Hold Manappuram Fin; target of Rs 33: Emkay

“Manappuram Fin, gold loan finance companies, (Manappuram and Muthoot) which have been growing by leaps and bounds until now, are facing regulatory headwinds, which is likely to put a break on their business growth prospects. Manappuram has grown its AUM’s by a whopping ~500% in the last three years (FY10-12), aided by significant branch expansion and almost 100% increase in gold prices during that period.”

“Taking note of the fast paced growth in the light of inherent concentration risk and adverse gold price movement, RBI in its recent guidelines on 22nd March 2012 put a cap of 60% on Loan to Value ratio for gold loan finance companies. Around 7% of the Manappuram overall book is at 90%+ LTV, while another 24% of the book is between 80-90% LTV (As on 31st Dec 2011). Assuming rest of the book is at 65% blended LTV, 12% of the current AUM’s will be shaved off by Q1FY13/ Q2FY13, provided the existing customers do not bring in additional gold at the time of renewal. Resultantly we have cut our AUM growth estimates from 40% earlier to 17.4% for FY13. For arriving at our credit growth estimates we have also assumed consistent 3.5MT addition in gold stock per quarter in FY13 and 10%yoy increase in gold prices.”

“We believe the recent LTV cap of 60% could prove to be fatal for these GFC’s as it will change the entire business model for them. While we have tried to factor the impact in our numbers, the exact impact is difficult to estimate as customer reaction to these new guidelines is still unclear. The new guidelines put GFC’s in a disadvantageous position over banks and money lenders, as with lower LTV’s, GFC’s existing customers might also move to money lenders and banks. Due to lower visibility for FY14, we are valuing the stock on FY13 numbers at 1XFY13 ABV, with a target price of Rs33. Any further regulatory tightening and significant contraction in existing customer base due to 60% LTV pose downside risk to our target price,” says Emkay Global Financial Services research report.     

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