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Friday, November 16, 2012

Manappuram Finance Ltd:
A Company with a Steady Business Model
Please Click on the Chart to get a better view
Manappuram Finance Limited is India’s first listed and highest credit-rated gold loan company (99.1% of assets under management or AUMs, represent gold loans as on March 31, 2012). Incorporated in 1992, it has since emerged as one the of the fastest growing gold loan companies in India and widely recognized as a leading wealth creator in the Indian stock market. Today, it has around 3000 plus branches across 26 states and UTs with Assets under Management (AUM) of about Rs.11,600 plus crores, a workforce of about 22,000 and a live customer base of 16 lakhs.Headquartered in Kerala,
The company was also the first NBFC from Kerala to issue bonus shares in the ratio of 1:1 in 2007 and then, repeat the feat twice, in 2010 and in 2011 (making it three such instances in five years). Moreover, in 2007, Manappuram Finance Ltd became the first Kerala based NBFC to receive foreign Investment from FIIs, and also get the highest short term credit rating of A1+ from ICRA. In 2010, it became the very first Kerala-based company to offer ESOPs (Employee Stock Option Plan) to its middle and senior management functionaries. In April 2011, it became only the second listed company from Kerala to have its shares traded in the "A-Group" at the Bombay stock exchange.
It showed a massive 76% growth in gold loan disbursement in 2011-12. It opened, 844 new branches during 2011-12 and 5,000+ new employees were added to the Manappuram family during 2011-12. In FY12, its total Gold holdings was around 65.57 tonnes (up from 52.97 tonnes in FY11). 
Concern: This year, on March 21, the RBI imposed a cap on the loan to value (LTV) ratio for NBFCs at 60% of the value of collateral. RBI’s concern is that the rapid growth of gold loan companies, along with a dependence on public funds, poses a systemic risk. Further, there was concern about concentration risks in the gold loan NBFCs, arising from their single-product focus. 
However, the management feels that, the RBI has acted out of its key responsibility to prevent critical risks from materializing. At the same time, it also believes that gold loans can be a transformative force in India’s financial sector, particularly in promoting financial inclusion and in monetising India’s vast stock of private gold. Hence, the company feels that it is imperative that, the RBI do not lose sight of the significant upside potential that gold loans hold. By restricting the LTV to 60% and making it applicable only to the NBFCs, there is a real risk of breathing new life into the unorganised sector (local pawnbrokers and moneylenders), and of stifling the original innovators in the business. The company therefore, expects the RBI to recalibrate its policy responses as required. The fact that they have now constituted a working group, led by Shri K.U.B. Rao, to study the business of gold loans is a positive step in this direction.
Triggers: 
1. Strong pan-India distribution network.
2. Front-runner in the high-growth driven gold loan industry.
3. Flexible gold loan schemes, high quality customer service and short response time.
4. Enjoys highest CRISIL rating (A1+) for short-term debt instruments, including commercial paper. For nonconvertible debentures (NCD) issues, possess CRISIL (A+), ICRA (LA+), Brickwork (AA-) and CARE (A+).
5. Robust support system, IT infrastructure, appraisal process, internal audit, inventory control and safety systems.

6. Experienced and professional management, supported by a motivated team, is taking Manappuram to greater heights of achievement.
7. Multiple sources of low cost funds by way of credit lines from 34 banks, unutilised limits with banks and financial institutions, commercial papers (shortterm money markets), retail NCDs and bonds. 

8. Capital and Reserves of the Company as on March 31, 2012 stood at Rs.23,810.08 million (Rs.2381.01 Cr). The P/E of the company is only 4.55 against the Industry P/E of 17.07. The expected EPS for FY13, is Rs.8. 
Moreover, yesterday, the Finance Minister, spoke of issuing fresh Banking Licenses to the NBFCs, within the next few quarters--this probably had some positive effect on the share prices of some of the companies from this space, like SKS Microfinance Ltd, L&T Finance Holdings Ltd, etc. I therefore, think it is now time to buy good stocks from this sector. I place a medium term target of Rs.60, and short term target of Rs.39-41, for the scrip