CMP Rs39, Target Rs45, Upside 16.7%
RoA to settle at respectable level post the full impact of new regulations
Over the past seven months, gold loan companies have been hit by a spate of game changing regulations - LTV cap of 60%, stringent bilateral assignments guidelines and higher Tier-1 capital requirement of 12% (to be reached by end-FY14). In the initial phase of the adjustment process, AUM growth has been severely impacted while contraction in NIM and RoA has been limited. Though RoA would most certainly deteriorate through the year, it is likely to settle at healthy levels of 3.5-4% in the longer term supported by reasonable pricing discipline, cyclical decline in funding cost and realization of operating efficiencies. Given the systemic importance of gold loan companies, incremental regulations are likely to be less stringent – a cap on cash disbursements can dilute financial inclusion.
Manappuram unlikely to deliver a significant decline in FY13 earnings
As per our estimate, Manappuram’s PAT could decline by 9% in FY13; in contrast to a significant decline feared a quarter before. Structural reasons behind our improved expectations now are 1) better earnings performance in Q1 FY13 2) lower compression in portfolio yield (to settle near 23% v/s 21% expected earlier) and 3) strong operational response from the company (stringent cost containment measures undertaken). Though profit would continue to decline in coming three quarters, Manappuram would still deliver RoA of 3.8-4% for the year on a flattish AUM. Except for additional adverse regulations, we see minimal risk to similar RoA performance in FY14.
Valuation to start discounting emerging business clarity
Manappuram’s valuation has witnessed wild gyrations in the recent past driven by a mix of internal and external factors. While corporate governance has been strengthened, the evolving business dynamics have been reassuring. With major regulations behind, the key valuation driver for the stock would be emerging business clarity. Lower LTVs, reducing assignments and a high capital base (Tier-1 at 20%) are credit positives for Manappuram. With undemanding valuation of 1x FY14 P/adj.BV, we retain BUY recommendation.