 2. Ambit Capital research
Ambit 8.2 132.6 217 1.1 16.940 13.3 81.500 613 3.017 70% 25.589 3.000 656 Branch expansion numbers based on historical trends and management guidance Customers per branch will increase with increased branch productivity as the newly opened branches mature Increase in the amount of gold pledged per customer based on historical trends and increased per capita gold holdings We do not have a view on gold prices and hence have assumed constant gold prices in the near future Assuming constant LTV on the gold pledged Decrease in yield due to increased competition in the segment Increase in cost of funds due to rising systematic rates and gold loans being removed from priority sector FY10 FY11E FY12E FY13E Comments
Gold pledged per customers (gms) Gold prices per gram (Rs) LTV ratio Yield on advances Cost of funds No.5 2017 70% 23.381 1.
Ambit versus consensus
Exhibit 24: Ambit v/s consensus
(Rs mn) Net Revenues FY11E FY12E Net profits (Rs) FY11E FY12E
Source: Bloomberg.024 1.081 623
48. FY11-13 CAGR of 40% vs FY09-11 CAGR of 87%.2
25.5% 8.0% 8.197 4.410 12.0 2017 70% 23.4 263 1.836 2.963 6.962 141.5 239 1.7 12.9 97. FY11-13 CAGR of 44% vs FY09-11 CAGR of 168%.561 7.300 15.
4 11.8 16%
23.9 2.5 28.9 2.7 2.2 3. We take comfort from the fact that such a sharp correction in gold prices has not been witnessed for 30 years.5 15.4 77%
5.1x).7 0.0 21.4 9.5 1.5 -2%
Mannapuram currently trades at 1.0 2.2 2012E 9.
Exhibit 25: Relative Valuation NBFCs Power Finance Corporation Dewan Housing Finance LIC Housing Finance IDFC Shriram Transport Finance M&M Finance SREI Infrastructure Finance Ltd REC SKS Finance Average of above Manappuram Gen.4 3.9 4.3 3.2 3.7
(Rs) (USD bn) 2011E
2012E 2011E 2012E
Ambit Capital Pvt Ltd
Key risks to our stance
All three key risks to our positive stance on Manappuram are “external” in nature: A sharp decline in gold prices: a decline of more than 40% in gold prices within a quarter with gold prices then staying at those depressed levels for more than a year could seriously impact credit quality for Manappuram as the likelihood of willful defaults would increase in such a scenario.7 8.0
RoE (%) 18.3 8%
1.1 19.5 0.4 34%
9.4 3.6 2.Manappuram General Finance & Leasing
Our FY11 numbers are ~6% above consensus estimates as we are expecting the impact of new RBI guidelines to crystallize in FY12 and not in Q4FY11. in order to mimic the impact of rising competition.6 19.2 2.6 1.6% to 4. We have explicitly forecast net profits for FY11. Our sensitivity analysis shows that such scenario could erode Manappuram’s entire year profitability. Ambit Capital research
Price 264 264 178 139 698 696 46 247 643
Mcap 6.7 0.5 14.1 0.5x FY12 earnings which is at 8% and 33% discount respectively to its closet peer SKS which we believe is unjustified given that gold financing is a much better business model than unsecured microfinance model.2 9. & Leasing Premium or Discount to above
Source: Bloomberg.8 3.7 19.9 2.0 3.3 3.6 6.9 9%
16.2 5.9 20%
2.2 21.9 3.5 3.9
P/BV (x) 2011E 2.6 2.4 9.7 19.8 28.9 1.1 2012E 1.6 1.6 1.9 12.1 1. From FY20 we have assumed terminal growth of 5%
Based on these assumptions our excess return model values Manappuram at Rs143 per share (implied FY12 P/B of 2.3 4.5x and FY12 P/E of 13.1 1.2 2.3 4.9 1.2 14.7 18.3 4.
We have valued Manappuram using an “excess return to equity” model which is based on ‘Net Profits – (cost of equity x beginning of the year book value)’ for all the future years discounted back to the present using a cost of equity of 15%.9 12.0
RoA (%) 2.5 3.2 24.8 1.5 1.4 1.9x FY12 book value and 9. we have faded the loan book growth from 35% to 10% and ROA from 4.5 22.7 1.8 13.8
P/E (x) 2011E 11.9 14.3 4.6 1.8 8.6 23.7 19.6 8.5 11.0 14. implying 36% upside from current levels. Fin.8 14.1 70%
22.3 11.3 4. Between FY13-FY20.4 2.7 10.4 12.3 23.0 1. FY12 and FY13 based on the assumptions in the table above.0
g crude. steel.) and its value is primarily driven by the perceived notion that it is a valuable commodity. whilst the Supreme Court of India has still to give its verdict on validity of Kerala Moneylender’s Act on NBFCs like Manappuram. it could affect Mannapuram’s operational flexibility and lending yield in the state of Kerala (~19% of Manappuram’s loan book comes from this state). Moreover. Regulatory and political intervention: Whilst we do not foresee the RBI capping interest rates for gold loans following its decision to remove gold loans from priority sector. etc. If the verdict goes in favour of Kerala government state.
Ambit Capital Pvt Ltd
. Hence any changes at the global level which could erode confidence in the commodity would be damaging for gold prices and hence for Mannapuram. we cannot rule out such an irrational decision being taken under political pressure.Manappuram General Finance & Leasing
Gold losing its status as a precious commodity: Gold does not have as much utilitarian real value like other commodities (e.
2 2.682 18.154 33% 6.666 8.460 1.454 3.942 2.921 3.Manappuram General Finance & Leasing
Exhibit 26: Balance sheet
Year to March (Rs mn) Sources of Funds Shareholders' Funds Loan Funds Secured loans Unsecured loans Total Sources of Funds Application of Funds Fixed Assets Investments Cash and Bank balances Net Loan book Net Current Assets Total Applications of Funds Total assets including assignments
Source: Company.249 11.413 3.888 1.081 326 623 4.869 128.914 2.0
Ambit Capital Pvt Ltd
.516 161 21 140 3.6
FY12E 12.265 2. Ambit Capital research
FYO9 1.103 157.306 5.765 3.979 1.274 1.510 5.106 18.045 107 25 82 1.1 4.410 8.646
116.574 1.733 403 7.450 93.307 33% 4.437
FY13E 16.300 15.462 31.646 1.392 20.437 116.407 2.234
83.024 538 899 7.434 33% 2.501 1. Ambit Capital research
FYO9 1.351 2.018 142 57 1.561 12.488 64.679 4.301 403 3.300 1.865 7.274 169 22 147 5.185 11.707 28.566
FY10 6.198 2.024 723 1232 9.856 24.948 74.506 3.539
FY11E 19.794 1.638 177 23 154 6.462 569 1.344 11.884 16.712 793 6.296 122 260 6.888
FY12E 23.185 280 11 1.395 536 859 482 133 243 2.963 200 308 9.134 4.1 11.1
FY11E 8.1 15.888 116.010 24.2
FY10 3.197 4.412 348 6.357 16.818 621 34% 1.646 83.475 141.541 403 5.982 157.103 1.103
Exhibit 27: Income statement
Year to March (Rs mn) Net Income Net Interest Income Interest Income Interest Expense Non-Interest Income Fee based services Other income Expenditure Employee Cost Other operating expenses Advertisements Rent Others Operating Profit Bad debts and provisiosn Depreciation Profit Before Tax Taxes Tax rate Net Profit Basic EPS Diluted EPS
Source: Company.545 104.114 916 76 20 56 601 284 317 82 54 181 674 178 34 462 160 35% 302 2.030 1.544 2.805 2.962 4.835 3.836 379 158 4.7 7.608 11.159 83.
1% 16.91% 40.6 1.5% 13.66% 18.4% 1.9% 8.5% 12.9 2.3%
FY11E 26.0% 10.13% 31.2% 0.0% 0.0% 22.6% 30.5% 1.0 5.79% 41.31% 0.44% 42.81% 47.55% 0.0% 5.4% 1.3%
Exhibit 29: Valuations
Year to March (%) P/E P/BV ROA ROE Dividend Yield
Source: Company.2 10.18% 40.9% 5.Manappuram General Finance & Leasing
Exhibit 28: Ratio analysis
Year to March (%) Loan Growth (YoY) Yield on advances.8%
FY10 173% 29.5% 13.1 17.5%
FY12E 13.6% 0.Calculated Spreads NIM-Calculated Cost to income ratio Opex as a % avg assets Gross NPAs (gold loans) Net NPAs (gold loans) CAR
Source: Company.31% 0.5% 12.0% 10.7%
FY11E 192% 25. Ambit Capital research
FYO9 92% 27.3% 23.5% 11.5%
Ambit Capital Pvt Ltd
.9% 34.3 5.9 5.3%
FY12E 40% 23.6% 21.9 4.0% 8.9% 0.5% 7.14% 19.94% 16.9 3.7% 0.2%
FY13E 9.8% 0.1% 0.Calculated Cost of funds. Ambit Capital research
FYO9 61.7% 16.56% 41.18% 29.6%
FY13E 35% 23.0% 10.66% 0.14% 22.3% 17.78% 15.0 3.94% 0.1% 8.
com email@example.com firstname.lastname@example.org email@example.com nitinbhasin@ambitcapital. Automobiles) Desk-Phone (022) 30433202 (022) 30433211 (022) 30433209/3221 (022) 30433285 (022) 30433252 (022) 30433210 (022) 30433203 (022) 30433255 (022) 30433205 (022) 30433241 (022) 30433206 (022) 30433201 (022) 30433216 (022) 30433259 (022) 30433274 (022) 30433175 (022) 30433292 (022) 30433264 (022) 30433054 E-mail firstname.lastname@example.org email@example.com firstname.lastname@example.org ankurrudra@ambitcapital.Ins Equity Director.com email@example.com firstname.lastname@example.org bhargavbuddhadev@ambitcapital.Ins Equity VP .com chhaviagarwal@ambitcapital. Ahire Ankur Rudra.com poonamsaney@ambitcapital. CFA Research Analysts Amit K. CFA Parikshit Kandpal Poonam Saney Puneet Bambha Rajesh Kumar Ravi Ritika Mankar Ritu Modi Subhashini Gurumurthy Vijay Chugh Sales Name Deepak Sawhney Dharmen Shah Dipti Mehta Pramod Gubbi.com ashishshroff@ambitcapital.Ins Equity Senior Manager Equities VP .Institutional Equities – (022) 30433174 saurabhmukherjea@ambitcapital. CFA Ashish Shroff Ashvin Shetty Bhargav Buddhadev Chandrani De.com email@example.com parikshitkandpal@ambitcapital. CFA Chhavi Agarwal Gaurav Mehta Krishnan ASV Nitin Bhasin Pankaj Agarwal. CFA Sarojini Ramachandran Designation VP .com firstname.lastname@example.org
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