2 JUNE 2016
INITIATING COVERAGE I SECTOR: FINANCE
Manappuram Finance
STOCK INFO.
BLOOMBERG
BSE Sensex : 26843
S&P CNX : 8219
MGFL:IN
REUTERS CODE
CMP: INR53
INVESTMENT ARGUMENT:
TP: INR75 (+41%)
Buy
MNFL.NS
(INR CR)
Y/E MARCH
NII (INR Cr.)
PPP (INR Cr.)
NP (INR Cr.)
EPS (Rs)
EPS Growth (%)
ABV/Share (Rs)
P/E (x)
P/BV (x)
RoE (%)
RoA (%)
Div yld (%)
FY16
1,402
593
353
4.2
30%
32.0
12.6
1.6
12.8
3.0
3.4%
FY17E
1,697
754
451
5.4
28%
34.5
9.9
1.5
15.3
3.3
3.4%
FY18E
2,005
925
558
6.6
24%
38.2
8.0
1.3
17.3
3.4
3.4%
Revamped the business model to de-risk gold loan business:
Post the FY12-14 period, when the gold loan industry faced regulatory
challenges coupled with steep decline in gold prices, Manappuram re-
aligned its business model to de-risk it from volatility in gold prices. The
key changes it made to the core gold loan business were: (a) introduced
shorter duration products of 3-6 months (12 month earlier) and
recalibrated LTV to link it to product tenure i.e. lower LTV for higher
tenure and vice versa and (b) adopted push approach instead of pull
earlier - started reaching out to customers through enhanced marketing
and branch activation efforts and linked employee incentives to sourcing
business, timely recovery and default rates. The new business model
built around lower LTVs and branch activation should lead to a revival in
earnings growth.
Synergistic diversification into new businesses:
Manappuram has
forayed into synergistic non-gold businesses - microfinance, home loans,
CV loans and LAP. The objectives behind this diversification are (a) to
reduce dependence on gold loans and gold price fluctuation, (b) to
capitalise on its proven operational capability to process large volume,
small ticket transactions with semi-urban and rural customers, (c) to
leverage its strong 19.3 lac retail customer base and retail network of
3,293 branches, (d) to utilize excess capital (CAR of 24.0%) and (e) to
leverage upon Manappuram's existing brand image.
Recovery in ROE on the back of higher operating and financial
leverage:
Earlier, AUM de-growth led by regulatory issues resulted in
a decline in return ratios due to fixed Opex costs. With focus on improving
productivity, Manappuram has not increased gold branches post FY13
to boost operating leverage. We thus expect Opex to AUM ratio to decline
as AUM growth improves thereby driving ROA from 3.0% in FY16 to
3.4% by FY18E. Along with increase in leverage from 4.5x to 5.6x,
RoE is set to improve from 12.8% in FY16 to 17.4% by FY18E.
Valuations not factoring in the changed business model and
expansion in new businesses:
With a change in the gold loan business
model and expansion in new businesses, we expect increased earnings
visibility with stable asset quality and improvement in return ratios. The
measures taken by Manappuram over the last 15 months to turn around
its business prospects should enable it to post 26% earnings CAGR over
FY16-18E. We value the standalone business at 1.8x FY18 ABV (lower
than 2.1x commanded by asset financiers like SHTF and MMFS having
inferior return ratios and asset quality); the microfinance business at
3.0x FY18E ABV (25% discount to our target multiple for SKSM) and
housing finance business at 2.0x FY18 ABV (at 40% discount to
industry). Consequently, our SOTP value for the company is at INR 75.
The stock provides for a dividend yield of 3%.
KEY FINANCIALS
Shares Outstanding (Cr)
Market Cap. (INR Cr)
Market Cap. (US$ M)
Past 3 yrs NII Growth (%)
Past 3 yrs NP Growth (%)
Dividend Payout (%)
STOCK DATA
52-W High/Low Range (INR)
Major Shareholders (as of Mar'16)
Promoter
Non Promoter Corp Holding
Public & Others
Average Daily Turnover(6 months)
Volume
Value (INR cr)
1/6/12 Month Rel. Performance (%)
1/6/12 Month Abs. Performance (%)
3,570,909
12.9
31/101/72
35/103/68
56/20
33.7
40.1
26.3
84.12
4,463
666
10
19
43
Maximum Buy Price: INR60
Jehan Bhadha
(jehan.bhadha@motilaloswal.com); Tel:+912233124915
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Manappuram Finance
SOTP Valuation
Entity/Segment
Standalone
Microfinance (90% stake)
Housing Finance
Total
CMP
Returns
FY18 Adj. BV
30.5
5.5
1.7
Target P/B (x)
1.8
3.0
2.0
Value
55
17
3
75
53
41%
Share
73%
22%
5%
100%
AUM growth of 24% over FY16-18E driven by non-gold businesses; non-gold book to form
25% of AUM by FY18E:
Non-gold portfolio is expected to grow at 80% as against 14% for gold
portfolio over FY16-18E and thus lead to overall AUM growth of 24% over the same period. We model
non-gold portfolio to form 25% of overall AUM by FY18E as against 12% as on FY16.
Non-gold businesses (Asirwad Microfinance in particular) to create value in the long run:
As on
FY16, Manappuram had a loan book of INR 999cr in microfinance, INR 129cr in home Loans, INR 130cr
in CV, INR 44cr in LAP and INR 51cr in other segments; aggregating to INR 1,352cr of non-gold loan
book. Manappuram acquired 85% stake in Asirvad Microfinance in FY15, (when it had an AUM of INR
322 cr in March 2015) headquartered in TN with operations in T.N, Kerala and Karnataka. Manappuram
intends to expand its business to more states. The 85% stake was purchased for a consideration of INR
136cr. Manappuram has further invested INR 100cr during FY16 in the subsidiary and currently holds a
90% stake. The microfinance sector has made a strong comeback in recent months and with a stable
regulatory environment in place, future prospects are bright. As a subsidiary of Manappuram, Asirvad has
already benefited substantially by access to lower cost funds (credit rating upgraded by 3 notches to A-)
which, in turn, is enabling expansion to other states. With a loan book of INR 999cr, Asirvad has already
generated ROA of 3.9% in FY16. In the coming quarters, microfinance will contribute significantly to
Manappuram's growth along with other new businesses.
Auction losses subsiding, as legacy portfolio runs off:
Manappuram's legacy portfolio (higher LTV
product, with 1 year duration) ran off in June 2015 and the entire auction was done by August 2015.
Auction-related losses, which led to decline in yields and lower NII growth, are now behind. As a result,
gold yields increased 200bp QoQ in 3QFY16 and a further 40bp QoQ in 4QFY16 to 24.2%.
CONCERNS
Sharp decline in gold prices:
Gold loans constitute more than 88% of total advances. Though the
average LTV on the loan portfolio is 70% and most products are now shorter duration, a sharp decline in
short time can lead to losses. An appreciation in INR would also lead to a decline in gold prices. Reduction
in import duty (10%) can also lead to a correction in gold prices.
Competition:
Increased competition from both banks and non-banks could lead to lower lending yields
and growth, adversely impacting profitability.
BACKGROUND
Manappuram Finance was incorporated in 1992 and is now the second largest gold loan NBFC in India.
The company is promoted by Mr VP Nandakumar, MD & CEO, whose family has been involved in the
gold loans business since 1949. Manappuram's AUM stood at INR 114b as on March 2016. It has a pan-
India presence, with 3,293 branches across 23 states and 4 union territories, through which the company
serves 1.93m customers. Promoters, Mr VP Nandakumar and family hold ~33.7% in the company. Various
DIIs and FIIs hold 40%. The senior management comprises professionals with significant experience in
the financial services business.
2 June 2016
2

Manappuram Finance
IVRCL: Financials and Valuation
Financials and valuation
Income Statement (Consolidated)
Y/E March
Interest Income
Interest Expenses
Net Interest Income
Change (%)
Non Interest Income
Net Income
Change (%)
Operating Expenses
Pre - Provision Profits
Change (%)
Provisions
PBT
Tax
Tax Rate (%)
PAT before Min. Int.
Less: Min. Int.
PAT after Min. Int.
Change (%)
FY14
2,076
1,027
1,049
-1%
36
1,085
1%
695
390
0%
47
343
117
34%
226
-
226
8%
FY15
1,968
877
1,091
4%
25
1,116
3%
674
442
13%
28
414
142
34%
271
0
271
20%
FY16
2,349
947
1,402
28%
25
1,426
28%
836
591
34%
42
548
193
35%
355
2
353
30%
FY17E
2,822
1,125
1,697
21%
27
1,724
21%
970
754
28%
60
694
236
34%
458
7
451
28%
(INR Cr)
FY18E
3,417
1,412
2,005
18%
29
2,035
18%
1,110
925
23%
61
864
294
34%
570
12
558
24%
Profits to grow at a CAGR of
26% over FY16-18E on the
back of strong loan growth,
low OPEX and stable credit
costs
Balance Sheet (Consolidated)
Y/E MARCH
Equity Share Capital
Reserves & Surplus
Net Worth
Min. Int.
Pref. Sh.
Borrowings
Other Liabilities
Total Liabilities
Cash & Bank balances
Investments
Loans
Net Fixed Assets
Other Current Assets
Deff Tax Asset
Total Assets
FY14
168
2,324
2,492
-
-
7,795
551
10,838
863
796
8,242
207
702
29
10,838
FY15
168
2,465
2,633
15
5
8,632
331
11,616
823
217
9,622
207
716
31
11,616
FY16
168
2,590
2,758
21
5
9,638
417
12,839
463
49
11,519
230
534
43
12,839
FY17E
168
2,815
2,983
28
5
12,393
459
15,867
236
49
14,439
190
910
43
15,867
(INR Cr)
FY18E
168
3,136
3,304
40
5
15,298
536
19,183
280
49
17,572
147
1,092
43
19,183
Advances to grow at 24% in
FY17E supplemented by
higher gold prices; and at
over 20% post FY17E given
the rising mix of fast growing
non-gold businesses
Asset Quality (Consolidated)
Asset quality to remain
stable
GNPA
NNPA
GNPA Ratio
NNPA Ratio
PCR
E: MOSL Estimates
99.6
82.3
1.2%
1.0%
17%
108.4
90.0
1.1%
0.9%
17%
100.8
70.6
1.0%
0.7%
30%
129.5
82.4
1.1%
0.7%
36%
(%)
157.4
89.2
1.2%
0.7%
42%
2 June 2016
3

Manappuram Finance
IVRCL: Financials and Valuation
Financials and valuation
Ratios (Consolidated)
Expect yields to decline due
to a gradual rise in
competition
Y/E March
Avg. Yield on loans
Avg. Cost of Borrowings
Spread
Net Interest Margin
Profitability Ratios (%)
(Consolidated)
RoE
RoA
Cost to Income
CAR
Valuation
(Consolidated)
Adj. Book Value Per Share (Rs)
Change (%)
Stock trades at 1.3x FY18E
P/ABV with advances/profit
growth of 24%/26% over
FY16-18E and ROE
improving from 12.8% in
FY16 to 17.3% in FY18E
Price-BV (x)
EPS (Rs)
Change (%)
Price-Earnings (x)
Dividend Per Share (Rs)
Dividend Yield (%)
E: MOSL Estimates
FY14
22.9%
12.9%
10.0%
11.3%
FY15
22.2%
12.3%
9.9%
12.1%
FY16
22.4%
11.0%
11.4%
13.2%
FY17E
21.9%
10.8%
11.1%
13.0%
FY18E
21.5%
10.8%
10.7%
12.5%
High capital adequacy to fuel
advances growth without
dilution
9.2%
1.9%
64.1%
27.7%
10.6%
2.4%
60.4%
25.6%
12.8%
3.0%
58.6%
24.0%
15.3%
3.3%
56.3%
20.9%
17.3%
3.4%
54.5%
19.1%
28.7
2%
-
2.7
8%
-
1.8
-
30.3
6%
-
3.2
20%
-
1.8
-
32.0
6%
1.6
4.2
30%
12.6
1.8
3.4%
34.5
8%
1.5
5.4
28%
9.9
1.8
3.4%
38.2
11%
1.3
6.6
24%
8.0
1.8
3.4%
2 June 2016
4

Manappuram Finance
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