>Manappuram General Finance & Leasing (RELIGARE)

Manappuram General Finance & Leasing (MAGFIL) operates in the niche business of lending against gold collateral, primarily to low-income customers. Its client profile and niche expertise support higher interest rates, resulting in best-in-class margins of 13–15% and an ROE of 30–35%. MAGFIL’s ongoing expansion drive will help it tap into the large section of Indians not considered ‘bank-worthy’, but who own the gold assets necessary to secure small loans. We expect its AUM to triple to Rs 59bn by FY12 as its distribution network expands. With a model that is scalable and highly profitable, we initiate coverage on MAGFIL with a Buy.

Loans backed by gold tailor-made for India: Access to affordable credit services by India’s low-income segment remains limited, as small-ticket loans entail higher operating costs and a higher perceived risk. Lower income households are still heavily dependent on moneylenders who charge exorbitant rates. Substitution of these loans with gold-based lending by NBFCs holds tremendous potential due to the safety of gold as collateral and large accumulated gold stock among Indians households. MAGFIL is a key player in this segment with strong expertise and credibility in loan disbursal and jewellery valuation, particularly in South India.

Robust AUM growth to continue: The Manappuram group (MAGFIL and sister company MAFIT) has reported strong business growth during FY06-FY09, with gold loan assets under management logging a 125% CAGR due to aggressive branch expansion and easy availability of funds. The group has ramped up its distribution network from 291 branches in FY07 to 765 in H1FY10 and is
expected to double its presence in the next three years. We expect this expansion drive to aid a 67% CAGR in AUM to Rs 59bn over FY09-FY12.

Best-in-class NIMs of 13–15%: With clients who have little recourse to bank credit and short-term funding needs, MAGFIL earns a high yield on advances of 24–30%. At the same time, improved access to institutional funds supports easy availability of capital at a rate of 10–12%. As a result, MAGFIL reported NIMs of 13–15% over FY07-FY09, which we believe are sustainable given its high pricing power. With stable margins, we expect NII to log a 72% CAGR over FY09-FY12.

Merits premium valuation: We believe that MAGFIL represents an opportunity to invest in a highly profitable business model with strong growth potential. We expect the company to maintain an ROE of 33–35% over the next three years, with a PAT CAGR of 93% over FY09-FY12. With its superior return ratios and asset quality (delinquencies at only 0.2% of AUM in the gold segment), we believe the stock should trade at a premium to other NBFCs. We initiate coverage with a Buy rating and target price of Rs 682, based on 2.8x FY11E ABV.

To read the full report: MANAPPURAM GENERAL FINANCE & LEASING