Random thoughts on Manappuram Finance

Of late a friend of mine suggested me to look at Manappuram Finance Limited (MFL). Lately, capital markets have been very buoyant and hence everyday a couple of ideas prop up. Alas, I decided to give the company a look through. On the face of it the company seems worth a further dig. Some random facts from a quick look are presented below:

• Loan book size of 9000 odd crores
• 10 years sales CAGR 67%
• 10 years profit CAGR 60%
• Dividend yield: 4.5%
• P/B: .90

 MFL is a non banking finance company predominantly involved in lending against gold. Their past 10 year record looks more astonishing when you consider the fact that their business peaked out in 2012 and since then there has been no growth. Volatility in gold prices, downward trend, regulatory concerns are factors attributed by management for the dent in growth. I read through the 2015 annual report to understand the business a little better and present my findings below:

• Earlier into only gold loan financing, now planning to mobilize existing customer base through other avenues of finance viz vehicle loans, retail loans and housing loan
• Existing business having 3293 branches, 4 business verticals, 1.75 million customers and covering Pan India
• Currently South India focused with 70% branch presence in South India. However Gold loan book outstanding in South India has come down from 82% to 68% over the years
• Business seems to have peaked out in 2012, after which there has been a steady decline in Income, AUM & profits
• From the annual report figures seems 2015 has shown some revival in business after 3 years. Need to look at why this has happened?
• Started practice of recalibrating LTV ratio to tenure of loan last year and now more than 2/3rds of book in gold loan has been shifted to shorter tenure reducing vulnerability to gold prices. Full benefits will be visible from 2016
• Borrowings cost as a whole have declined by 70 bps over the year due to upgrades by Credit Rating Agencies
• Company mentions that even though opportunity in a single portfolio of gold loans where their core competency lies is huge they have diversified primarily due to regulatory hurdles faced by gold loan industry and thus the perception that gold loan companies are risky. Company also mentions of opportunity available in CV lending, affordable housing finance and microfinance
• Completed acquisition of Asirvad Microfinance (a seven year old company) AUM of 322 crores and presence in Tamil Nadu, Kerala and Karnataka. Intend to expand through this vertical(Microfinance model under holding company could benefit as cost of funds will be lower)
• Implementing Automatic Intrusion Alert Management System (AIAMS) Manappuram estimates cost savings of Rs 100 crores over 3 years due to a decline in costs
• Implementing Gold Loan Depository Services which will entail massive savings on costs front due to a decline in turnaround time for loans

I have very little understanding of finance business. What little i understand is that in the finance business you need someone running the business who understands the business very very well. Even the best finance companies in India be it banks or NBFC's have been due to an able leader who have steered their business well.
What i could comprehend from MFL is that the company was enjoying a brilliant period which hit a speed breaker in 2012. They seem to enjoy lot of brand equity in South India. (Need to look into this matter further). Also, it is difficult to gauge how good the management is from one annual report. Need to look at a lot of history for this. 

• What 2015 annual report tells us is that MFL has core competency in lending against gold. That business is facing regulatory hurdles hence the management is trying to strengthen the business so that any regulatory hurdle in the future will not have a very adverse impact 
• Trying to create other new verticals so that it can diversify its existing revenue stream  to reduce impact of regulatory hurdles in future.(I cannot tell now how much of this is diversification and how much diworsefication)
• Managing its costs well to reduce overall costs of borrowing for the company
• Adding newer verticals to kickstart revenue growth. Now entering verticals with higher yielding loans and with overall cost of fund being lower will surely boost profit. 

Finance is a difficult business where if one gets the business matrix right a lot of money can be made because in a growing country like India its a low hanging fruit(think of all the chit fund companies) However, if one venture out of their core competency for the sake of growth it can be hazardous, case in point what i have highlighted above in bold. In the case of MFl it needs to be studied further to understand more about the pedigree of the management so as to make an idea as to whether the newer ventures eventually lead to diversification of revenues along with steady growth in profits without the NPA's or the management forgets its core competency and destroys the business model altogether. Currently my study is not complete to comment on the above. Will look at this further and come up with another post.