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MOSL: MANAPPURAM FINANCE: Gold loan growth still muted, but yields show an improvement

MANAPPURAM FINANCE: Gold loan growth still muted, but yields show an improvement

(MGFL IN, Mkt Cap USD1.1b, CMP INR102, TP INR130, 28% Upside, Buy)

• MGFL reported a consolidated PAT of INR2.82b (inline), down 35% YoY. This was driven by a sequential growth of ~2% in consolidated AUM, a QoQ improvement of ~90bp in NIM, and stable OPEX (CIR at 49%).
• The important question to answer at this juncture is whether the narrative should now change from Gold loan growth and margin compression to improvement in yield and the near-end of high credit costs in the MFI business?
• The trade-off between margin and spreads and Gold loan growth will continue in the near term as there is no let-up in the aggression among Banks and Gold loan FinTechs. Demand in the lower ticket Gold loans (which is core to Gold loan NBFCs) still remains weak. Instead of competing in the higher ticket lower yield Gold loan segment, the management remained steadfast that in FY23 it will continue to prioritize profitability over the relentless pursuit of loan growth.
• We wish to highlight: a) In the current demand environment, loan growth will be a casualty since the priority has shifted to spreads/margin, and b) while the yields bottomed out in 4QFY22 and will even marginally improve from current levels, the Gold loan NBFC business is never again going to be a business with ~16% NIM, and c) a large part of the restructured advances have already slipped into NPA and credit costs should moderate significantly in 2HFY23, in line with the management's guidance.
• These are at cyclical lows and the muted Gold loan growth expectations are already reflected in the current valuations of 0.8x FY24E P/BV. We maintain our Buy rating, with a TP of INR130 (based on 1x FY24E P/BV).

Gold demand muted; non-Gold businesses getting back to the growth path

• Gold AUM grew by ~1.5% QoQ to INR205b, while Gold tonnage declined by 1.5% to 67t. Within Gold loans, LTV improved by 300bp to 65%, while the average ticket size was largely stable QoQ ~INR56K (v/s ~INR43K YoY).
• MFI AUM declined by 2% QoQ to INR65.5b. Asirvad MFI seems to have again initiated higher write-offs in 1QFY23, which led to credit costs of 6.8% (v/s 7.2% in 4QFY22). MFI GNPA grew by ~4pp QoQ to 7.7% on account of slippages from the restructured pool of MFI loans.

Expansion in spreads and margin driven by improving yields

• NII grew 6% QoQ to INR9.6b, led by an improvement of ~90bp/60bp in standalone yields/spreads. Consolidated NIM improved by 85bp QoQ to 13.1%.
• We estimate Gold loan growth of ~9% for MGFL in FY23 and 14%/10% CAGR in consolidated/Gold loan AUM over FY22-24.

Highlights from the management commentary

• The management expects demand for Gold loans to pick-up after the monsoons. It guided at a Gold loan growth of 10% in FY23. In other segments, AUM growth will be in excess of 20%.
• It guided at Gold loan yields of 21-22% over FY23.
• MGFL is awaiting approval from the RBI to open new branches. The central bank conducted an inspection and recommended some action points for the company to work upon. Once these are completed, it expects to secure approval from the RBI to open new branches.

 

Valuation and view

• We have raised our FY23/FY24 EPS estimate by 7%/8% to factor in a higher margin in the Gold loan segment and moderation in credit costs from the MFI business.
• The demand environment in Gold loans isn't very buoyant, and the management has clearly articulated that it s
• We believe the risk-reward for MGFL, at 0.8x FY24 P/BV, is still favorable for a consolidated RoA/RoE of 4%/16% over FY23-24. We maintain our Buy rating with a TP of INR130 (based on 1x FY24E consolidated BVPS).