Manappuram may give 10-15% return in FY14: Espirito Santo

Santosh Singh, analyst, Espirito Santo, talks about the KUB report and what one can expect in terms of gains from stock in gold space. 

Also read: Muthoot, Mannapuram may not post positive Q3 nos: Tulsian Below is the edited transcript of his interview to CNBC-TV18. Q: According to the KUB Rao report, if we transfer the loan-to-value (LTV) from 60 percent to 75 percent, then the value itself is being calculated differently. Even if you remove stones and working charges on ornaments; the actual gold value is lower. What is your view on the report?
A: Under LTV, no one will get higher loan per gram. KUB Rao Committee report has pointed out two things, first they are recommending an increase in LTV and on the other hand they are asking for rationalization. The value will be calculated on the scrap value. As per our calculation whatever the gold association at this juncture is using 10 gm value, it will have similar value if it is calculated at 75 percent. Q Why should one be bullish on these stocks and is the report bullish for gold loan companies?
A: We maintained that we expected that the report would be slightly negative. Based on that expectation, for Manappuram the market was pricing that it was trading at one-time book and it would generate 17-18 percent return-on-equity (ROE). The market was pricing that there would be a cap on cash at Rs 50,000 but the report suggested a cap at Rs 2 lakh. The market was not excited about the report either being positive or negative but they were excited that the report itself came out.
The report would ease out funding, that is the biggest concern for Manappuram when its commercial papers (CPs) dried down from 16 percent to 1 percent and were required to honour all the CPs after RBI guidelines as there was no clarity on how the regulations would be.
These regulations provide a guideline on what model the price of the stock based, whereas earlier it was not possible as the RBI was coming out with one regulation maybe a month and it was negative and no one was aware where it will stop.      Q: We already saw a 20 percent rally. How much more do you think is it justified and between Manappuram and Muthoot which one would you pick?
A: I don't track Muthoot. Even at Rs 40, Manappuram is trading at a forward book at 1.1 time forward book. Even post RBI restriction, if the fund flow is proper then we will get a return of 10-15 percent in FY14. With growth rate of 10-15 percent, Manappuram will give a return of 17 percent on equity (ROE) based on the current yields. At 17 percent ROE, the stock should trade at around 1.4-1.5 times multiple. At 1.4-1.5 times multiple, the stock can trade above Rs 50. At this juncture we have put a fair value for the stock at Rs 45, based on the assumption that strictness on the funding will remain. If the funding flow gets clear then the stock can move above Rs 50.