Manappuram Q4 loss seen Rs 50 cr on Rs 250 cr loan default

Moneycontrol Bureau

Gold loan firm Manappuram Finance may report a loss of Rs 50 crore in the current quarter as it may not be able to recover Rs 250 crore of loans given to customer due to a decline in gold prices, Managing Director I Unnikrishnan said in an interview to CNBC-TV18.
The stock has been sliding since Tuesday after the company selectively briefed key investors that the value of defaults could be much sharper than what the company had guided earlier. Due to falling gold prices, many customers who had taken loans against gold jewellery found it profitable to default on the loan and then buy gold afresh at a cheaper rate from the market. Quite a few brokerages have downgraded their ratings on the stock following the development.
"There is a perception that the gold loan business is secure as the underlying asset is highly liquid and the borrower has emotional attachment to the asset," brokerage house Espirito Santo wrote in a note to clients on Wednesday.
"However, the recent episode highlights that slippages are very high (15 percent of Q3 FY12 disbursements turning bad) and even in a stable gold price scenario the company may incur losses. This makes us believe that Manappuram has become a levered play on gold prices," the note said.
Manappuram shares were flat at Rs 23.70 in morning trade after declining around 30 percent since Tuesday. Below is the verbatim transcript of his interview on CNBC-TV18 Q: What most investors are a little perplexed about is the connection between gold prices and what kind of performance Manappuram does because they were thrown quite a bit by what you disclosed for the fourth quarter. Can you take us through a clear correlation between how gold prices affect your business per se? A: If gold price goes up we can disburse more, if the gold price goes down our disbursement normally will be less because we keep a particular loan-to-value (LTV) ratio of the gold price at the time of lending. Q: I meant the exact sensitivity, can you take us through what a 5 percent drop in gold prices could translate to given the kind of losses that you are going to unveil or you have spoken about for Q4? A: Currently, we are disbursing loans up to LTV of 60 percent of the collateral value. At this LTV, even if there is going to be a 10 percent correction in the gold price, our earnings are not going to be affected. Q: But your under recoveries are going to be much sharper right because you have only seen a 3 percent correction in gold prices and you have marked down your under recoveries significantly. So what we are trying to understand is what exactly the correlation is? For every 1 percent fall in gold what kind of a hit can investors in Manappuram expect to see? A: This has happened on account of certain loans relating to FY12 where the LTV was as high as 85 percent. Under the new regulatory regime this will not happen. So any loans which we have disbursed after last February this kind of issue will not occur, given that we have already put in place strong interest collection, and our LTVs are also low. Q: So can you share more clearly what looks like the likely picture for Q4 in terms of whether or not first you will actually post a loss as many analysts fear? What would your under recovery figure look like on current count? A: We are following a very prudent accounting policy when it comes to recognition of any anticipated losses. So, we expect there could be some loss. Under recovery of interest is in the range of Rs 250 crore and as a result there could be a loss in the range of Rs 50 crore for this quarter. However, the full year earnings will be in the range of Rs 300 crore. Q: Do you think this is a one off problem which will go away after Q4 or in a weakening or static gold price scenario you see challenges going forward as well? A: This is going to be a one-off hit and we do not expect under normal business circumstances to have further hit going forward. Q: There also seems to be a concern on slippages, I believe 15 percent of Q3 disbursements have turned bad. Are you seeing that happening with this fall in gold prices that you are probably going to see a rise in slippages as well through Q4? A: One thing to be understood is that 15 percent of Q3 has not gone bad. What we are saying is instead of collecting 30 percent revenue on that we are going to collect only 15 percent revenue. That also is limited to Q3 alone of last year. Q: Next time there is some revision in guidance you have made up your mind that you will talk to all investors at the same time right? A: Yes, that is what we always do normally.