Manappuram Finance: Navigating Challenges and Opportunities

Manappuram Finance (CMP: Rs 148.25, Market Cap: Rs 11,871 crore) has faced hurdles in profitably growing its gold loan book, which was further exacerbated by the recent Enforcement Directorate (ED) raid on the promoter. 

Nevertheless, the company is witnessing growth driven by its non-gold portfolio, alongside stabilizing margins and asset quality. With its current undemanding valuation, the question arises: Is it the right bet?

Balance Advantage Fund - How to Approach

Manappuram - Non-Gold Takes Center Stage

In the most recent quarter, the company's assets under management (AUM) showed a YoY growth of 21 percent and a sequential increase of 5 percent. 

However, it's essential to note that the main driver of this growth was non-gold loans, particularly in microfinance, housing finance, and vehicle finance. In contrast, gold loans experienced only modest 1 percent growth, while non-gold loans surged by an impressive 60 percent.

The gold loan portfolio, which had been declining, is displaying some signs of recovery. However, it's a challenge for the company to sustain double-digit growth in this segment. 

While stable gold prices theoretically benefit gold financing by reducing loan-to-value ratios and boosting demand, we don't anticipate a dramatic transformation in Manappuram's gold-financing business.

Manappuram's lending yield in the gold portfolio stands at over 21 percent, with plans to maintain it in the 21-22 percent range. 

Given the aggressive stance of banks in this sector and their cost of funds advantage, sustaining such lending yields may prove challenging. Additionally, the recent ED raid on the promoter could potentially impact the cost of institutional funding, despite management denials.

The Challenge of Growth vs. Margin

Banks are increasingly reaching the last mile through fintech and small NBFC partners, which forces Manappuram to make a tough decision between growth and margin. 

While overall margins have remained stable despite rising funding costs due to the withdrawal of teaser loans, growth challenges persist in the gold loan business due to a stagnant customer base and gold tonnage.

In the near future, we can expect Manappuram to adopt a more aggressive stance in the non-gold portfolio as the company aims for an equal share between gold and non-gold. Will this diversification trigger a revaluation of the stock?

Manappuram is addressing its gold loan portfolio's challenges by enhancing its non-gold businesses, including microfinance, housing finance (primarily affordable), vehicle finance, and other products such as MSME and personal loans. 

While growth in these businesses, except for microfinance, may be on a relatively smaller base, it is likely to be robust. However, maintaining asset quality, which has faced issues in the past, will be a crucial challenge.

Notably, the microfinance entity Asirvad, in which Manappuram holds close to a 98 percent stake with an AUM exceeding Rs 10,000 crore, requires funds to sustain growth. Capital raising in this regard could serve as a positive trigger for the stock.

Risk-Adjusted Return Concerns

A potential trade-off between the loss on gold loans (a relatively high-yielding yet secured asset) and high-yield non-gold businesses could lead to asset quality problems. As a result, Manappuram may not command a premium valuation that pure gold financing entities enjoy. 

A Trading Bet, Not for Risk-Averse Long-Term Investors

While the current valuation may seem undemanding at 1x FY25e book value, it's important to consider the concerns highlighted. 

    Manappuram Finance might present a promising trading opportunity with incremental improvements in quarterly earnings, but it remains a stock to be cautious about for long-term investors who prioritize risk mitigation.