manappuram finance limited (mgfl)...2 anand rathi research manappuram finance limited (mgfl) was...

Anand Rathi Research

Time Horizon – 12 Months

November 30, 2016

Sep-16 Jun-16 Mar-16 Dec-15

Promoter 34.4% 34.4% 33.7% 32.6%

Institutions 40.8% 40.8% 40.1% 39.4%

Non Institutions 24.8% 24.8% 26.3% 28.0%

Total 100% 100% 100% 100%

Source: Company, Anand Rathi Research, Bloomberg

V

A

L

U

E

P

I

C

k

(In ₹ Mn.) FY-15 FY-16 FY-17E FY-18E

Total Income 19,864 23,602 31,450 40,340

EBITDA 13,381 15,405 21,150 27,734

EBITDA Margin 67.4% 65.3% 67.3% 68.8%

EPS (₹) 3.2 4.2 6.9 10.3

EV/Sales 4.1 3.4 2.6 2.0

EV/EBITDA 6.0 5.2 3.8 2.9

P/E (x) 23.9 18.3 11.1 7.5

Price Performance CY13 CY14 CY15 YTD

Absolute -51% 131% -30% 171%

Relative -58% 100% -25% 169%

Relative stock performance (Nov’15=100)

CMP: ₹77

Target: ₹108

Shareholding Pattern (as on Sep’16)

Key Data

Bloomberg Code MGFL IN

NSE Code MANAPPURAM

BSE Code 531213

Sector Financial Services

Industry Non Banking

Face Value (₹) 2.0

BV per share (₹) 33

Dividend Yield (%) 2.8%

52 Week L/H(₹) 25 / 107

Market Cap. (₹ mn.) 64,773

Manappuram Finance Limited (MGFL)

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MGFL Nifty

2 Anand Rathi Research

Manappuram Finance Limited (MGFL) was incorporated in 1992, the company has been one of India's leading gold loansNBFCs promoted by Mr. V.P. Nandakumar (current MD & CEO) whose family has been involved in gold loans since 1949.

One of the largest listed players in the gold loan business with an AUM of ₹145 billion as of Sep’2016. Established pan-Indiapresence, with a strong distribution network of 3,293 branches spread across 23 states and 4 union territories, with a livecustomer base of ~2.2 million.

During the latest quarterly results, MGFL has reported a growth of 52.4% in its consolidated revenues at ₹8,423 million asagainst ₹5,535 million in Q2-FY17. In terms of growth MGFLs new business continues to grow at healthy rate followed byGold business. The share of new business other than Gold loan is around 15% as of Q2-FY17.

The company’s profit after tax (PAT) improved during the quarter with PAT margins improving 1145 basis points to 22.8% at₹1,924 million as against 11.4% at ₹630 million in Q2-FY17. The company’s cost of funds declined by ~100 bps to 10.1%during the quarter.

On balance sheet, MGFL’s AUM increased 11.3% to ~₹145 billion in Q2-FY17 sequentially. The company has shownsignificant improvement in NPA levels which declined from 1% in Q2-FY16 to 0.9% in Q2-FY17.

Going ahead, the management has re-iterated its plans to utilize surplus capital to build or acquire new lending productsrelevant to the existing retail customer base.

Addition of new synergistic product segments - Microfinance, Commercial vehicles, Mortgage & Housing Finance areexpected to drive growth while core gold loan business to continue to grow at similar rate.

We expect MGFL to significantly improve its operating performance in medium term with majority of growth coming fromits non core business while its Gold business to continue to perform at current levels. We do not see any significant impact(NPL) on the company’s Gold loan business due to any temporary decline in gold prices as the company has alreadyreworked its business model for such risks.

We reinitiate our coverage on Manappuram Finance Limited with a BUY rating and a target price of ₹108 per share.

Improving macro environment along with de-risking business away from single product.



Q2-FY17 Results (Consolidated)

Source: Company, Anand Rathi Research


(In ₹ Mn.) Q2-FY17 Q2-FY16 Chg H1-FY17 H1-FY16 Chg

Total Revenues 8,423 5,525 52.4% 15,884 10,916 45.5%

Operating Expense 2,423 2,010 20.6% 4,623 4,017 15.1%

EBITDA 5,999 3,515 70.7% 11,261 6,899 63.2%

Other Income 67 41 114 60

Depreciation 156 134 311 257

EBIT 5,910 3,422 72.7% 11,064 6,701 65.1%

Interest 2,959 2,421 5,609 4,782

PBT 2,951 1,001 194.8% 5,455 1,920 184.2%

Tax 1,016 364 1,907 685

Exceptional Items - - - -

PAT 1,935 637 203.8% 3,549 1,235 187.3%

Minority /Other Adj. (12) (7) (21) (12)

Consolidated PAT 1,924 630 205.2% 3,527 1,223 188.3%

Margins Q2-FY17 Q2-FY16 ChgBPS H1-FY17 H1-FY16 ChgBPS

Operating Margin % 71.2% 63.6% 761 70.9% 63.2% 770

Net Margin % 23.0% 11.5% 1145 22.3% 11.3% 1103


MGFL has a pan India presence…


Extensive Pan India presence through 3,293 branches

spread across 23 States and 4 Union territories in

India.

Strong Presence in Rural & Semi Urban markets as

more than 60% of the Gold is held in Rural India.

Focus on diversified presence across India, South

Region now constitutes 68% of the branch network as

compared 76% in FY11.

Widespread branch network has enabled AUM

diversification with South now contributing 65% of the

total AUM as compared to 87% in FY11.



…with extensive branch network and well spread demographics.


MGFL has emerged from a small geographical player predominantly operating in South India to a much larger national

player in last few years.

The company has almost doubled its AUM in the markets outside of south India. Currently MGFL’s AUM consists only 65%

from south zone than earlier 83% in FY-12.

The company now has extensive pan India presence through 3,293 branches spread across 23 States and 4 Union

territories in India.

In terms of demographic spread, MGFL is predominantly a Rurban player having 84% of its business in rural, semi urban

and urban centers. Metro cities contributes only 16% of its business.

4% 8%8%

15%5%

12%

83%65%

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25%

50%

75%

100%

FY-12 FY-16

East West North South

AUM Break-up Evolving Into A More Pan India Player

9%

15%

11%65%

East West North South

22%

30%32%

16%

Rural Urban Semi Urban Metro

Branch Network Demography Mix



Having successfully mitigated through addressing core weakness…




…and introducing new synergistic product segments…


Rationale for strategy to diversify into synergistic product segments:

Strategy to Utilise surplus capital to build or acquire new lending products relevant to the existing retail customer base.

To leverage the strong retail customer base, retail branch network and the strong Manappuram Brand Equity build over

the years.

To Leverage our operational capability to process large volume, small ticket lending transactions with semi-urban and

rural customers.

Focus to enhance the revenue mix and improve structural return on equity (RoE).



…leading to a well diversified product portfolio.


Microfinance Segment CV SegmentHousing Segment

• Acquired a majority stake (85%) in Asirvad Microfinance Private Limited, one of the leading microfinance institutions in Tamil Nadu in February 2015.

• Eight-year old NBFC- MFI with operations in Tamil Nadu, Kerala and Karnataka.

• Current Loan Portfolio stood at Rs 9,988 mn as on Mar 31, 2016.

• Credit Rating Improved from BBB- to A-.

• Focus on Low Income Borrower.

• To expand into other states leveraging Manappuram'sNetwork.

• Started commercial operations in January 2015.

• Current loan portfolio stood at Rs 1,286 mn as on Mar 31, 2016

• Focus on Affordable Housing for Mid to Low income Group.

• To open more branches in urban and semi-urban locations in South and West of India.

• Launched loans for commercial vehicles, selectively in Southern and Western India.

• Current loan portfolio stood at Rs 1298 mn as on Mar 31, 2016.

• Focus on Underserved Category of Customers who do not have access to Formal Banking system.

• To open more branches in Rural and semi-urban locations.



Which has started to get reflected in improved performance of MGFL

Cost of Funds & Net Yields PAT (₹ Mn.) & NIMs

Gross & Net NPAs Customer Base & Average Ticket Size

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Customer Base (Mn.) Avg Ticket Size ₹ (RHS)



0%

7%

14%

21%

28%

FY-13 FY-14 FY-15 FY-16 H1-FY17

Cost of funds Net Yields

10.00%

11.50%

13.00%

14.50%

16.00%

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PAT NIMs (RHS)

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FY-13 FY-14 FY-15 FY-16 H1-FY17

Gross NPAs Net NPAs


MGFL’s new segments which currently contributes around 15% to its total AUM of ₹145 billion is expected to contribute around 25%by FY-18 which is expected to significantly drive earnings for the company in next two year.

We believe MGFL to grow its revenues at a CAGR of ~30% in next two financial years while its profitability is expected to grow ataround ~57% within the same period.

We also expect MGFL’s core Gold business to remain stable on evolving complex macro factors. We expect Gold prices to remain ataround current levels with volatility of around 10% in years to come due to complex nature of counter macro events amid aggressiveglobal competitive currency de valuations and political uncertainty in European Union.

On demonetisation, we estimate that negative fallout to be largely limited to short term liquidity factors rather than structural andeven believe that any movement of funds into gold post demonetisation could prove positive for gold finance companies in casesuch asset is remonetised.

MGFL stands to gain with stability in its core business and higher growth in new segments.

Segment Wise AUM FY-16 and Expected AUM FY-18 Revenue & Profit After Tax

Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research


80000

110000

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Mar-16 Mar-18

Gold Microfinance (Asirvad) Housing Finance CV & Others

₹ M

illio

n

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10,500

21,000

31,500

42,000

FY-15 FY-16 FY-17E FY-18E

Total Revenue (₹Mn.) PAT (₹ Mn.)


With growth from new segments like

microfinance, housing finance, CVs and others

leading the earnings growth.

While its core gold loans business too is expected

to maintain growth momentum.

At CMP, the stock is trading at 11x times FY-17E

earnings and 7.5x times FY-18E earnings.

We reinitiate our coverage on MGFL with a BUY

rating and a target price of ₹108 per share.

Relative stock performance (Jun’15=100)

Valuation and Recommendation:

Source: Bloomberg, Anand Rathi Research


Key Ratios (Consolidated) FY-15 FY-16 FY-17E FY-18E

EPS (₹) 3.2 4.2 6.9 10.3

P/E (x) 23.9 18.3 11.1 7.5

P/B (x) 2.5 2.3 1.9 1.5

ROE 10.3% 12.8% 17.4% 20.6%

ROA 2.5% 2.9% 4.0% 4.8%



Margins FY-15 FY-16 FY-17E FY-18E

Operating Margin % 67.4% 65.3% 67.3% 68.8%

Net Margin % 13.7% 15.0% 18.5% 21.5%

Consolidated Financials:


(In ₹ mn) FY-15 FY-16 FY-17E FY-18E

Total Revenues 19,864 23,602 31,450 40,340

Operating Expense 6,483 8,197 10,300 12,606

EBITDA 13,381 15,405 21,150 27,734

Other Income 70 136 236 303

Depreciation 540 558 662 807

EBIT 12,911 14,983 20,724 27,229

Interest 8,774 9,474 11,695 13,756

Misc. items - (25) - -

PBT 4,137 5,484 9,029 13,473

Tax 1,422 1,932 3,187 4,756

Minority Interest (2) (18) (22) (35)

PAT 2,713 3,534 5,820 8,682

(In ₹ mn) FY-15 FY-16 FY-17E FY-18E

Liabilities

Totat Shareholder's Funds 26,378 27,580 33,401 42,083

Minority Interest 154 212 234 269

Long-Term Liabilities 16,419 16,000 30,163 30,163

Other Long-term Liabilities 1,101 1,270 1,270 1,270

Deferred Tax Liability (310) (434) (434) (434)

Short-term Liabilities 72,111 83,329 99,486 1,27,607

Total 1,15,853 1,27,958 1,64,119 2,00,957

Assets

Net Fixed Assets 2,066 2,303 2,972 3,613

Long-Term L&A 2,620 5,377 5,377 5,377

Non Current Investments 51 51 51 51

Other Non-Current Assets 432 1,296 1,296 1,296

Current Asset 1,10,685 1,18,930 1,54,422 1,90,621

Total 1,15,853 1,27,958 1,64,119 2,00,957



The company’s core business is exposed to regulatory changes by RBI, any negative changes could impact its

revenues significantly.

Key Risks:



Rating and Target Price history:

Date Rating Target Price (₹) Share Price (₹)

27-Jun-16 BUY 84 66

30-Nov-16 BUY 108 77

MGFL rating detailsMGFL rating history & price chart

Source: Bloomberg, Anand Rathi Research Source: Bloomberg, Anand Rathi Research

NOTE: Prices are as on 30th Nov 2016 close.


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