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Tuesday, 15 August 2017

Mannapuram Finance - A NBFC Company


Mannapuram Finance - A NBFC Company
Financial Institutions, Banks, Insurance Co. have always been favorites of Warren Buffet. But what makes these companies favorites of  Ace investor and why does everyone in this country run after a banking license.
Let’s try and understand the business model these companies and very simply -  they borrow money from market on a particular interest rate & lend that very same money on higher interest rates and the difference between the lending and the borrowing interest rate is their margin. Now compare this model to any other business model, like say a manufacturing industry, where you require capital to build a plant, the waist of  the plant to start production, then find buyers for your product, incur operational costs for maintenance of the plant, run the risk of obsolete technology, compete with countries producing cheaper goods like China etc.

The moment you say NBFC or Banking, you do away with such operational issues. There is no need for a huge capital outlay to kick start your project nor is there any risk of technology going obsolete.  To grow or expand a NBFC/Banking business, all you need to do is borrow money and then lend it and watch your profits grow. Simple isn’t it? The answer is NO. Of late, in the Banking sector, we have seen a growth in the NPAs, specially the PSU Bank. The Banks have lent exponentially to infra companies like Real estate,  Power, Steel, Telecom etc., during their hey days however now that the cycle has reversed, the  Banks are finding it difficult to get their money back.

Now let’s discuss about these NBFC companies, Business model is same, borrow & lend.  We have NBFCs like :

Housing Finance - LIC Housing, GIC Housing, Indiabull Housing..
Consumer Good Finance - Bajaj Fin, Capital First
Micro Finance- SKS Micro-finance.
Auto Finance- Shriram Finance, Mahendra finance etc.
In the last  2-3 years all these finance companies have grown significantly and so has their share price, the reason is simple, though their business model is similar to Banks, however, their NPA ratio is much lower as compared to Banks.
Our pick, among all these NBFCs is Mannapuram Finance. Let us check some of the basic parameters which sets Mannapuram Finance as our favorite


Growth Potential - Currently Mannapuram Finance has around 4000 branches and are mainly in the business of Gold loans which comprises 80 % of their portfolio,  another 10% in micro lending & around 3% Housing finance. Company is targeting to grow their Housing Finance portfolio & 50-50 balance sheet by 2020-25. Housing Finance is considered to be a secured lending as the security is in nature of real estate. It has a huge growth potential since construction companies have huge unsold inventories in their books. With the falling interest rates and various Govt. Schemes boasting  affordable housing, these housing finance companies would be potential gainers. Mannapuram finance has a strong and spread out branch network along with a strong employee base. It will not be difficult for Mannapuram Finance to expand it’s exposure in the housing sector, riding on it’s current infrastructure.

Management - Eyeing the opportunity in Housing & other sectors, the company has recently recruited ex CMD of State Bank of Travancore who comes with a vast experience in different sectors. Recruiting Senior and experienced personnel gives an insight  to the management’s serious thought process towards expansion & growth.

Valuation- In Warren Buffet words, valuation is the key, at what price is the company available in the market?  P/E ratio, what is the price of company compared to its earnings. Mannapuram Finance is trading at a P/E of around 9.63 times trailing 12 months earnings whereas its peers like Bajaj Fin. is having P/e of 46.92, Capital First @30.68, Gruh Finance @ 55.51.

Low NPA Ratio- Mannuparam Finance has a gross NPA of 1.1% and a Net NPA of 0.9%  low as per the last quarterly results compared to other finance companies. Company’s total provisioning for as of Jun 17 is Rs. 80.7 cr. One thing to be noted here that Manappuram has been following 50% provisioning for 90-120 days NPA and 100% for 120 days and above. Infact company’s provisioning are higher by Rs. 33cr against what has been mandated by RBI.As per the management worst is behind in the micro-finance industry and they expect much lower provisioning in the subsequent quarters.


Now we can discuss about the current performance of the company in terms of latest quarterly results of the company. In Q1 results Company has reported 11.7%growth in income from operations on YOY basis at 833.19 cr. Company’s AUM is up marginally by 2.8% on YOY basis at 13.380 cr. As per the management commentary, higher auctions and the lingering effect of demonetization has been impacting the growth in gold loan book. However, they are now seeing signs of reversal with aim to grow @20% approx.

The growth rate is good as far as company’s new verticals are concerned i.e. Micro-finance AUM is up from 1237 cr to 1827 cr on YOY basis. Similarly, housing finance is up from 170cr to 320 cr and commercial vehicle loan book is up from 168.4 cr to 343.74 cr. Overall, The share of new business verticals in consolidated AUM has increased to 19.8% from 12.8% at the end of  June 17.  

We expect the company will report better results in the coming quarters on the back of higher AUM and lower losses or even profits in micro-finance business.

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