Worst over for Manappuram, may get re-rated: Espirito

Moneycontrol Bureau

Brokerage house Espirito Santo feels the worst may be behind for Manappuram Finance, and clarity on rules for gold loan firms could be the re-rating trigger. The stock, which had crashed to a low of Rs 18.60 in May this year, has doubled since then and is currently trading around Rs 36. Espirito analysts Santosh Singh and Nidesh Jain see Rs 45 as a fair value for the stock. 'With the stock trading at a discount to book and our expectation of the loan book growing from hereon, we think the stock merits another look," the duo said in their report. "We could have seen the bottom in terms of loan book and profit in this quarter, hence we expect the company to generate at least 18% ROE(return on equity) in FY13(estimated) and then stabilise at around 19% FY15E onwards," the report says. According to Espirito, the recommendations of the Rao Committee report, which is due anytime, may not be negative for gold loan companies. RBI restrictions on the quantum of loans against gold, and redefinition of the category 'priority sector', crimped profit margins of gold finance companies like Manappuram and Muthoot. "In our opinion even if the tone is slightly negative, it would at least give clarity around the gold loan industry and funding flow can improve from the CP route and institutions. This can lead to not only faster growth but also a reduction in borrowing cost for the company, which is currently around 13%," says the Espirito report. "We have been very conservative on our valuation of this stock and have priced in another 100 bps reduction in yields, with cost of funds stabilising at 12% and growth rates at 15% even in FY14E. If the environment improves and management is able to deliver on its promise of  around 24% yields and 20% growth rate, our valuation model suggests that the stock could double from here in next couple of years," the report says.