Gold Loans

‘Lending with comfort’

Muthoot Finance – BUY India - a huge gold loan market

CMP: Rs154 Target: Rs202 India is one of the largest markets for gold accounting for ~10% (18,000-
20,000 tons) of the global gold stock. Rural India is estimated to hold
 Largest gold financing around 65% of this. Shaped by sentimental and structural factors,
company in the country with country’s demand for gold has been buoyant defying the phenomenal rally
20%+ market share
in price. It is estimated that ~10% of country’s gold stock has been
 AUM growth to moderate but
pledged, of which, ~75% is in the unorganized market (money lenders,
remain strong on higher base
pawn brokers, etc) and balance ~25% in organized market (specialized
 NIM to decline on steep
increase in funding cost; yield NBFCs, other NBFCs, commercial/cooperative banks, etc).
to be relatively resilient
Organized market growing at robust pace
 Earnings CAGR to remain
brisk at 39% over FY11-13E
As per IMaCS Industry Report (2010 update), the organized gold loan
 RoA to marginally come-off;
market in India stood at Rs350-400bn at end-FY10 having witnessed a
RoE to normalize robust 40% CAGR over FY02-10. We estimate the market to have crossed
Rs550bn by end-FY11 as specialized NBFCs Muthoot Finance and
Manappuram combine have grown their book by Rs130bn+ during the
year. Share of the organized pie has been increasing rapidly due to
Manappuram – BUY
significantly lower rate of interest charged, higher LTV offered and
CMP: Rs57 Target: Rs73
perceived safety of the ornaments. With penetration still negligible at 1-
1.5%, the organized market would continue to witness strong growth.
 Fastest growing gold loan
company; 8x AUM growth
Specialized NBFCs better placed than banks
over FY09-11
Amongst organized players, specialized gold loan NBFCs have witnessed
 New branches to drive 45%
AUM CAGR over FY11-13E exceptional growth driven by management aggression/strength, robust
 NIM to contract sharply due to
branch expansion, belligerent marketing spend and ability to raise capital
decline in yield and increase in timely. Given the customers preference for them over banks due to critical
funding cost factors like low levels of documentation, quick disbursal of loans, higher
 Earnings CAGR to remain LTV offered, flexibility in loan terms, etc, specialized NBFCs command
robust at 47% over FY11-13E premium yields and enjoy superior profitability. Therefore, they represent
 RoA to trend down while RoE a much better medium to ride the gold loan growth story.
to improve
Initiate coverage on Muthoot and Manappuram with BUY rating
We initiate coverage on Muthoot Finance and Manappuram with a BUY
rating. Both the companies have witnessed 100%+ CAGR in their gross
gold loan book over FY09-11. Notwithstanding the substantial business
investments made, they have improved their profitability profile. Their
dream run is expected to normalize though on account of higher base,
intensifying competition in the key Southern region, recent adverse
regulation with respect to assignments and steep increase in funding cost.
Nevertheless, their earnings CAGR is estimated to be strong in the range
of 35-50% thereby making current valuations (1.6-1.7x FY13 P/BV)
attractive. Key risk factors would be unfavorable regulatory changes and
material correction in gold prices.

Financial summary
Y/e 31 Mar Muthoot Finance Manappuram
(Rs m) FY12E FY13E FY12E FY13E
Total operating income 18,307 25,029 13,325 17,755
Yoy growth (%) 42.7 36.7 56.8 33.2
Operating profit (pre-provisions) 11,220 15,573 7,168 9,687
Net profit 6,891 9,576 4,498 6,106
yoy growth (%) 39.4 39.0 59.1 35.7

EPS (Rs) 18.5 25.8 5.4 7.3

BVPS (Rs) 75.2 96.3 27.3 33.2
P/E (x) 8.3 6.0 10.6 7.8
P/BV (x) 2.0 1.6 2.1 1.7
Research Analyst
ROE (%) 33.4 30.1 21.4 24.2
Rajiv Mehta, CFA
ROA (%) 3.4 3.6 4.3 4.2
[email protected]
CAR (%) 17.4 16.6 21.7 19.0
Source: Company, India Infoline Research

June 21, 2011

Gold Loans

Gold loan market in India

India is one of the largest markets for gold accounting for ~10%
India is one of the largest markets for
gold accounting for ~10% of the global (18,000-20,000 tons) of the global gold stock as at end-FY10. During
gold stock 2005-10, annual gold demand has been stable at around 700 tons
despite a 22% CAGR in gold prices. Indian consumers have an affinity
for gold that emanates from various social and cultural factors making
Inelasticity in gold demand shaped by their demand for bullion partly price inelastic. Further, the low level of
multiple structural factors financial inclusion and poor access to financial products make gold the
default savings and investment instrument for the country’s vast rural
populace. Also high liquidity (conversion into cash instantly to meet
Rural India is estimated to hold around urgent fund requirements) of gold has been driving its robust demand.
65% of total gold stock Rural India is estimated to hold around 65% of total gold stock.
It is estimated that ~10% (1,800-2,000 tons) of the country’s gold
stock has been pledged for loans combined in the organized and
~10% of the country’s gold stock has
unorganized markets. The long-operated unorganized gold loan market
been pledged for loans
is huge (accounting for ~75% of the pledged gold stock) and includes
numerous pawn brokers and money lenders operating primarily in
rural areas. These players have a strong understanding of the local
Of this ~75% is with the unorganized
customer base and offer immediate liquidity to borrowers in need
players such as money lenders, pawn
brokers, etc without requiring elaborate formalities. However, they charge
exorbitant interest rates in the range of 30-50% pa and offer relatively
lower LTV (loan-to-value) in the range of 40-60%. It is estimated that
Unorganized players charge exorbitant
there are more than 1 lac money lenders across the country with 40-
interest rates and offer lower LTV
50% of them present in the Southern states of Andhra Pradesh
(~31,000), Karnataka (~15,000), Tamil Nadu (~13,000) and Kerala
Estimated more than 1lac money (~7,000). Almost all the money lenders typically use gold as security
lenders across the country; 40-50% of
for lending rarely using any other materials such as household goods,
them in Southern India
etc in the form of security.
The organized market accounting for ~25% of the pledged gold (500
tons) includes specialized NBFCs (pre-dominantly focusing on gold
The share of organized players (NBFCs loans), other NBFCs, commercial banks and co-operative banks. The
and Banks) has been increasing rapidly
share of the organized pie has been increasing rapidly due to lower
rate of interest, relatively higher LTV, safety of the ornaments and
other benefits.

Annual demand for gold in India

900
(MT)
750

600

450

300

150

0
1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Source: World Gold Council and IMaCS

Sector Report 2
Gold Loans

Organized gold loan market growing at robust pace

As per IMaCS Industry Report (2010 update), the organized gold loan
Organized gold loan market stood at
Rs350-400bn at the end of FY10; market in India stood at Rs350-400bn at the end of FY10. Over FY02-
estimated at Rs550bn+ by end FY11 10, the market has witnessed a robust 40% CAGR. We estimate
organized market to have crossed Rs550bn at the end of FY11 as
leading NBFCs, Muthoot Finance and Manappuram have combined
Substituting traditional players, registered Rs130bn+ accretion in their gold loan book during the year.
tapping fresh markets and rally in gold Apart from substituting unorganized players and tapping fresh markets
prices have driven the growth of (areas/locality), the impressive growth of organized market has been
organized market
driven by handsome rally in gold prices since 2005. During FY05-11,
gold prices have witnessed 22% CAGR.

Notwithstanding the growth witnessed, The organized gold loan portfolio accounted for merely 1.2% of the
penetration still remains negligible value of total gold stock in India as at end-FY10, as per IMaCS
Industry Report (2010 update). The sheer negligible penetration,
aggressive network expansion/marketing initiatives by players and
Organized market to continue to grow
at robust pace increasing awareness/adoption of gold loans would drive strong growth
of the organized market over the next 3-4 years. The only caveat
would be a material correction in gold prices.

Changing perception of gold loans The sustained marketing efforts of specialized NBFCs have been
could drive accelerated adoption by diminishing the stigma attached to pledging gold jewellery and altering
upper middle and higher income the perception of gold loans from an ‘option of the last resort’ to an
groups
‘option of convenience’. Therefore, we believe that market for gold
loan products could exponentially grow if there is an accelerated
adoption by upper middle and higher income groups.

Organized gold loan market Penetration of the organized market

600 Value of Gold stock Penetration of Org Mkt
(Rs bn)
36 1.5
500 (Rs tn) (%)
30 1.3
400
24 1.0
300
18 0.8
200
12 0.5
100
6 0.3
0
0 0.0
FY02

FY07

FY09

FY10

FY11

FY02 FY07 FY09 FY10

Source: World Gold Council, IMaCS and India Infoline Research

Stupendous rally in Gold since 2005 Returns delivered by Gold each fiscal
24,000 42.0
(Rs/10gm) (%)
20,000 35.0

16,000
28.0
12,000
21.0
8,000
14.0
4,000
7.0
0
Oct-05

Jul-06

Jan-08

Oct-08

Jul-09

Jan-11
Apr-07

Apr-10

0.0
FY06 FY07 FY08 FY09 FY10 FY11 YTD

Source: Bloomberg, India Infoline Research

Sector Report 3
Gold Loans

Southern India is the largest gold loan market

Presently, the southern region of India accounts for 85-90% of the
organized gold loan market. The dominance of the region is attributed
to its majority share in the country’s gold holding and more openness
Southern region accounts for ~40% of
India’s annual gold demand and 85- towards borrowing against gold. According to IMaCS Industry Report,
90% of the organized gold loan market south India accounts for 40% of India’s annual gold demand, followed
by the western region at 25%, northern region at 20-25% and eastern
region at 10-15%.
Not surprisingly, ~70-75% of the branches of specialized NBFCs such
~70-75% of the branches of as Muthoot Finance and Manappuram are located in the southern
specialized NBFCs are located in the region. More importantly, a disproportionately higher share of business
southern region comes from this region manifesting its higher proclivity towards
borrowing against gold. Over the past two years, however, specialized
NBFCs have started expanding aggressively in the other three regions
Share of southern region has been on accompanied by belligerent promotions to enhance awareness. This
decline with these NBFCs expanding along with shifting psychographics is likely to drive a gradual decline in
aggressively in other regions
southern region’s share in the organized gold loan market.

Specialized NBFCs better placed than banks

The operating dynamics of specialized NBFCs (Muthoot and
Operating dynamics of specialized
Manappuram) and banks are vastly different which is reflected in the
NBFCs and banks are vastly different
margins and profitability. For a specialized NBFC, gold loans is the
primary business while banks have traditionally viewed gold loans for
agriculture purpose as a safer means to meet their priority lending
targets. Further, with increase in default rates in some retail segments
Banks have enhanced focus on gold
loans due to its higher profitability especially personal loans over the past few years, banks have
adjusted for lower default rates enhanced focus on gold loans as it offers attractive returns adjusted
for low levels of defaults. Recently, RBI precluded gold loans from
being classified under the agriculture sector, thereby making such
loans ineligible to meet banks' priority lending targets.
Specialized NBFCs have invested heavily in building their service
Specialized NBFCs typically command offerings and typically command premium yields and attractive
premium yields and therefore enjoy profitability. Though interest rate charged varies in the wide range of
significantly superior profitability
12-26%, average yield earned by these players is between 18-25%.
Interest rates charged by commercial and co-operative banks are
significantly lower varying from 8-13%. Generally, banks also levy
Their NIM and RoA are in the range of processing charges which is not in the case of NBFCs. Resultantly,
8-16% and 3-5% as compared to 2-
NIMs of gold loan NBFCs are substantially higher at 8-16% as against
4% and 1-2% respectively for banks
2-4% for banks. RoA of NBFCs is much attractive at 3-5% v/s 1-2%
for banks.
Our conversations with Muthoot and Manappuram revealed that their
Branches of specialized NBFCs located branches located near to banks (some even in the same building) are
closer to banks are witnessing higher
able to attract more customers than latter in spite of higher interest
customer visits
rates. They attribute customer’s preference for NBFCs to 1) low levels
of documentation and formalities 2) quick approval and disbursal of
Customer preference for these NBFCs loans (average turnaround time is 10-15 minutes for a new customer
despite their higher interest rates is
and 5-8 minutes for an existing customer) 3) higher loan-to-value
driven by multiple structural factors
exposure (75% at the higher end as compared to 60-65% given by
banks) 4) flexibility in terms of loans and 5) presence of expert
valuers. It has to be understood that gold loan customers typically look
Customers are usually in urgent need
at minimum disbursal time and maximum loan exposure for their gold
of funds and therefore are driven by
maximum loan exposure and minimum as they have an urgent need for funds. Further, since loans are all
disbursal time over-collateralized by gold jewellery, there is minimal requirement for
documentation and credit assessment, thereby shortening the
response time.

Sector Report 4
Gold Loans

NBFC’s market share has been increasing at fast clip

According to IMaCS Industry Report, the market share of NBFCs in the
Market share of NBFCs has increased organized gold loan market has increased significantly from 18% in
significantly from 18% in FY07 to 32%
FY07 to 32% in FY10. On the other hand, other players such as public
in FY10
and private banks and co-operatives have witnessed a material decline
in their market shares. However, commercial banks focused on
However, commercial banks focused southern India (IOB, SIB, Indian Bank, Andhra Bank, Federal Bank,
on southern India continue to
etc) continue to dominate the market with 58% share in FY10. NBFC’s
dominate the market with 58% share
market share gain has been mainly driven by exceptional growth of
specialized gold loan companies such as Muthoot and Manappuram.

Movement in market share of organized Growth over FY07-10 of organized players

players
Public Banks Private Banks NBFCs Co-operatives 75
(%)
100.0% 60
14.5 12.1 9.7

80.0% 45
18.4 23.6 32.2

60.0% 14.8 13.7 30

11.6
40.0% 15

52.3 50.6 46.5

20.0% 0

NBFCs
Private
Banks
Public

Banks

operatives
Co-
0.0%
FY07 FY09 FY10

Source: IMaCS and India Infoline Research

Growth in loan book witnessed by leading Top 5 gold loan providers with market share
players
FY07 FY09 FY10
Gold Loan Book Market Share
75
(Rs bn) 90 24.0
(Rs bn) (%)
60 75 20.0
60 16.0
45
45 12.0
30
30 8.0
15 15 4.0
0 0.0
0
Muthoot Fin

IOB

Manappuram

SIB
Indian Bk
IOB
Manappuram

Indian Bank
Finance

South Indian
Muthoot

Muthoot
Fincorp

Andhra
Bank
Bank

Source: IMaCS and India Infoline Research

Sector Report 5
Gold Loans

Critical success factors for Gold Loan companies

Reach/Strong
Operational risk distribution
management – network
Brand
Technology,
recognition
Systems and
Processes

Faster Critical success

turnaround time Access to low
factors for Gold Loan
cost of funds
companies

Unique and
customized Evaluation of
product offering Gold
Security of
Gold as
collateral

Source: Company, India Infoline Research

Adverse regulations could hurt profitability

Kerala has imposed its Money Lenders Act on all NBFCs operating in
Kerala has imposed its Money Lenders
Act on all NBFCs operating in the state the state that proposes an interest rate ceiling of 18%, substantially
proposing an interest rate cap of 18% lower than 20-24% charged by gold loan companies. The imposition of
the Act was later upheld by the High Court and NBFCs such as
Manappuram and Muthoot have challenged this decision in the
Supreme Court. Their contention is that they are already governed by
Its imposition is being challenged by RBI and interest rate charged is as per the guidelines under the fair
specialized NBFCs in Supreme Court practice code. Further, the 7,000+ registered money lenders in Kerala
are actually charging higher interest rate of 30-40% than prescribed
18%. Tamil Nadu, Karnataka and Andhra Pradesh also have their own
Money Lenders Act but have not imposed it on NBFCs. In our view, a
Other southern states have not perceivable risk could be RBI setting an interest rate and margin cap
imposed Money Lenders Act on NBFCs
for gold loan companies as done for MFIs recently. If caps are set at
similar levels (26% for interest and 12% for margin), than some gold
loan companies (such as Manappuram) would be impacted at the
margin level.

Correction in gold prices would impact growth

Over the past three years, there has been a sustained rally in gold
prices having risen from US$917/ounce in FY08 to US$1,432/ounce in
A material portion of AUM growth for
FY11 (a 16% CAGR). We believe that a material portion of AUM growth
gold loan companies was driven by
gold price uptrend for gold loan companies was driven by the gold price uptrend mainly
reflected in improving average ticket size of loans. In the light of
persisting global uncertainty, we assume gold prices to be stable over
the next two years. However, if there is a material correction in price
Therefore, a significant correction in
gold prices would have a direct impact than AUM growth of the gold loan companies would be directly
on their future growth impacted. Companies would need to add higher number of customers
as average ticket size would decline. We believe that impact of sharp
decline in gold prices on asset quality would be limited given a
comfortable LTV ratio of ~70% and shorter loan tenures.

Sector Report 6
 Muthoot Finance Ltd – BUY
‘Dominant player’

Sector: Financials Largest gold financing company in the country

Sensex: 17,507 Muthoot Finance (Muthoot) is the largest gold financing company in India
with a gross gold loan portfolio of Rs15.9bn as at March 2011 and a
CMP (Rs): 154
commanding market share (20% in FY10). Company’s AUM has
Target price (Rs): 202
witnessed a phenomenal 82% CAGR over the past four years driven by
Upside (%): 31.0
substantial network expansion, significant improvement in branch
52 Week h/l (Rs): 199/154 productivity, sustained rally in gold prices and strong brand recognition.
Market cap (Rscr) : 5,734 Gold stock has increased from 23MT to 112MT over FY07-11 representing
6m Avg vol (‘000Nos): - 49% CAGR. About 67% of the current ~2,900 branches are located in the
No of o/s shares (mn): 372 southern region which contribute 74% to the gold loan portfolio.
FV (Rs): 10
AUM growth to moderate but balance sheet growth to be strong
Bloomberg code: MUTH IN We anticipate Muthoot’s AUM growth to slow down to a more normalized
Reuters code: - 37.5% pa over FY11-13 due to base effect, increasing penetration and
BSE code: 533398 competition in South (especially Kerala) and slower adoption of gold loan
NSE code: MUTHOOTFIN product in other regions. Further, if the gold rally were to halt, AUM
Prices as on 20 Jun, 2011
growth would be purely volume driven. With limited incentive for
Shareholding pattern
assignments now, bulk of the incremental growth would be reflected on
the balance sheet propping up the net loan CAGR to 57.5% over FY11-
May '11 (%)
13. Business growth would be mainly driven by significant improvement
Promoters 80.1
in productivity of ~1,750 branches added in the past two years.
Institutions 6.9
Non promoter corp hold - NIM to contract on sharp increase in funding cost
Public & others 13.0 Notwithstanding the tailwind from IPO, Muthoot’s NIM is estimated to
correct by 140bps in FY12 to 9.5% due to steep rise in the cost of funds.
Performance rel. to sensex The cost of bank borrowings has increased by 150-200bps in recent
(%) 1m 3m 1yr months on account of lending rate hikes by banks and loss of PSL status
for assignments. Any fresh retail secured NCD issuance by Muthoot would
Muthoot 1.7 - -
likely happen at elevated rates (11-12%) in-line with recent issuances by
Manappuram 4.3 (2.5) 53.5
other NBFCs. The yield on loan portfolio is expected to remain firm during
M&M Fin (1.9) (10.7) 36.1
the year despite intensifying competition aided by the recent hike (100-
Shriram Tran (6.9) (15.6) 2.1 150bps) in interest rate by the company.

Share price trend RoA to marginally come-off; RoE to remain impressive though
Muthoot Sensex Significant improvement in AUM/Branch (from Rs58mn to Rs80mn over
140 FY11-13) and lower incremental marketing/promotion expenditure would
drive some operating leverage. Resultantly, opex/average assets ratio is
120
estimated to decline by 30bps over FY11-13 to 3.6% marginally
100 cushioning the impact of NIM contraction on RoA. The recent IPO has
80 augmented capital adequacy and reduced leverage. RoE, as a result, is
likely to normalize to 30-35% from 51% in FY11. Considering the
60
estimated robust earnings of 39% over FY11-13, we initiate coverage on
May-11 Jun-11
Muthoot with a BUY rating and 9-month target of Rs202.

Financial summary
Y/e 31 Mar (Rs m) FY10 FY11 FY12E FY13E
Total operating income 6,157 12,832 18,307 25,029
Yoy growth (%) 98.2 108.4 42.7 36.7
Operating profit (pre-provisions) 3,477 7,936 11,220 15,573
Net profit 2,276 4,942 6,891 9,576
yoy growth (%) 132.8 117.1 39.4 39.0

EPS (Rs) 7.6 15.4 18.5 25.8

BVPS (Rs) 19.4 41.7 75.2 96.3
P/E (x) 20.4 10.0 8.3 6.0
P/BV (x) 7.9 3.7 2.0 1.6
ROE (%) 47.6 51.5 33.4 30.1
ROA (%) 3.7 3.9 3.4 3.6
CAR (%) 14.8 15.8 17.4 16.6
Source: Company, India Infoline Research

June 21, 2011

Muthoot Finance Ltd

Largest gold financing company in the country

Muthoot Finance (Muthoot) is the largest gold financing company in
India with a gross gold loan portfolio of Rs15.9bn as at March 2011.
Market share in the organized gold
loan industry stood at ~20% in FY10 Gold loans comprised about 99% of the company’s AUM. As per IMaCS
Industry Report 2010 Update, Muthoot’s market share in the organized
gold loan industry stood at ~20%. With company having witnessed a
phenomenal 82% CAGR over the past four years, Muthoot’s market
share has increased significantly from 11% in FY07. The robust
Has witnessed a 82% AUM CAGR over business growth has been driven by substantial network expansion
the past four years (49% CAGR in branches), significant improvement in branch
productivity, sustained rally in gold prices and strong brand
recognition. Gold stock has increased from 23MT to 112MT over FY07-
11 representing 49% CAGR. Muthoot employed 23,688 people at the
Gold stock has increased from 23MT to end of FY11. About 67% of company’s branches are located in
112MT over FY07-11
southern region which contributes 74% to the gross gold loan
portfolio. However, the business share of other regions has increased
over the past three years with Muthoot’s strong emphasis on regional
Through its ~2,900 branches, diversification. Presently, through its ~2,900 branches, company has
company has presence across 21
presence across 21 states and 4 union territories. As per the company,
states and 4 union territories
it has been serving 65,000-70,000 gold loan customers per day in
recent months.
Muthoot is a systemically important non-deposit taking NBFC
headquartered in the state of Kerala. Muthoot’s promoters have an
extensive 70 years of experience in the gold loan business and the
Promoters have an extensive 70 years
of experience in the gold loan business current management has demonstrated the ability to drive and
manage multi-fold business growth. In addition to the gold loans
business, company provides money transfer services through its
branches (sub-agents of various registered money transfer agencies)
and has recently commenced providing collection agency services.
Muthoot also operates three windmills in the state of Tamil Nadu.

Gross gold loan portfolio has witnessed 82% Robust branch expansion has driven AUM
CAGR over FY07-11 growth
Gross Gold Loans Gold Stock No of Branches No of Employees

180 150 3,000 18,000

(Rs bn) (MT) (no) (no)
150 125 2,500 15,000

120 100 2,000 12,000

90 75 1,500 9,000

60 50 1,000 6,000

30 25 500 3,000

0 0 0 0
FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11

Source: Company, India Infoline Research

Sector Report 8
Muthoot Finance Ltd

Regional distribution of branches – 67% in Regional distribution of gross gold loan

South portfolio – 74% in South
East West North South East West North South

100.0% 100.0%

80.0% 80.0%

60.0% 60.0%

40.0% 40.0%

20.0% 20.0%

0.0% 0.0%
FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11

Source: Company, India Infoline Research

Catering to individual customers requiring short-term loans

Muthoot’s gold loan customers are typically small businessmen,
vendors, traders, farmers and salaried individuals, who for reasons of
convenience, accessibility or necessity, avail of credit by pledging their
Company had 4.7mn loan accounts at
gold jewellery. Company had 4.7mn loan accounts at the end of FY11,
the end of FY11
representing a 68% yoy growth. Muthoot offers loans for varying
amounts, interest rates and exposures (LTVs). The principal loan
amount usually ranges from Rs2,000-100,000 while the interest rate
could vary in the range of 12-30% per annum. As per the company,
Interest rate vary in the range of 12-
30% pa; most of the loans are in the most of the loans are in the range of Rs5,000-50,000. Aided by the
range of Rs5,000-50,000 handsome rally in the gold prices, average ticket size of loans has
been increasing materially. It was Rs33,464 in FY11, higher 28% over
FY10. Loans are offered for a maximum tenure of 12 months,
however, the average tenure is about 4 months. Average LTV (loan-to-
Average tenure of loans is about 4 value) is at 72% on the pure weight of gold with 35-40% of the loans
months
having an LTV >70%.

Short response time for disbursements

Each branch of Muthoot is staffed with persons possessing local
knowledge and understanding of customers' needs and who are
adequately trained to appraise collateral and disburse loans within a
As loans are over-collateralized by,
credit assessment and documentary few minutes. Although, Muthoot conducts certain know-your-customer
requirements are minimal (KYC) procedures at the time of sanctioning a loan, the company
generally relies on the quality of the gold jewellery provided as
collateral rather than on a stringent credit analysis of the customer.
Further, since loans are over-collateralized by gold jewellery, credit
assessment and documentary requirements are rather minimal thereby
Two key factors that impact response significantly shortening the turnaround time for disbursement. The two
time are loan ticket size and number of
key factors that impact response time are loan ticket size and number
items pledged
of items pledged. Company claims to disburse loans up to Rs20,000 in
size within five minutes from the time gold is tendered to appraiser.
The ability to timely appraise the quality of the gold jewellery collateral
is critical to the response time. However, assessing gold jewellery
quickly is a specialized skill as it requires assessing jewellery for gold
Company has two staff training
content and quality manually without damaging the ornaments.
colleges and three regional training
centers Muthoot has two staff training colleges, one each in Cochin and Delhi,
and three regional training centers located in Chennai, Hyderabad and
Bangalore. The staff training colleges and regional training centers are
used to train new employees in appraisal skills, customer relations and
communication skills.

Sector Report 9
Muthoot Finance Ltd

AUM growth to moderate significantly over FY11-13E

Despite being the largest player in the organized gold loan market,
Muthoot has significantly outpaced
Muthoot has significantly outpaced the industry in terms of growth.
industry growth over FY07-11
Company’s gross gold loan book has witnessed 82% CAGR over FY07-
11 as against 46% CAGR of the organized market. In the past two
years, growth has been much stronger at 118% pa. Sheer size of the
opportunity, management aggression, timely fund raising, robust
branch expansion and buoyancy in gold prices have driven the robust
growth. Gold stock has increased from 23MT to 112MT over FY07-11
representing 49% CAGR. Gold loans being the flagship lending product
for Muthoot constitute 99% of its AUM. Going ahead, we expect AUM
growth to moderate significantly on account of increasing penetration
Expect AUM growth to moderate and competition in South (especially Kerala) and slower adoption of
significantly; estimate FY11-13 CAGR gold loan product in other regions. Further, if the gold rally were to
at 37.5% halt, AUM growth would be purely volume driven. We factor in a
substantial moderation and expect AUM CAGR of 37.5% over FY11-13.
With Muthoot having added ~1,750 branches (64% of March-ending
Substantial growth would be driven by
relatively new branches strength) in the past two years, we believe that a substantial portion
of the incremental growth would be driven by these relatively new
branches. Company has planned for a modest branch addition of 500
each in FY12 and FY13. Resultantly, average branch productivity is
AUM/Branch to increase from Rs58mn
at end-FY11 to Rs80mn at end-FY13 estimated to shoot up with AUM/Branch increasing by 38% from
Rs58mn at end-FY11 to Rs80mn at end-FY13.

AUM to witness 37.5% CAGR over FY11-13E FY12E and FY13E branch addition to be
modest
AUM yoy grow th 1,200
(no)
300 120
(Rs bn) (%) 1,000
250 100
800
200 80
600
150 60
400
100 40
200
50 20

0 0 0
FY08 FY09 FY10 FY11 FY12E FY13E FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

AUM/Branch to increase significantly

90
(Rs mn)
75

60

45

30

15

0
FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Sector Report 10
Muthoot Finance Ltd

Assignments to come-off sharply; net loan book to grow much

faster than AUM
Loan assignment has been a significant feature for Muthoot forming
Assignments have been ~25% of AUM ~25% of its AUM in the past three years. Company has been selling a
in the past three years portion of its loan portfolio to banks on regular basis for an upfront
fixed consideration. This arrangement represented a relatively cheaper
source of capital as the interest rates were 150-200bps lower than
other bank borrowings. The interest benefit was offered by banks as
Interest rates on assignments were the purchased portfolio could be classified under the agriculture sector
150-200bps lower than other bank
for meeting the priority sector lending target. Under such transactions,
borrowings
Muthoot has to provide credit enhancement through fixed deposits
with respective bank or by issuing a corporate guarantee for an
amount equal to a negotiated percentage of the value of the loans
being assigned.
The assigned book and liability does not appear on the balance sheet
of the company. Cash raised by assignment is used for generating
fresh gold loans. The loans assigned are managed by the company
(therefore, customers not impacted) and interest income as well as
assignment expenses are recorded in the P&L. On maturity of the
RBI recently precluded gold loans from
being classified as PSL for banks assigned portfolio, the repayment goes to the bank and assignment
liability disappears. In a recent circular (dated February 2nd 2011), RBI
precluded gold loans from being classified under the agriculture sector
for meeting PSL requirements. Thus the interest benefit has
Thus, interest benefit on disappeared and the cost of loan assignments has become similar to
loan assignments has disappeared other bank borrowings. As per the company, the new regulation would
apply to new assignments and not impact the existing arrangements.
Also, it is unlikely to impact the availability of funds.
In the absence of any interest advantage under assignments, company
Company has assigned loans worth expects majority of its incremental bank borrowings through its routine
~Rs8bn since the RBI circular cash credit/working capital loan facility. With some of the banks still
interested, company has assigned loans worth ~Rs8bn since the RBI
circular. However, management has hinted at lower assignments going
Lower assignments would prop-up net ahead. With this, bulk of the growth would be reflected on the balance
loan CAGR to 57.5% over FY11-13 sheet thereby propping up the net loan CAGR to 57.5% over FY11-13.

Assignments to decline sharply on loss of PSL Resultantly, net loan book on balance sheet
status to grow much faster than AUM
Assignments as a % of AUM Net loan book yoy grow th

48 30 300 120
(Rs bn) (%) (Rs bn) (%)
40 25 250 100

32 20 200 80

24 15 150 60

16 10 100 40

8 5 50 20

0 0 0 0
FY08 FY09 FY10 FY11 FY12E FY13E FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Sector Report 11
Muthoot Finance Ltd

Share of NCDs and Banks to increase in borrowings

The primary sources of borrowing for Muthoot have been Retail
secured NCDs (known as Muthoot Gold Bonds), banks (CC/WC loan
facility) and assignments. Combined, these three sources formed 90%
Borrowing mix to materially shift
towards retail secured NCDs and bank of company’s total borrowings. Retail NCDs having a term of 1, 2 or 3
borrowings years are placed privately to the customers visiting branches. With
assignment estimated to significantly come down, the borrowing mix
would move materially shift towards retail secured NCDs and bank
Share of equity in Total Assets funding borrowings. The share of subordinated debt and other forms of
has received a boost from recent IPO n borrowings including CPs would also rise. The share of equity in Total
Assets (including Assignments) funding would receive a boost from the
recent IPO of ~Rs9bn.

Borrowing profile as at FY11-end Total asset (incl. assignments) funding mix

trend
NCD - MGB Banks Borrow ings Subordinated debt Ow ned Funds NCD - MGB Banks Borrow
Assignments Others Subordinated debt Assignments Others
6%
100.0%
26%
80.0%
26%
60.0%

40.0%

20.0%
4%
0.0%
38% FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Cost of borrowing to rise materially in FY12E

Muthoot’s cost of borrowing stood at 8.8% for FY11 representing a
30-35% of borrowings carry fixed rate marginal increase over FY10. As against 100% of loans assets that are
of interest v/s 100% of loans at fixed rates, only 30-35% of company’s borrowings (primarily NCDs
and subordinated debt) carry fixed rate of interest. The interest rate
on the balance 65% borrowings, mainly from banks (assignment and
others), are floating linked to the respective banks' BPLR or base rate.
Cost of bank borrowings has shot-up In the recent past, the cost of bank borrowing (including assignments)
by 150-200bps in the recent past
has shot-up by 150-200bps due to material increase in lending rates
and loss of PSL status for assignments. The central bank’s monetary
Interest rate offered on Retail NCDs tightening and difficult liquidity conditions have forced all commercial
would also track the macro trend banks to raise their BPLR and base rate substantially over the past 6-9
months. The interest rate offered on Retail NCDs would also track the
macro trend as already seen in higher rates (11-12%) being offered by
Expect Muthoot’s funding cost to many NBFCs on new NCD issuances. We therefore expect Muthoot’s
increase sharply by 180bps in FY12. cost of borrowings to witness a steep increase of 180bps in FY12.

Sector Report 12
Muthoot Finance Ltd

Cost of funds to rise by 180bps in FY12E

12.0
(%)
11.0

10.0

9.0

8.0

7.0

6.0
FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Yield to be resilient in FY12E but may weaken in FY13E; NIM to

correct materially
Yield on loan portfolio has been steady
The average yield earned on the loan portfolio was 19.7% in FY11. It
around 20% over the past five years has been steady around 20% over the past five years despite a
significant increase in organized competition. As per Muthoot, further
competition in the Southern region is also unlikely to impact its loan
yields as the overall business pie is expanding with increasing adoption
Recently, company has raised interest of gold loans by middle and higher income individuals. Recently,
rates on loans by 100-150bps to pass- company has raised interest rates on loans by 100-150bps to pass-on
on the increase in funding cost the increase in funding cost thus reflecting its strong pricing power.
Company’s loan yield is materially lower when compared to its closest
competitor, Manappuram, and in-line with most NBFCs present in the
Expect a stable loan yield in FY12 and gold loan segment. We assume a stable loan yield in FY12 and a
a correction of 70bps in FY13 correction of 70bps in FY13 factoring some impact of intensifying
competition.
NIM on the other hand is estimated to decline sharply by 140bps in
NIM to decline sharply by 140bps in FY12 due to steep increase in funding cost. This would be despite the
FY12 due to steep increase in funding beneficial impact of the recent equity raising though an IPO. NIM is
cost likely to stabilize in FY13 near 9.5%. The key upside risk to our margin
assumption for FY13 would be a sharp reversal in interest rate cycle.

Yield on AUM to be relatively stable NIM to witness steep fall in FY12E due to
sharp increase in funding cost
23.0 12.0
(%) (%)
21.0 11.0

19.0 10.0

17.0 9.0

15.0 8.0

13.0 7.0

11.0 6.0
FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Sector Report 13
Muthoot Finance Ltd

Improvement in branch productivity would drive some

operating leverage
With substantial growth to be driven by relatively younger branches
(<2 years old) and modest new branch addition plans, we expect
AUM/Branch to increase sharply from average branch productivity to witness a significant jump. Year-ending
Rs58mn in FY11 to Rs80mn in FY13
AUM/Branch is estimated to increase sharply from Rs58mn in FY11 to
Rs80mn in FY13. This is likely to kick-in some operating leverage for
Muthoot over the next two years. We don’t expect any leverage in staff
Operating leverage would be driven by and rent expenditure as salary and rental inflation would likely remain
advertising and other opex
firm. Material leverage would actually come in from advertising and
other opex. The advertising expenditure has increased three-fold in the
past two years driven by aggressive marketing and promotion to
improve brand awareness. Company expects only a marginal increase
in FY12. Lower other opex ratio would be driven by higher capacity
Opex/average assets ratio to decline
from 3.9% in FY11 to 3.6% in FY13 utilization. Overall, we expect opex/average assets ratio to decline
from 3.9% in FY11 to 3.6% in FY13.

Advertising and other opex would be the Opex/Avg. Assets to decline marginally over
drivers of operating leverage FY11-13E
Staff Exp Rent Advertising Other Opex 5.0
(%)
2.1 (% of Avg
4.5
Assets)
1.8

1.4 4.0

1.1 3.5
0.7
3.0
0.4

0.0 2.5
FY08 FY09 FY10 FY11 FY12E FY13E FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Recent equity issuance has augmented capital adequacy;

further dilution unlikely till FY13E
As per the revised norms of RBI, all systemically important non-
deposit taking NBFCs are required to maintain a CAR of at least 15%
from March 31, 2011. To adhere to this regulation in the backdrop of
Company raised ~Rs9bn through an strong business growth, Muthoot raised ~Rs9bn (67% of its FY11
IPO in April 2011 augmenting its Tier-1
networth) through an IPO in the month of April 2011. This has
ratio by ~700bps
significantly augmented its Tier-1 ratio (likely by ~700bps) which
stood at 10.3% at the end of FY11, just above new minimum
requirement of 10%. Though AUM growth is expected to moderate
substantially over the next two years, capital consumption would
Tier-1 ratio is unlikely to dip below remain high as bulk of the growth would be reflected on balance sheet.
10% over the next two years aided by However, the Tier-1 ratio is unlikely to dip below 10% over the next
substantial plough backs two years aided by substantial plough backs. We therefore do not
foresee any need for further equity dilution in the medium term.

Sector Report 14
Muthoot Finance Ltd

Capital adequacy augmented by recent IPO; Plough backs would be substantial in FY12E
Tier-1 ratio to remain comfortable and FY13E; would aid capital adequacy
CAR Tier-1
9
20.0 (Rs bn)
(%)
8
17.5
6
15.0
5
12.5

10.0 3

7.5 2

5.0 0
FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Negligible asset quality concerns

With gold loans constituting 99% of AUM, Muthoot’s GNPL% has
moved in a narrow band of 0.2-0.5% in the past five years. As the
Muthoot’s GNPL% has moved in a
narrow band of 0.2-0.5% in the past pledged gold jewelry holds high sentimental value for the borrower,
five years defaults have been rare. In the case of a default, company sells the
gold jewellery collateral through auctions to the local jewellers. The
loans are over-collateralized thereby providing cushion against
material correction in gold prices. Therefore, probability of any loss
arising to the company is extremely low.

Historically, company’s NPL Historically, Muthoot provisioning for NPLs has been limited to
provisioning has been limited to regulatory requirements – 10% for sub-standard assets and 50-100%
regulatory levels for doubtful assets. With 95% of NPLs being sub-standard assets,
overall provisioning cover stands lower at 15%. We expect more
Expect more conservative provisioning conservative provisioning by the company in future taking the
by the company in future provisioning cover to 25% by FY13. During Q3 FY11, RBI introduced
0.25% provisioning for standard gold loans which the company met in
H2 FY11. We estimate stable credit charge in FY12 and FY13 at 0.3%.

Asset quality to remain robust Credit charge to be stabilize near 0.3%

GNPL NNPL 0.5
(%)
0.6
(%) 0.4
0.5

0.4 0.3

0.3
0.2
0.2
0.1
0.1

0.0 0.0
FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Sector Report 15
Muthoot Finance Ltd

RoA to come-off marginally; RoE to decline but remain robust

Muthoot’s RoA in FY11 was handsome 3.9% reflecting its robust
profitability. In the next two years, a key headwind for RoA would be
RoA to decline by marginal 30bps over
FY11-13 to 3.6% the anticipated 140bps decline in NIM. However, this would be partly
offset by the expected operating leverage. With asset quality to remain
sanguine, provisioning in unlikely to pose any threat to profitability.
Overall, we estimate Muthoot’s RoA to decline by marginal 30bps over
RoE to normalize to 30-35% with
recent reduction in leverage FY11-13 to 3.6%. RoE, which stood at exceptional 51.9% in FY11 due
to peak leverage (9x), would normalize to above 30% with leverage
correcting to around 7x.

Decline in PAT/AUM % to be lower than NIM RoA to marginally trend down impacted by
cushioned by operating leverage NIM correction
5.0 4.5
(%) (%)

4.0
4.5

3.5
4.0
3.0
3.5
2.5

3.0
2.0

2.5 1.5
FY08 FY09 FY10 FY11 FY12E FY13E FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

RoE to fall from exceptionally high levels due to reduction in

leverage
RoE Leverage
52.0 10.0
(%) (x)
47.0 9.0
42.0
8.0
37.0
7.0
32.0

27.0 6.0

22.0 5.0
FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Sector Report 16
Muthoot Finance Ltd

Valuation attractive considering robust profitability and strong

earnings growth
Despite the anticipated slowdown in AUM growth and contraction in
Overall profitability of Muthoot to margin, overall profitability of Muthoot would still remain robust with
remain robust RoA in the range of 3.5-4% and RoE in the range of 30-35%. Further,
earnings CAGR over FY11-13 is estimated to be strong at 39% on an
average AUM growth of 50%. At the current price of Rs154, the stock
Estimate earnings CAGR at strong 39% trades at 12% below the IPO price and at attractive valuation of 1.6x
over FY11-13 FY13E P/BV. Though there are valid concerns with respect to further
increase in the funding cost and potential adverse regulations, current
valuation seems to have digested a significant part of it. We initiate
Recommend BUY with a 9-month coverage on Muthoot with a BUY rating and 9-month target of Rs202
target of Rs202 (valued at 2.1x FY13 P/BV).

Sector Report 17
 Muthoot Finance Ltd

Financials

Income statement Key ratios

Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13E Y/e 31 Mar FY10 FY11E FY12E FY13E
Interest income 10,775 22,983 37,175 49,134 Growth matrix (%)
Interest expense (4,737) (10,326) (19,094) (24,380) Net interest income 103.6 109.6 42.9 36.9
Net int income 6,037 12,657 18,082 24,754 Total op income 98.2 108.4 42.7 36.7
Non-int income 119 175 225 275 Op profit (pre-
Total op income 6,157 12,832 18,307 25,029 provision) 133.5 128.3 41.4 38.8
Total op expenses (2,680) (4,897) (7,087) (9,456) Net profit 132.8 117.1 39.4 39.0
Op prof (pre-prov) 3,477 7,936 11,220 15,573 Loans 112.4 115.1 81.6 36.6
Provisions (21) (323) (619) (841) Borrowings 66.8 126.1 58.2 37.1
Profit before tax 3,456 7,612 10,601 14,732 Total assets 65.8 126.3 63.3 35.9
Taxes (1,180) (2,670) (3,710) (5,156)
Net profit 2,276 4,942 6,891 9,576 Profitability Ratios (%)
NIM 11.2 10.9 9.5 9.5
Return on Avg Equity 47.6 51.5 33.4 30.1
Balance sheet
Return on Avg Assets 3.7 3.9 3.4 3.6
Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13E
Fixed assets 1,533 2,341 2,435 2,751
Per share ratios (Rs)
Intangible assets 0 0 0 0
EPS 7.6 15.4 18.5 25.8
Investments 75 75 75 75
BVPS 19.4 41.7 75.2 96.3
Net loans 54,298 116,821 212,158 289,914
DPS - - 3.0 4.0
Net Current Assets 2,766 13,516 2,132 1,883
Def Tax Asset
(Net) (21) (23) (23) (23) Other key ratios (%)
Total assets 58,650 132,730 216,777 294,601 Loans/Borrowings 102.8 97.9 112.4 112.0
Opex /Avg. Assets 4.4 3.9 3.5 3.6
Net worth 5,845 13,344 27,942 35,778 CAR 14.8 15.8 17.4 16.6
Secured loans 45,471 102,112 161,924 222,633 Tier-I capital 9.5 10.3 12.3 11.6
Unsecured loans 7,334 17,274 26,910 36,189 Gross NPLs/Loans 0.5 0.3 0.3 0.3
Total liabilities 52,805 119,386 188,835 258,822 Total prov/Avg loans 0.0 0.3 0.3 0.3
Equity + Total Net NPLs/Net loans 0.4 0.2 0.2 0.2
liabilities 58,651 132,730 216,777 294,601 Tax rate 34.1 35.1 35.0 35.0
Dividend yield - - 1.9 2.5

Sector Report 18
 Manappuram Finance & Leasing – BUY
‘Comfortably placed’

Sector: Financials Fastest growing gold loan company; 8x AUM growth over FY09-11
Sensex: 17,507 Manappuram has been the fastest growing gold loan company in the
country. It has tripled its AUM in the past one year and grown it eight
CMP (Rs): 57
times in the last two years. Company is the second largest listed gold
Target price (Rs): 73
loan company after Muthoot with ~7% share of the organized market.
Upside (%): 28.0
Apart from a sustained rally in gold prices, substantial network expansion
52 Week h/l (Rs): 95/35 (79% CAGR in branches over FY09-11) has driven the exponential growth
Market cap (Rscr) : 4,744 in AUM. The robust growth was mainly funded by two back-to-back QIP
6m Avg vol (‘000Nos): 2,742 issues in FY10 (Rs2.45bn) and FY11 (Rs10bn). Presently, >75% of its
No of o/s shares (mn): 834 2,200-2,300 branches are located in the largest business region of South
FV (Rs): 2
that contributes a disproportionate ~87% to company’s business.
Bloomberg code: MGFL IN New branches to drive 45% AUM CAGR over FY11-13E
Reuters code: MGFL.BO After a significant outperformance to industry growth, we expect
BSE code: 531213 Manappuram’s growth momentum to moderate over FY11-13 to 45%
NSE code: MANAPPURAM with increased penetration/competition in South (especially Kerala) and
Prices as on 20 Jun, 2011
slower adoption in other regions. More importantly, net loans (on the
Shareholding pattern
balance sheet) would witness a higher 57% CAGR in the absence of any
loan assignments in future. With Manappuram having more than doubled
March'11 (%)
its branches in FY11, bulk of the anticipated growth would be fuelled by
Promoters 36.5
substantial uptick in productivity of the new branches.
Institutions 31.9
Non promoter corp hold 0.9 NIM to contract on declining yield and increase in funding cost
Public & others 30.7 We estimate Manappuram’s margin to correct by ~360bps over FY11-13
from 16.7% to 13.1%. Current loan yield at ~24% is not only
Performance rel. to sensex substantially higher than interest charged by commercial and co-
(%) 1m 3m 1yr operative banks but also materially elevated than Muthoot, a like-to-like
competitor. Increasing competition in Southern region could push
Manappuram 4.3 (2.5) 53.5
company’s yield lower in the medium term. On the other hand, funding
Muthoot 1.7 - -
cost has already increased by 150-200 bps qoq in Q1 FY12 due to loss of
M&M Fin (1.9) (10.7) 36.1
PSL status on assignments and increase in bank lending/CP rates.
Shriram Tran (6.9) (15.6) 2.1
Operating leverage to cushion RoA while RoE to improve
Share price trend With company having significantly invested in capacity augmentation and
Manappuram Sensex
brand awareness, material operating leverage would kick-in over FY11-
13. We expect a substantial improvement in AUM/Branch from Rs36mn to
250
Rs55mn as new branches mature. Further, advertising expenditure is
200 estimated to remain stable or marginally increase. As such, opex/average
150 assets ratio is likely to decline considerably from 7% in FY11 to 5.5% in
100
FY13. This would cushion the impact of margin contraction on RoA.
However, RoE would improve as leverage increases from 2.9x to 5.1x.
50
Given the strong growth and profitability profile, we initiate coverage on
Jun-10 Dec-10 Jun-11
Manappuram with a BUY rating and 9-month target of Rs73.

Financial summary
Y/e 31 Mar (Rs m) FY10 FY11 FY12E FY13E
Total operating income 3,413 8,496 13,325 17,755
Yoy growth (%) 167.6 148.9 56.8 33.2
Operating profit (pre-provisions) 1,907 4,373 7,168 9,687
Net profit 1,197 2,827 4,498 6,106
yoy growth (%) 295.2 136.1 59.1 35.7

EPS (Rs) 3.5 3.4 5.4 7.3

BVPS (Rs) 17.9 23.1 27.3 33.2
P/E (x) 8.1 8.4 10.6 7.8
P/BV (x) 1.6 1.2 2.1 1.7
ROE (%) 30.8 22.3 21.4 24.2
ROA (%) 5.6 4.8 4.3 4.2
CAR (%) 31.0 30.5 21.7 19.0
Source: Company, India Infoline Research

June 21, 2011

Manappuram General Finance & Leasing Ltd

Fastest growing gold loan company

Headquartered in the State of Kerala, Manappuram General Finance
and Leasing Ltd (Manappuram) is the second largest listed gold loan
Manappuram is the second largest
listed gold loan company with ~7% company with ~7% share of the organized market. Initially registered
share of the organized market as deposit taking NBFC, company has changed its status recently to
become a non-deposit taking NBFC.

Manappuram, a flagship company of Manappuram Group, is primarily

engaged in providing loans against household used jewellery pledged
by customers. As at March 2011, company’s AUM stood at Rs75bn;
99.3% of which were gold loans and remaining are historical portfolio
By having grown its AUM 8xin the past
two years, Manappuram is the fastest of hypothecation against vehicle loans and other business/personal
growing gold loan company loans. By having tripled its AUM is the past one year and grown eight
times in the past two years, Manappuram is the fastest growing gold
loan company in the country.

The exponential growth was supported by substantial branch (79%

Exponential growth was supported by CAGR over FY09-11) and employee (103% CAGR over FY09-11)
substantial branch addition and the
addition. A sustained rally in gold prices also played a critical role in
rally in gold prices
AUM accretion. The robust growth was funded mainly by two back-to-
back QIP issues in FY10 (Rs2.45bn) and FY11 (Rs10bn). Presently,
more than 75% of its 2,200-2,300 branches are located in the largest
>75% of branches are located in the
business region of South (uniformly spread across Kerala, Tamil Nadu,
largest business region of South
Karnataka and Andhra Pradesh). In terms of business, Southern region
has a disproportionate share of ~87%. However, this has been
In terms of business, Southern region declining gradually as company has been aggressively adding branches
has a disproportionate share of ~87%
in the other three regions. Manappuram employed 16,751 employees
as at end-March 2011.

Manappuram was founded by late V C Padmanabhan in 1949 and is

currently managed by his son V P Nandakumar, who is the Executive
Strong Board comprising 13 members
with high level of independence Chairman. Company has a strong Board comprising 13 members with
high level of independence.

AUM has grown 8x in the past two years Branch expansion has supported AUM growth
90 2,400
(Rs bn) (no)
75 2,000

60 1,600

45 1,200

30 800

15 400

0 0
FY07 FY08 FY09 FY10 FY11 FY08 FY09 FY10 FY11

Source: Company, India Infoline Research

Sector Report 20
Manappuram General Finance & Leasing Ltd

Catering to individual customers requiring short-term loans

Individuals such as traders, merchants, small enterprise owners, self-
Gold loan customers borrow for an employed/professionals, farmers, etc are the typical gold loan
emergency or funding a cash flow
customers of Manappuram. They do not borrow for planned
mismatch
expenditures but rather for an emergency or funding a cash flow
mismatch (bridge financing). These customers prefer NBFCs such as
Manappuram due to near access, lesser formalities/procedures, no
processing charges and faster turnaround time. Company’s average
Average loan disbursal time is 15 loan disbursal time is 15 minutes for a new customer and 7-8 minutes
minutes for a new customer and 7-8 for an existing customer as KYC takes about 5 minutes. This is in
minutes for an existing customer comparison to 1-2 days for commercial and cooperative banks. Lower
turnaround time is a critical advantage is this business as most
customers want money immediately. Company’s branches next to
banks such as IOB, Indian Bank, SIB and Federal Bank offering
materially lower interest rates (8-12%) has been able to attract
significantly higher number of customers.
Though loans are provided for standard one year tenure (promissory
note is signed for one year), the average duration is actually much
Loans are provided for standard one shorter at near 4 months as these loans are essentially taken to
year tenure but the average duration manage transient cash flow issues. Borrowers have the option to settle
is near 4 months
the loan whenever they want (not even one-day lock-in) and the
interest is charged only for that period. Further, there is no pre-
payment fee. After closing the old loan, the same customer may return
to take a new loan after few months. Interest is serviced either
monthly or quarterly depending on duration of the loan.
With decades of presence, extensive branch network and
Average ticket size of loan has endorsements by multiple well-known celebrities, Manappuram enjoys
increased from Rs27,000 to Rs35,000
a strong brand recall and trust. The average ticket size of loan has
over the past one year
increased from Rs27,000 to Rs35,000 over the past one year.
Presently, company witnesses an average 25,000 customer visits daily
across its ~2,300 branches (more than 10 customers/branch).

Provides exposure against scrap value of the gold jewelry

Manappuram accepts only household used jewelry and gold coins as
Provides exposure against scrap value security. For jewelry, the scrap value of gold arrived at after making
of gold jewellery arrived after making
various deductions is used as base for lending exposure. Conversely, a
various deductions
gold jewelry worth Rs100 (buying price) for the borrower is not of the
same value for the company as making charges, value of studded
stones/diamonds, carving/shouldering expenses, costs involved in
selling (in case of payment default) needs to be adjusted. As per the
company, the scrap value for offering exposure is typically 80-85% of
customer value. The gold appraisers at the branches are thoroughly
trained in gold appraisal methods. Several tests are performed for
checking spurious gold such as touchstone test, nitric acid test, sound
test and hallmark confirmation.

Sector Report 21
Manappuram General Finance & Leasing Ltd

Interest rate charged are higher than banks but lower than
money lenders
Typically, the interest rate on the loan varies in the range of 12-24%
Interest rate varies in the range of 12- mainly determined by weight/purity of gold and exposure taken. The
24% determined by weight/purity of
determination of interest rate is software (program) driven and not ad
gold and exposure taken
hoc or at the discretion of appraiser who is just responsible for
appraising the gold for its purity and weight. The latter details are fed
in the system which throws up 3 to 4 LTV (loan-to-value) options with
System throws up 3 to 4 LTV options
associated interest rates. The top end of the interest rate range is
with associated interest rates
charged for highest LTVs, generally 75-77% of the scrap value. The
lowest 12% interest is charged only for combination of 24 carat gold
and low (40-50%) LTV. As per the company, 85-90% of borrowers
85-90% of borrowers choose the
choose the highest LTV option that attracts interest of 24%. The
highest LTV option that attracts
interest of 24% residual customers choose lower LTV (40-60%) attracting lower
interest rates of 12-18%. However, the average duration of lower LTV
loans is significantly shorter than higher LTV loans. Interest rate
contracted on a loan is not altered later if the cost of funds increases.

Extensive branch network is at the heart of the business

In the gold loans business, being near to the customer is extremely
important as gold does not travel more than 2-3km. In few Southern
Gold does not travel more than 2-3km
states, Manappuram’s branches are at an average distance of 2-3km
from each other. With higher availability of funds (via QIP issuances
and promoter fund infusion) over the past couple of years, company
Company has not only increased
has not only increased penetration in the Southern states bus also
penetration in South bus also
aggressively expanded in other regions aggressively expanded in other three regions. Currently, which is the
largest gold loan market accounting for 40-45% of the country’s gold
stock.

Operating cost dynamics – Branch breakeven at Rs12-14mn

AUM
Each branch of the company has seven employees – Branch Head,
Assistant Branch Head, Two Appraisers (GL1 and GL2), Cashier,
Each branch of the company has seven
employees Security and House Keeper. The average size of the branch is 700-800
sqft and the cost of setting-up is Rs0.7-0.8mn mainly comprising four
computers, furniture, safe room/strong room (made as per RBI norms
for Banks) and security systems (IP cameras, burglar alarm of three
Average size of branch is 700-800 sqft
and cost of setting-up is Rs0.7-0.8mn categories, etc). The monthly running cost of a branch (pre-dominantly
salaries and rental) is ~Rs150,000 in rural and semi-urban areas and
~Rs175,000 in urban areas (higher rentals). Two different keys are
required for opening the safe/strong room – one is with the Branch
Branch breakeven happens when AUM Head and the other with Assistant Branch Head. Company undertakes
reaches Rs12-13mn which typically theft insurance of all the Gold stock across its branches. For a branch
takes less than one year’s time to breakeven, its AUM has to reach Rs12-14mn which typically takes
less than one year’s time.

Sector Report 22
Manappuram General Finance & Leasing Ltd

AUM to witness 45% CAGR over FY11-13E; newly opened

branches to drive growth
Manappuram has significantly Organized gold loan market has grown by more than 40% pa over
outperformed industry growth over FY07-11. Manappuram, driven by management aggression and aided
FY07-11 by significant capital raising has grown at far superior rate of 109%
albeit on a low base. We expect the exceptional growth momentum to
Expect exceptional growth momentum moderate significantly over FY11-13 to 45% as penetration and
to moderate significantly over FY11-13 competition has increased significantly in South (especially Kerala)
while other regions may take some time for a full-fledged adoption of
gold loan product. However, such growth would still be commendable
on the existing higher base. Our growth forecast for the company is
conservative than Management’s expectation of 50-60% growth over
Management expects 50-60% growth the next two years. Organized gold loan market is likely to grow by
over the next two years
35-40%.

With Manappuram having more than doubled its branch network in

Bulk of growth to come from FY11 (added 1,059 branches), bulk of the anticipated growth would
substantial uptick in productivity of come from substantial uptick in productivity of the new branches. The
new branches
new branches which were average 6-month old had an average
AUM/Branch of ~Rs8mn at the end of FY11 as compared to ~Rs67mn
for old branches. As such, we expect a material improvement in
Material improvement in AUM/Branch AUM/Branch from Rs36mn at end-FY11 to Rs55mn at end-FY13. It also
from Rs36mn at end-FY11 to Rs55mn
factors a relatively modest branch addition of 400 each in FY12 and
at end-FY13
FY13, as indicated by the company. About 70% of the new branches
would come in North, West and East regions.

AUM to witness 45% CAGR over FY11-13E Branch expansion to be relatively modest
180 1,200
(Rs bn) (no)
150 1,000

120 800

90 600

60 400

30 200

0 0
FY08 FY09 FY10 FY11 FY12E FY13E FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Branch vintage and AUM AUM/Branch to increase significantly

120 60
(Rs mn) (Rs mn)
100 50

80 40

60
30
40
20
20
10
0
In FY11 In FY10 In FY09 In FY08 In FY07 In FY06 Till 0
FY05 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Sector Report 23
Manappuram General Finance & Leasing Ltd

Entire growth to reflect on balance sheet in the absence of

assignments
While the AUM is expected to witness 45% CAGR over FY11-13, net
On-balance sheet loans to witness a loans (on balance sheet) would witness a higher 57% CAGR in the
higher 57% CAGR in the absence of
absence of any loan assignments in future. Under loan assignments,
assignments
Manappuram would assign (sell) a portion of its gold loan portfolio to
banks in return for an instant drawdown (generally 95-100% exposure
given) under the existing working capital limit at a lower rate (typically
100-125bps cheaper than other borrowings). As the gold loans
purchased could be categorized as priority sector lending under the
agriculture advance category, assignments were attractive for banks
despite offering subsidized interest rate.

Year-end assignments have registered 42% CAGR over FY08-11;

Year-end assignments have registered
42% CAGR over FY08-11
however declining significantly as a proportion of AUM from 68% to
15% over the period. Through a circular dated February 2nd 2011, RBI
disallowed banks from classifying purchased/assigned gold loans as
priority sector lending under the agriculture advance category. Since
then, banks are not offering lower interest on assignments and
Manappuram is not keen on selling its portfolio without interest
benefit. Outstanding loan assignments fell by 22% during Q4 FY11 to
stand at Rs11.2bn at the end of the year. These loans are maturing
With robust 30% CAR, company does
over the next 4-5 months. With robust 30% CAR, company does not
not foresee any need for new foresee any need for new assignments in the medium term. We have
assignments taken year-end assignments as zero for FY12 and FY13 in our model.
As per the management, the need for assignments would only arise
when CAR dips below 18% and company not choosing to raise equity
capital.

Assignments have been a critical part of the Net loan book to witness a faster 65% CAGR
business over FY11-13E
12.0 AUM Net Loans
(Rs bn)
180
10.0 (Rs bn)
150
8.0
120
6.0
90

4.0 60

2.0 30

0.0 0
FY07 FY08 FY09 FY10 FY11 FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Sector Report 24
Manappuram General Finance & Leasing Ltd

Assignments to not impact availability of funds

The absence of assignments is unlikely to act as a constraint for robust
AUM growth. As per the understanding given by the company,
Absence of assignments is unlikely to assignments were a part of the original credit limit extended by banks
act as a constraint on AUM growth and at the requirement of either the company or the bank assignments
were worked out. So non-attractiveness of assignments post the RBI
disqualification from PSL has not impacted availability of funds from
banks. Rather, banks are offering significantly higher credit limits yoy
to Manappuram. The credit limit outstanding stands near Rs50bn
spread across more than 25 banks. Company has enjoyed high credit
rating and recently its long term rating was upgraded from LA+ to
LAA- by CARE. The latest short-term debt raising programme was
rated P1+ by Crisil and A1+ by ICRA.

Significant reliance on short-term funds; funding mix to move

towards NCDs and CPs
With Manappuram essentially into short-term lending with average
duration of loans at less than four months, company is heavily reliant
Bank borrowings form a substantial on wholesale funding. Bank borrowings (Cash Credit facility and 1-year
portion of company’s total borrowings
working capital loans) form a substantial part of the total borrowings
of the company with 56% share. Commercial Papers having average
maturity of 5 months are the second largest source of funding with
15% contribution. The share of retail non-convertible debentures
(NCDs) privately placed to customers visiting branches having maturity
of 1-3 years is ~7-8%. Subordinated debt qualifying for Tier-2 capital
Borrowing mix to shift significantly with maturity of five years is 4-5% of total borrowings. Assignments
towards NCDs and CPs in future were 16-17% of borrowings as at FY11-end. In the absence of
assignments in future, we expect the borrowing mix to significantly
skew towards NCDs and CPs. Their share in the Total Assets (including
Assignments) funding is estimated to increase from 6% and 12%
Recently, company announced its respectively in FY11 to 10% and 21% respectively in FY13. Recently,
maiden retail NCD issue of Rs7.5-10bn
company announced its maiden retail NCD issue of Rs7.5-10bn.

Borrowing profile as at FY11-end Total asset (incl. assignments) funding mix

trend
Retail NCD Banks Borrow ings Assignments Ow ned Funds Bank Borr Retail NCD Bonds
CP Bonds Others CP Others Assignments

4% 1% 7% 100.0%
15%
80.0%

60.0%

40.0%
17%
20.0%

56% 0.0%
FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Sector Report 25
Manappuram General Finance & Leasing Ltd

Cost of funds has increased materially in the recent past

Manappuram’s cost of borrowing is expected to spike-up during Q1
FY12 impacted by 1) loss of PSL status on bank funding against
assignments (interest rate to increase 100-125bps) 2) material hike in
bank lending rates (other borrowings linked to either Base Rate or
In Q4 FY11, cost of borrowings PLR) and 3) significant increase in CP rates due to tight liquidity.
increased by 80bps qoq
Company’s reliance on bank borrowings, assignments and CPs is
substantial with these sources combined comprising ~88% of total
borrowings as at the end-FY11. During Q4 FY11, Manappuram
witnessed 80bps qoq increase in its cost of borrowings to 10%. In Q1
FY12, company expects a considerable spike of 150-200 bps. We
Company expects a considerable spike
of 150-200 bps qoq in Q1 FY12 expect the cost of borrowings to further increase (though not
significantly) in Q2 FY12 as interest rate are likely to remain firm and
liquidity may remain tight for some time. In our view, the full-year
borrowing cost would likely be higher by 150bps yoy.

Quarterly cost of borrowings (reported) Annual cost of borrowings (calculated)

13.0 12.0
(%) (%)
12.0 11.0

11.0 10.0

10.0
9.0
9.0
8.0
8.0
7.0
7.0
Q2 Q3 Q4 Q1 Q2 Q3 Q4 6.0
FY10 FY10 FY10 FY11 FY11 FY11 FY11 FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Yields may weaken; NIM to contract significantly

Current loan yield materially higher Current loan yield at ~24% is not only substantially higher than
than Muthoot, a like-to-like competitor interest charged by commercial and co-operative banks but also
materially elevated than Muthoot, a like-to-like competitor. Increasing
competition in Southern region could push company’s yield lower in
Intensying compettion to pressurize the medium term. We have assumed a decline of 250-300bps in loan
loan yields yield over FY11-13. This is in contrast to the management’s
expectation of steady loan yield near 24%. A weakening yield and
higher cost of funds would drive a significant correction in NIM. We
NIM to fall from 16.7% in FY11 to estimate Manappuram’s margin to correct by more than 350bps over
13.1% in FY13 the next two years. NIM would fall from 16.7% in FY11 to 13.1% in
FY13. The key upside risk to our margin assumption for FY13 would be
a sharp reversal in interest rate cycle.

Sector Report 26
Manappuram General Finance & Leasing Ltd

Yield on AUM to decline in the medium term NIM to witness a sharp correction
30.0 20.0
(%) (%)
27.0 18.0

24.0 16.0

21.0 14.0

18.0 12.0

15.0 10.0

12.0 8.0
FY08 FY09 FY10 FY11 FY12E FY13E FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Substantial operating leverage to kick in as branch productivity

improves considerably
Aided by Rs10bn raised via QIP, Manappuram added 1,059 branches
Added 1,059 branches during FY11
more than doubling its network during FY11 more than doubling its network. Company has also been
on an aggressive marketing spree to improve brand recognition and
enhance awareness of gold loan product. Manappuram has signed
Advertising exp has risen from Rs8mn various regional film superstars for promotion through television ad
in FY09 to Rs1.04bn in FY11 campaign. Resultantly, advertising expenditure of the company has
risen from an abysmal Rs8mn in FY09 to Rs1.04bn in FY11.
Bulk of the anticipated business growth in the next two years is
expected to come from significant improvement in productivity of the
new branches. Also, branch addition plans for FY12 and FY13 are
Improvement in branch productivity relatively modest at 400 branches pa. As such, we expect a material
and lower advertising exp to drive
improvement in AUM/Branch from Rs36mn at end-FY11 to Rs55mn at
operating leverage
end-FY13. Advertising expenditure is unlikely to jump substantially
with company having already established its brand. Management, in
fact, expects lower advertisement expenditure in FY12. Improvement
Opex/avg assets ratio to decline from in capacity utilization and restrained advertisement expenditure would
7% in FY11 to 5.5% in FY13 drive substantial operating leverage over the next two years. We
estimate opex/average assets ratio to decline considerably from 7% in
FY11 to 5.5% in FY13.

Substantial leverage would come from Opex/Avg. Assets to decline considerably

Advertising and other opex
Staff Rent Advt Other Opex 9.0
(%)
3.5 (% of Avg 8.0
3.0 Assets)
7.0
2.5

2.0 6.0

1.5
5.0
1.0
4.0
0.5

0.0 3.0
FY08 FY09 FY10 FY11 FY12E FY13E FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Sector Report 27
Manappuram General Finance & Leasing Ltd

Robust capital adequacy to support growth; no need for equity

fund raising till FY13E
Manappuram’s CAR stood at robust 30.5% as at the end of FY11,
CAR stood at robust 30.5% at end-
substantially higher than regulatory floor of 15%. Capital adequacy of
FY11 significantly augmented by the
QIP issue the company was significantly augmented by the Rs10bn QIP issue in
November 2010. As per management, need for raising equity capital
would arise only when CAR dives below 18%. Based on our AUM
growth assumption and anticipated substantial plough backs, we do
Further equity issuance unlikely till not foresee any urgent need of equity fund raising for Manappuram till
end-FY13 end-FY13. We estimate CAR at 21.7% for FY12-end and 19% for FY13-
end.

Plough backs would be substantial in FY12E Capital adequacy to remain comfortably

and FY13E above the regulatory requirements
6.0 CAR Tier-1
(Rs bn)
35.0
5.0 (%)
30.0
4.0
25.0
3.0
20.0
2.0
15.0

1.0 10.0

0.0 5.0
FY08 FY09 FY10 FY11 FY12E FY13E FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Asset quality has been impressive; NPLs to remain stable

Negligible NPLs in the gold loan Manappuram has negligible 0.2% GNPL and 0.1% NNPL in the gold
business loan business. The probability of default is relatively low as the gold
jewelry pledged has high sentimental value for the borrower. In case
of default on repayment, company sends three repayment notices in
the subsequent two months (last notice would contain intimation of
In the third month post default, gold jewelry action). In the third month post default, gold jewelry is
jewelry is auctioned for recovery of the auctioned for recovery of the loan. Loans outstanding for more than
loan
180 days from repayment date are classified as NPLs. So NPLs would
be recognized only in cases where the pledged gold jewelry could not
be sold due to some reasons between the 3rd and 6th month from
repayment date. During Q3 FY11, RBI advocated provisioning of
In Q3 FY11, RBI advocated
provisioning of 0.25% for standard 0.25% for standard gold loans, which was earlier not there.
gold loans Provisioning for sub-standard loans is 10% and doubtful loans is 50-
100%.

Overall GNPL% of the company has declined significantly over the past
three years in-line with conscious ramp down of the hypothecation
Company has substantially provided (vehicle) loan portfolio and exceptional growth in gold loan book. By
against the legacy business NPLs
FY11, Manappuram had substantially provided against the
hypothecation loan NPLs and only marginal provisioning remains. We
forecast stable asset quality and credit charge in FY12 and FY13.

Sector Report 28
Manappuram General Finance & Leasing Ltd

Asset quality would continue to be robust Prov/Avg. loans to be marginal

GNPL NNPL 0.9
(%)
3.0
(%) 0.8
2.5
0.6
2.0
0.5
1.5
0.3
1.0

0.5 0.2

0.0 0.0
FY08 FY09 FY10 FY11 FY12E FY13E FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

RoA to come-off but remain stunning; RoE to rise on improving

leverage
As compared to banks and most NBFCs, Manappuram’s RoA is
significantly superior at near 5%. Higher return has been driven by
Higher profitability driven by exceptional NIM, lower operating cost and negligible NPLs. While NIM
exceptional NIM and negligible NPLs is expected to correct materially over FY11-13, substantial operating
leverage should cushion its impact on RoA. Also, NPL provisioning is
unlikely to witness a spike in the light of stable asset quality. Overall,
we believe RoA would trend down from 4.8% in FY11 to 4.2% in FY13,
still remaining impressive both in absolute and relative terms. RoE, on
RoA to trend down due to margin the other hand, is estimated to improve to 24% in FY13 from 22% in
contraction while RoE to improve on
FY11 driven by increasing leverage. Further, our business growth and
increasing leverage
profitability projections suggest that Manappuram may not require any
equity fund raising in the next two years.

PAT/AUM % to decline lower than NIM aided RoA to trend down impacted by NIM
by operating leverage correction
8.0 6.0
(%) (%)
7.0 5.5

6.0 5.0

5.0 4.5

4.0 4.0

3.0 3.5

2.0 3.0
FY08 FY09 FY10 FY11 FY12E FY13E FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, India Infoline Research

Sector Report 29
Manappuram General Finance & Leasing Ltd

RoE to improve on increasing leverage

RoE Leverage
36.0 6.0
(%) (x)
30.0 5.0

24.0 4.0

18.0 3.0

12.0 2.0

6.0 1.0

0.0 0.0
FY08 FY09 FY10 FY11 FY12E FY13E

Source: World Gold Council and IMaCS

Steep price correction post QIP; valuation cheap given growth

and profitability profile
Post the QIP issue in November 2010 at Rs84 (adjusted for recent 1:1
bonus), Manappuram has witnessed a significant price correction of
Post QIP, underperformance to Bankex
has been glaring
32%. The underperformance to Bankex has been glaring at 22% since
then. Concerns with respect to increasing cost of funding (due to loss
of PSL status for assignments and higher bank lending/CP rates) and
potential regulations with respect to interest rate and margin have
Estimate robust 47% earnings CAGR
over FY11-13
weighed heavily on company’s valuation. Despite being conservative
than management in our growth and margin assumptions, we estimate
robust 47% earnings CAGR over FY11-13. We have not factored any
regulation changes in our projections as it is difficult to anticipate. We
BUY with a 9-month target of Rs73
initiate coverage on Manappuram with a BUY rating and 9-month target
of Rs73 (valued at 2.2x FY13 P/BV).

Sector Report 30
 Manappuram General Finance & Leasing Ltd

Financials

Income statement Key ratios

Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13E Y/e 31 Mar FY10 FY11E FY12E FY13E
Interest income 4,675 11,634 21,013 29,277 Growth matrix (%)
Interest expense (1,305) (3,157) (7,707) (11,542) Net interest income 174.3 151.5 57.0 33.3
Net int income 3,371 8,477 13,306 17,736 Total op income 167.6 148.9 56.8 33.2
Non-int income 42 18 19 19 Op profit (pre-
Total op income 3,413 8,496 13,325 17,755 provision) 264.5 129.3 63.9 35.1
Total op expenses (1,506) (4,123) (6,157) (8,068) Net profit 295.2 136.1 59.1 35.7
Op prof (pre-prov) 1,907 4,373 7,168 9,687 Loans 323.7 240.6 76.3 40.0
Provisions (89) (134) (352) (435) Borrowings 307.4 208.0 76.6 41.0
Profit before tax 1,818 4,239 6,816 9,252 Total assets 295.5 209.8 61.8 37.4
Taxes (621) (1,412) (2,317) (3,146)
Net profit 1,197 2,827 4,498 6,106 Profitability Ratios (%)
NIM 18.8 16.7 14.1 13.1
Return on Avg Equity 30.8 22.3 21.4 24.2
Balance sheet
Return on Avg Assets 5.6 4.8 4.3 4.2
Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13E
Fixed assets 535 1,388 1,517 1,610
Per share ratios (Rs)
Intangible assets 34 60 60 60
EPS 3.5 3.4 5.4 7.3
Investments 1,407 403 403 403
BVPS 17.9 23.1 27.3 33.2
Net loans 18,694 63,670 112,235 157,120
DPS 0.5 0.6 1.0 1.3
Net Current Assets 3,759 10,171 8,317 9,209
Def Tax Asset
(Net) 33 87 87 87 Other key ratios (%)
Total assets 24,462 75,779 122,620 168,488 Loans/Borrowings 101.8 112.6 112.4 111.6
Opex /Avg. Assets 7.0 7.0 5.9 5.5
Net worth 6,106 19,240 22,762 27,649 CAR 31.0 30.5 21.7 19.0
Secured loans 16,501 43,724 71,037 101,001 Tier-I capital 26.1 26.7 18.6 16.2
Unsecured loans 1,856 12,817 28,821 39,838 Gross NPLs/Loans 1.3 0.4 0.3 0.3
Total liabilities 18,357 56,541 99,858 140,839 Total prov/Avg loans 0.5 0.3 0.4 0.3
Equity + Total Net NPLs/Net loans 0.6 0.1 0.1 0.1
liabilities 24,462 75,780 122,620 168,488 Tax rate 34.2 33.3 34.0 34.0
Dividend yield 1.8 2.1 1.8 2.2

Sector Report 31
Recommendation parameters for fundamental reports:
Buy – Absolute return of over +10%
Market Performer – Absolute return between -10% to +10%
Sell – Absolute return below -10%

Published in 2011. © India Infoline Ltd 2011

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