{"id":4804,"date":"2011-03-25T15:56:28","date_gmt":"2011-03-25T10:26:28","guid":{"rendered":"https:\/\/www.moneyworks4me.com\/investmentshastra\/?p=4804"},"modified":"2013-01-11T17:42:16","modified_gmt":"2013-01-11T12:12:16","slug":"manappuram-general-finance-leasing-company-and-stock-analysis","status":"publish","type":"post","link":"https:\/\/www.moneyworks4me.com\/investmentshastra\/manappuram-general-finance-leasing-company-and-stock-analysis\/","title":{"rendered":"Company Shastra: Manappuram General Finance & Leasing Ltd. (MAGFIL)"},"content":{"rendered":"

Manappuram Finance: Is the Stock worth its weight in gold?<\/h1>\n

MAGFIL \u2013 Company Highlights<\/span><\/h3>\n

MAGFIL<\/strong>:<\/strong><\/span> India’s largest listed gold loan company<\/p>\n

Market View of MAGFIL Ltd Stock (31st Mar\u201911)<\/span><\/h3>\n

Current Stock Price:<\/span><\/strong> Rs. 132.40<\/p>\n

52 Week-High Stock Price:<\/span><\/strong> Rs. 189.90<\/p>\n

52 Week Low Stock Price:<\/strong><\/span> Rs. 66.50<\/p>\n

Latest P\/E:<\/strong><\/span> 23.68<\/p>\n

Latest P\/BV:<\/strong><\/span> 3.22<\/p>\n

Tell me more about MAGFIL<\/h2>\n

MAGFIL, a Kerala based non-banking financial company, is engaged in providing loans against household used jewellery pledged by its customers. Jewellery is regarded amongst the safest form of asset lending, with both physical custody and beneficial ownership with the lender<\/p>\n

The company had a Total Asset under management (AUMs) of Rs. 65.2 bn as on December 31, 2010 (including assigned portfolio). Gold loans form a huge part, approx. 98% of MAGFIL’s revenue. It grants small loans (Ticket size of Rs. 15,000 \u2013 Rs. 30,000) over short durations. It has an extensive branch network of 1,795 branches spread across 19 states of India (as of December 31, 2010). The branches are mainly concentrated in the Southern region of India viz. Kerala, Tamil Nadu and Andhra Pradesh;this region accounts for 85-90% gold loan market of India. The company has a credit rating history of investment grade rating since 1995.<\/p>\n

How has the Financial Performance of MAGFIL been?<\/h2>\n

The operating income of MAGFIL has grown by 61% approx. in the past ten years from Rs. 6.67 Cr in FY01 to Rs. 476.60 Cr. in FY10.\u00a0 The EPS has shown consistent growth (10 yr. CAGR of 50%), except in the years FY03 and FY08 where it showed de-growth. The BVPS has also risen significantly at 43% over the last ten years.<\/p>\n

MAGFIL has maintained a high Net Profit to Total Fund ratio, above 2%, over the last 9 years. This indicates that the management of the Company has utilised its funds efficiently. The asset quality also has been stable with Gold loan Net NPA at 0.14% in Q3FY11 (from 0.11% in Q2FY11), indicating that the company has low default risk. However the provisioning for NPAs was higher during the quarter as MAGFIL provided Rs. 12.5 Cr. (0.25% of standard assets) for standard asset provisioning as mandated by RBI.
\nThe capital adequacy ratio (CAR) of the company stood at an healthy 32.5% as on Q3 FY11 as compared to 15.5% a year ago, indicating that the company is well covered for its risk.<\/p>\n

Thus, the 10 YEAR X-RAY of the company is Green (Very Good)<\/span>.<\/strong><\/p>\n

Sustainable Net Interest Margins (NIMs)<\/strong><\/span><\/p>\n

The short durations of loans helps MAGFIL to easily manage its NIMs (difference in the interest income and interest expenses) as both the assets and liabilities get re-priced over shorter periods. Also, MAGFIL\u2019s credit rating (A1+ for short term loans) and its visibility amongst banks (with respect to raising loans) has improved. This has helped it reduce its cost of raising funds, leading to an increase in NIMs. As a result, MAGFIL reported NIMs of 13\u201315% over FY07-FY09, which are sustainable even in the long-term given its high pricing power.<\/p>\n

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What can we expect in the future? Here is the analysis of MAGFIL…<\/h2>\n

In the Short Term<\/h3>\n

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Q3FY11 continues to show strong growth..<\/strong><\/span><\/p>\n

The growth in profits was driven by the record growth in Asset under Management (AUM) which have shot up to Rs 6,498 Cr., an increase of 188% over Q3 of the previous year
\nThe company has raised Rs 1000 Cr. during the quarter as capital through Qualified Institutional Placement at a price of Rs 168\/- per share at a premium of Rs 166\/- per share.\u00a0\u00a0 This has\u00a0 increased the CAR of the company , further enabling it to grow its loan book and capitalize on the growing opportunities.
\nThe company has opened 402 branches during the quarter. The average business per branch has increased to Rs.3.59 Cr. as against Rs. 3.51 Cr. during the previous quarter ending September 30, 2010.
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\nSlight decrease in NIMs<\/strong><\/span><\/p>\n

Highers credit ratings and Priority sector loans have helped the company in reducing borowing costs significantly in the past three years. However, the company’s cost of funds will increase in the short term on account of two reasons:
\n1. Recently, the RBI has changed guidelines regarding agricultural loans:
\nLoans sanctioned to NBFCs for lending to individuals or other entities against gold jewellery, cannot be classified as Agri. loans
\nInvestments made by banks in securitised assets originated by NBFCs, where the underlying assets are loans against gold jewellery cannot be classified as loans to agricultural sector.
\nThus, the loans availed by MAGFIL will no longer be classified as priority sector lending, leading to ~ 100 bps increase in cost of borrowing. It will lead to a decrease in margins by 40 bps.
\n2. The company had voluntarily reduced its rate of interest by 3%, from 24% to 21%.<\/p>\n

Hence, where the company has robust targets for FY11 and FY12, its NIM are expected to be affected slightly. Thus, we can expect the short term prospects of the company to be\u00a0 Orange (‘Somewhat Good’)<\/span>.<\/strong><\/p>\n

In the Long Term<\/h3>\n

Increasing share of NBFCs in the underpenetrated Gold Loan Market<\/strong><\/span><\/p>\n

The size of private gold holdings by Indian households is expected to be around 20,000 tonnes, of which only 10% has been used for gold loans. In spite of rapid growth in the gold loan segment in the last three to four years, its penetration in India remains under 1%. Thus, there is a huge untapped potential for gold loans.
\nAlso, the gold loan market is largely unorganized\u00a0 and dominated by pawnbrokers and money lenders, charging an exorbitant interest rate of 36% p.a. These can be substituted by cheaper, gold-secured loans from NBFCs. In fact, the share of organized market is growing rapidly with emergence of specialized NBFCs.
\nMAGFIL with longstanding expertise in gold loan financing is well placed to tap the huge market potential.<\/p>\n

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MAGFIL – Fastest growing playe<\/strong><\/span>r<\/p>\n

Gold-backed lending represents a potential goldmine for non-banking finance companies (NBFC). MAGFIL, has been able to clock highest growth rate amongst different players in the last four years.<\/p>\n

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Strong pricing power to ensure profitability<\/strong><\/span><\/p>\n

A fairly large percentage of the Indian population is still deprived of banking services, despite huge initiatives taken by the commercial banks in India.\u00a0 They are charged exorbitantly high rates by moneylenders. MAGFIL provides loans to this segment.
\nAs the borrowers do not have access to commercial banking services, MAGFIL wields a very strong pricing power. The lending rate for MAGFIL is usually around 24-25%, which is significantly higher than what commercial banks charge but significantly lower than what local moneylenders would charge.<\/p>\n

HUJ – robust risk management strategy<\/strong><\/span><\/p>\n

The risk management strategy of MAGFIL is based on HUJ, viz., Household Used Jewelry. If the collateral does not satisfy any of the three criteria, it is not accepted as collateral.
\nThe whole business of model of MAGFIL revolves around the emotional value attached to HUJ. Since there is sentimental value attached to the collateral, the chances of defaulting on the loan are very low. MAGFIL uses various methods like traces of sweat, use of nitric acid etc. to judge whether the jewelry is used or not. No loans are granted against gold coins or biscuits
\nThis helps MAGFIL in mitigation of the inherent risks of the business and contain the NPAs in gold loans at just 0.1-0.3% over the last four years of its growth<\/p>\n

Reduced Borrowing costs<\/strong><\/span><\/p>\n

Higher credit ratings have helped the company to reduce its cost of borrowings. ICRA has recently upgraded its short-term rating to \u2018A1+\u2019 and long-term ratingto \u2018LA+\u2019.
\nThese ratings, enable the company to raise loans from various sources like Commercial Papers (CPs) and short-term debentures at cheaper rates, thereby reducing overall cost of funding.<\/p>\n

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Speedy disbursal in comparison with banks<\/strong><\/span><\/p>\n

The turnaround time at MAGFIL for a customer is roughly 30 minutes, something which is probably unbeatable by the banks due to procedural bottlenecks. Loans are usually availed for medical and financial emergency and hence the speed of loan disbursal is always of essence. Also, MAGFIL is able to hire local staff at cheaper cost. These factors give MAGFIL a certain edge over banks.
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\nBranch expansion to slow down going forward<\/strong><\/span><\/p>\n

MAGFIL has grown its branch network at an aggressive pace over the last few years. Over the past
\nfour years, MAGFIL has more than quadrupled its distribution network. However, the management has indicated that the pace of branch addition will slow down considerably in FY12. The company plans to add 500 branches in FY12 as against 1000 branches opened in FY11.<\/p>\n

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Key Concerns<\/strong><\/span>
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