Before we start this in-depth article on Manappuram Finance, let us look at one amazing fact about this company.

Mr. Nandakumar had started Manappuram Finance Limited in 1992 with a capital of ₹10 lakh. He used to add his money to the capital every year so that the capital grew. Then NBFCs required a minimum of ₹3 crores paid-up capital to list at the BSE. In 1995, Manappuram Finance Limited achieve a capital of about ₹1.25 crore. Mr. Nandakumar asked for small investments from his family members and friends and could raise another ₹1.75 Cr. to meet the regulatory requirement for the IPO.

However, soon after the IPO, the share price reduced from ₹10 to ₹8 per share and the investors started asking him to compensate for the losses. Mr. Nandakumar bought back the shares that traded in the market for ₹8, at ₹10 from these investors to keep his word. (Source – Rediff, Vijay Malik Blog)

History

Shri V.C. Padmanabhan was committed to the cause of uplifting the economically weaker sections of the society, particularly farmers and fishermen in his community. He dedicated his life to providing them easy loans at affordable rates. In 1949, he laid the foundation for Manappuram and imbibed his values into the organization. The Company has attained several milestones during its journey and has played a pivotal role in taking organized lending to underprivileged people.

In ancient times, gold was minted into coins. In most Indian households, it is still customary to treat it as a fixed deposit. Across the ages, gold has emerged as the preferred currency for trading, for measuring value and, of course, as a metaphor of purity. While a large part of India’s population resides in villages, people in semi-urban and urban areas also turn to family gold to tide them through adversities. Its value can be unlocked fast and when the better times return, one can easily reclaim it. With a steady increase in gold prices, it was definitely one of the most effortless forms of asset-based borrowing. But with increased competitiveness and increased technology, times sure are changing. (An even more in-depth historical story is narrated here by the promoter Mr. Nandakumar)

About Manappuram Finance

Manappuram Finance Ltd. is one of India’s leading gold loan NBFCs. Promoted by Shri. V.P. Nandakumar, the current MD & CEO, its origins go back to 1949 when it was founded in the coastal village of Valapad (Thrissur District) by his late father Mr. V.C. Padmanabhan. The firm was involved in pawnbroking and moneylending carried out on a modest scale. Shri Nandakumar took over the reins in 1986 after his father expired.

It was the first non-banking financial company (NBFC) in Kerala to receive a Certificate of Registration issued by the RBI, it was also among the earliest to go for an IPO in 1995.

Product offering by Manappuram Finance –

10 Year Financials of Manappuram at a Glance

We come to know from its 10-year financials that the company has grown its revenue at a CAGR of 18.6%, Net profit at a CAGR of 20%, Net interest income at a CAGR of 17.5%, and Net worth at a CAGR of 12.9%.

If one had invested Rs 1000 (100 shares of Rs 10 each) in 1995, the value today would be Rs 966,000 a CAGR of 32% for the past 25 years! Click here to know the calculations.

Management Team

Prima Facie the management and the board seem to be professional and seasoned in their respective fields and area of expertise. One can have a look at all the key managerial personnel and read their information here.

Shareholding

The majority shareholders are FIIs in Manappuram as we can see from the above shareholding pattern. Promoters hold 35.05% (they are the single largest shareholder).

We also see that the promoter has kept on adding little bit to their stake since 2012 (notice the black line denoting promoter holding). The promoter holding has increased from 31.55% in 2012 to 35.05% in March 2020. (Chart Source – Tijori Finance)

Manappuram’s Business Model and all the associated questions answered

How does it earn money?

Finally, the most important question. Money! How does it earn that?

Well in the case of Manappuram, it’s quite simple. Say ABC is a person who wants to borrow money for sowing crops, he has assets but they are illiquid (such as Gold, real estate, cattle, etc). Now he goes to Manappuram with 24 Karat gold weighing 10 grams. As of 4th July, the value of that gold is Rs 50000 approximately. Now suppose your gold is completely pure and has no fixtures and studs.

All well and good right? So now you must think, Manappuram will give you a loan of Rs 50000, Well, that’s wrong. Manappuram strives to maintain its loan to value at 60-75%. It means that when you get a gold asset which is worth Rs 100, Manappuram will only lend you anywhere between Rs 60-75 depending on the purity, loan tenure, and your past credit history.

Now why a 60% to 75% gap between the original value of Gold and Loan disbursed? That is done because that gap is the margin of safety for Manappuram. If gold prices go up, Manappuram is safe and sound but say Gold prices crash by 20%-25% then Manappuram has a problem (as their Loan Value and gold value becomes same and if some of the loans default, they need to auction the gold which has a cost associated with it and then, of course, there is the fixed and variable operating cost of employees, branches, gold storage, and security costs, etc)

On the LTV (Loan to Value) front Manappuram seems to be playing quite safe as the LTV as of Q4FY20 was just 59% meaning Manappuram has lent only Rs 59 towards Rs 100 of gold kept with them. This is also because of gold prices rising so the LTV keeps decreasing.

How do they charge the borrowers?

Their base rate of interest is 14%. However, depending upon how high the loan to value (LTV) is, additional interest (amounting to risk premium) ranging from 3-12% is charged over and above the base rate. The interest and risk premium is applicable only for the days the money was actually utilized. There are no prepayment penalties. Monthly compounding interest is charged, which the borrower has to pay at the specified periodicity or at the closure of loan, whichever is earlier. The interest rate is fixed and calculated on a reducing balance basis.

Who is eligible for Gold Loans? What Security has to be provided?

Anyone who owns gold ornaments can avail of the loan. (Note: minors are not eligible.) To obtain the loan one needs to submit their gold jewelry (within a karat range of 18 to 24 k) at the branch. The loan amount that is sanctioned will be based on the gold valuation which involves verification of its purity. The weight of stones etc. fixed on the ornaments will be deducted for the purpose of valuation.

Tenor of Loans?

Their gold loan products have a tenor of three months (1 to 3 months). Customers are counseled to service the interest on a monthly basis, to avoid the risk of default.

Max and minimum limit for Gold Loans? And any lock in and prepayment penalties?

Manappuram Gold loans may be availed for any amount between Rs.1,000 to a maximum of Rs.1.5 crore. Loan requests more than 1.5 crores shall be considered with special approval of management. Their gold loans do not have any minimum or lock- in-period and there are no prepayment penalties should a borrower choose to repay earlier than scheduled.

What are the documents required to avail of the Gold Loan? Any restrictions on end-use?

They only need one document of identity proof (such as ration card, driving license, PAN Card, Voter ID card, passport, etc.) and one document of residential proof. There are no end-use restrictions in gold loans.

What happens in case of defaults?

If full repayment of the loan, along with interest and charges, is not made within the period of the loan (as specified in the pawn ticket ) or within such period as demanded by the Company, the Company shall have the right to sell or otherwise dispose of the Gold through public auction at the risk and cost of the Borrower. The Borrower, out of his/her free will, authorizes the Company to dispose of the Gold by public auction at any time after 2 weeks from the date of notice to the Borrower at the given address and adjust from the net proceeds of such sale, all amounts, including interest and other charges, due to the Company in respect of the loan. If there is any surplus on such sale, the Company shall have the right to appropriate such surplus towards any other liability of the Borrower, solely or jointly with others, on any account whatsoever, to the Company at any of its offices. The net surplus, if any, after such appropriation, shall be refunded to the Borrower within 30 days of the auction. In case of any shortfall after disposal of the Gold, the Company shall have the right to resort to legal proceedings against the Borrower to recover the shortfall.

Customer Profile

In Q3FY15, the management of Manappuram gave a nice definition of their typical customer. “So regarding the customers, most of our customers are farmers or small traders who seasonal requirement that they pledge quarter to meet their seasonal requirement, etc., or somebody who onto spent money for children’s education for some time or they may be awaiting a loan from a bank for a longer duration then when they get it they redeem these ornaments, etc., these are our typical customers. See our target customers are not bank customers, our target customers are the customers going to the pawnbrokers, They are in the millions in number across India. We target those customers with greater transparency lower interest rate credibility availability etc., if it is the case we do not worry about the banks getting aggressive etc.”

Cross-Selling

Management said this in Q2FY19. ” Regarding cross-selling, we have nearly a live customer base of around 4.5 million now both in our gold loan as well as microfinance. We plan to cross-sell related products. In our two-wheeler business we are able to cross-sell, in-vehicle finance also we are able to cross-sell, in our housing finance is affordable housing, we are able to cross-sell to our customers these products. Going forward also we will come out with some products like Micro SME, etc., which are of secure nature, secured against the lender property of the Micro SME customers. So, we will take all the opportunity to cross-sell so that it has got a positive impact on our profitability.” No exact number is given recently for the people to whom Manppuram has cross-sold products.

But in Q3FY18, they did speak of a certain percentage. Click here to know.

Breakeven Level

Management said on one of its recent concalls that “The breakeven level will be around Rs. AUM 1.5 crores for a branch.”

Liability Mix

We all know of the IL&FS crisis and how ALM mismatches meant an existential crisis for some NBFCs. Now if they borrow short term but lend long term, there is a mismatch as they need liquidity to keep servicing their interests and loans. But Manappuram being a Gold loan NBFC and by virtue of its business strategy, it lends short term majorly (1 to 3 months) in Gold Loans segment, and in other lending segments, it lends up to 60 months.

Liability Mix in Q1FY15

Liability Mix in Q4FY20

We notice that Manappuram has been borrowing long term (Only commercial paper 11.1% of total borrowing mix which is short term) and lending short term which is a good sign as they can repay their long term loans from the repayments of borrowers on its short tenure loans.

Bankers to Manappuram

Top Bankers’ support has been constant in the past.

AUM constitution from FY15 to FY20

Changes in AUM; FY15 vs FY20

Manappuram is famous for its gold loans and as we see until 2015 Gold loans dominated 96% of its AUM but post that the management guided for and achieved less reliance on Gold Loans by diversifying into Microfinance, Housing Finance, and Vehicle loans, etc. The gold loan as a % of total AUM reduced from 96% in 2015 to 67% in 2020. We will elaborate on this in the latter part of this article.

Operational Efficiency of Manappuram

Just to make things more fun, while I have shown the operational efficiency of Manappuram on its own, I have also compared it to its biggest competitor Muthoot.

From the above Table, it becomes quite clear that Manappuram is operationally inefficient as it spends a higher amount of operating expenditure as % of its Net interest income. The average of 10 years for Manappuram is 52% while for Muthoot it is 43%.

Now one may argue here that Manappuram has more branches and hence it has more OpEx and the incremental OpEx is taking longer to break even and improve the ratios but the actual fact is quite the opposite!

As of Q4FY20, Manappuram has 4622 branches and Muthoot has 5330 branches. But what is surprising is that Muthoot has a much higher AUM and Net Interest Income (per branch metrics as well) when compared to Manappuram and is also better placed on its operational efficiency.

Reach

They had 4622 branches as of Q4FY20. The branch count is more than Axis Bank who has 4528 branches as of Q4FY20.

Credit Ratings

AS of Q4FY20, Manappuram and its subsidiaries have the following ratings.

Management Commentary and Outlook; FY15 to FY20

FY15FY16
FY17FY18
FY19FY20

Management Guidance and have they achieved it? FY15 to FY20

FY15 to FY17FY18 to FY20

Out of the 18 times, the management made guidance, they achieved it 13 times, translating into a success rate of 72%.

Some Important Milestones for Manappuram

2005 – Thanks to ICICI Bank, Manappuram became the first gold loan company to raise finance through the securitization and assignment route. This was in 2005.

2007 – In December 2007, Manappuram became the first NBFC in Kerala to attract foreign institutional investment when the celebrated PE fund Sequoia Capital invested 70 crore rupees together with Hudson Equity Holdings.

Q4FY15 – Manappuram completes the acquisition of Asirvad Micro-finance, a seven-year-old company with an AUM of Rs.322 crores and a presence mainly in Tamil Nadu, Karnataka, and Kerala. They said, “We intend to expand the business to 4-5 new states. The micro-finance sector has been growing well, a stable regulatory environment in place. Prospects for the future are bright as a subsidiary of Manappuram Asirvad will benefit by access to lower cost of funds. Asirvad was basically concentrated in one state and when they bought it, they did it at a valuation of 1.85 times price to book.

Q2FY16 – “In the last concall in August and also the one before that in May I have talked about our strategic shift to short tenure gold loan in order to de-risk the portfolio. The important development in this quarter is our entire portfolio has now been moved to new shorter tenure loans with shorter LTVs for a longer tenure. We crossed the Rs.10000 Crores milestone in the consolidated AUM. We managed to grow despite the challenging macroeconomic environment with softening gold prices.”

Q1FY19 –  Announced the acquisition of India School Finance Company, a niche player in loans for the educational segment where we see good traction.

Positives

The biggest positive is of course that the loans they offer are collateralized against gold. But that too has a set margin of safety and suppose there is a gold Crash, then things can go haywire.

This second positive point is a story of Manappuram which was covered on Dr. Vijay Maliks blog – “Manappuram Finance Limited faced heat from the regulator Reserve Bank of India (RBI) in 2012 when RBI asked it to stop using its branches to collect deposits from the public on behalf of Manappuram Agro Farms Limited (MAGRO). MAGRO was an entity owned by the promoter of Manappuram Finance Limited, Mr. V.P. Nandakumar. Let’s see the way event unfolded over the next few days: February 7, 2012: RBI bans MFL and MAGRO from accepting deposits February 10, 2012: Manappuram replies after the board meeting. The investor would notice that the company took the notice from RBI seriously and within a few days clarified its stance about RBI’s instructions. It clarified its intention of fully complying with the regulator’s instructions by dissociating itself from MAGRO. Mr. Nandakumar assured that he would honor all the liabilities towards the depositors of MAGRO. And most importantly, Manappuram Finance Limited established a committee under the chairmanship of Mr. Jagdish Kapoor, former deputy governor of RBI and chairman of HDFC Bank to improve the governance standards of the company. Moreover, reputed companies like Amarchand Mangaldas and KPMG were appointed to help this committee. These actions reflected the intention of the company to comply with the regulator’s intentions in letter and spirit in sharp contrast to some other corporates who try all the options under the sun to fight regulators be it in courts or media. March 14, 2012: Mr. Nandakumar writes to the board of Manappuram Finance Limited about his plan to sell a stake in the company to pay outstanding depositors of MAGRO.”

Negatives

There is a risk of counterfeit gold. This article titled “83 Tons Of Fake Gold Bars: Gold Market Rocked By Massive China Counterfeiting Scandal” talks about one of the biggest occurrences of fake Gold and the fallout that took place at a financing outfit.

There is a very famous quote – ‘A picture is worth a thousand words’. The below picture is indeed a thousand words because India’s largest bank is offering a gold loan at 7.75% where Manappuram’s starting rate is 14% and goes up to 26% as well! Now I don’t know about others but I feel Moats are weak when a bank’s lending cost is less than your borrowing cost.

It’s really alarming that SBI is offering a gold Loan at 7.75% and Manappuram’s cost of borrowing is 9.5%. Cost of borrowing is the raw material cost for a Financial Institution/Bank and it is the very base on which the whole business has to be built. And when the raw material cost itself is so high, then things do look a bit scary. Now you would say Manappuram is growing so much and making so much profit, how so?

This is how – If you had such a business that gave you 26% yields on loans, that would be as the folks at Carlsberg would put it – “Best Business in the World”.

(Below image showing Gold Loan yields for Manappuram)

But this is Business and let’s go back to the real world. Now Gold Loans are preferred by people who can’t go to banks (I am thinking no banking channel connectivity, no credit score, no papers, no history, no literacy, no liquid assets than can be given as collateral, just Gold ownership). Now the kind of lenders who are coming are of obviously such a setup that Banks may be hesitant to lend to them. Now you only imagine, why would a financial institution charge 26% on a loan? Of course, those who are of high risk. (On this, the management in Q3FY20 said something that raises some concerns. Click here to know the exact verbatim of the management commentary.) The same thing is being done by Manappuram charging very high-interest rates but then the Music may stop anytime as a lot of Banks (Small, Medium, and big all of them), as well as Financial Institutions, are stepping up their Gold Loans game. Business stress is driving gold loans, as a lot of industries are demanding upfront cash for product delivery.

For other business of Manappuram, the yields are again very high. Housing Finance business yields are 15.2% (Q4FY20) and 19.7% on Vehicle Finance business and if we apply the same logic here, you would appreciate that over here too the kind of underwriting being done is expected to be turbulent/scary. You would say, again Asirvad Home Finance and Microfinance are churning out profits. How dare you say something negative about them. But don’t worry, we are going to cover Asirvad Home Finance shortly.

Also when someone asked the same question of high yields that should ideally come down, the MD answered this

The response doesn’t clearly justify the competition part or the part of the high yields. It just tells that the Gold Loans business is high OpEx and hence they need to charge more. Now, it goes on to see when a giant like Bajaj Finance will go all in to disrupt the Gold Business. ( It can benefit from its economies of scale/size and heavily undercut competitors. It is already in Gold Loan Business but not that aggressive).

Mr. Abhishek Muraka has rightly said and it is worth concurring with. He says “A key argument for Gold loan space is under-penetration (image below). One can argue that only 5% of total gold in India is monetized formally, but the fact is 80% of the gold is held by 2% of the people who don’t need to take a “high cost” gold loan product in the first place. The formalization of GL is not a recent process. Muthoot Fincorp, the largest GL NBFC is also the oldest financial inst. in India, founded 143 years back in 1887. After this period, if 2/3rd of the market is still dependent on informal channels, there is an issue with the product itself. One issue is that GL is an “emergency” loan product and works on a declining slope – hardly any repeat. On the other hand, a consumer loan, say from Bajaj Fin is at 0% EMI (funded by the merchant) and the customer keeps coming back to buy a new updated electronic piece every year.”

If that wasn’t enough, we now talk about competition coming from banks, fintech startups, and financial institutions. Basically from every corner.

A recent Livemint article states “Lenders are renewing focus on gold loans expecting that there could be a higher demand for this product in the coming months as small businesses and individuals face cash flow problems. On 11 June, ICICI Home Finance started offering gold loans through its 70 branches. Last month, Canara Bank restructured its business to launch a gold loan vertical. After the merger with Syndicate Bank, Canara Bank’s gold loan portfolio is now about ₹56,000 crore. “We created a special gold loan vertical within our priority credit as people have a cash flow mismatch,” said A Manimekhalai, executive director at Canara Bank.”.

A Business Insider article states ” Federal Bank is focusing on safer gold loans amid the COVID-19 pandemic

A very recent Hindu Business Line article states “Equitas Small Finance Bank is offering gold loans to customers

From the above, we get to know the rush by Banks to step up their Gold Loans. The main reason is Bankers are stuck with huge liquidity earning 3-4% in government bonds. They want to lend & they think this one is safe.

Adding to this is one convenient feature by Muthoot: Get a gold loan sitting at home. Dedicated [email protected] The staff will visit the customer’s home at an appointed date and time, carry out required digital checks, verify the customer’s gold ornaments at the premises, create the loan and generate loan documentation, and the loan amount is credited to the customer’s bank account.

Cost of funds constant from 10 years. The cost of borrowing for Manappuram in 2011 was 9.16% and now it is 9.46% as of FY20. That itself speaks a lot and nothing else needs to be added to it.

Asirvad Finance Aggression – Manappuram management went big on its diversification (more like di-worse-fication) with its foray into MFI, CV/CE, and other types of lending. But take a look at the below table and the picture becomes clear –

To sum it up, Asirvad went all aggressive with its lending as seen from the crazy rise in AUM (3x in 3 years!). But that was obviously followed up with increased provisions and deteriorating asset quality. (Please Note Net NPA = GNPA – Provisions, so don’t let the Net NPA make you feel all good). The combined provisioning shaved off almost 2 quarters of net profit for them. The quote ‘Slow and steady wins the race’ applies in the world of Finance as well.

MoneyLife has also covered Gold Finance companies and their concerns here, here and here.

There was an issue where the company uploaded the result at 5.20 PM and took the call at 5.30 PM leaving no time for stakeholders to analyze and ask the correct questions. This was in Q4FY18 and it was fixed. The concall also highlighted the rapid scaling up of business concerns of Manappuram.

Flip Flops on Security Costs. The complete episode is mentioned here, in short – The company first talked about spending on technology and then spent a lot on armed Night Guards (Why? You may ask, nice question. This was because they stated in Q2FY18 that they saw some robbery taking place and thus they decided to spend on security costs. This gives rise to the thought that their security was not that great from the start and a robbery had to take place for them to take it up seriously), and then they reduced them as well to spend on technology. They should have made a mix of Guards + technology from the very start. Also, one thing that surprised me was the total security costs came to be such that each Armed Guard was paid 40000 Rs a month. Now that figure is quite high I felt and hence I checked on some sites –

Src – Indeed.in

Now I checked other sites as well and the max figure I got for an armed guard was 25000, and if we take more charges as night shift allowance, the max it may go to is 30-32000. So this is one concern. I am not accusing the management or something, it may be just overpaying which is again adding to operational inefficiency. While the gradual decrease of security costs post this period was a good show by the management, the rapid cost increase and the theft shouldn’t have happened in the first place.

Performance during Crisis

I always believe that one should judge a company by not how it grows during good times but how it insulates itself and makes the best of the opportunity during a crisis. With that let’s see how Manappuram fared during 2 major crisis in India –

Demonetization

The demonetization phase was turbulent for both Manappuram and Muthoot. We clearly see that the asset quality for both (more for Muthoot) got hit, provisions increased 3 fold for Manappuram, and for Muthoot 7 times from pre-demon levels. We also notice that the increased provisions ate away ~1 quarter of profits for both. Additionally, both companies took a cautious stance as seen from stagnant AUMs.

On the NII and profit front, Muthoot increased its NII and Net profit while keeping its AUM constant while Manappuram saw a drop in its Net profits with stagnant NIIs.

To summarize, the demonetization period translated into a turbulent period for both of these companies. But Manappuram stayed put with constant metrics on both the business and finance front while Muthoot came out stronger on the numbers front albeit with a deteriorated asset quality.

After Demonetization, Manappuram management was quite bullish and opportunistic. Click here to know the exact words the management spoke on demonetization.

Muthoot Management commentary isn’t available.

IL&FS Crisis

In the IL&FS crisis, on the financial performance front, everything was ok. Some more provisions with an increase in NII, Net profit, AUM, and improving asset quality.

However, the change happened in the Liability mix for both the companies.

For Manappuram, we clearly see from the pic on the left above (Q1FY19) that it relied a lot on Commercial paper (which is a short term money market instrument). Now we all know that the IL&FS crisis led to a spike in money market instruments along with illiquidity. Therefore, it is no surprise that when we fast forward to Q4FY19 we see the reliance on commercial paper down to 25% from 30% earlier and we also see that Manappuram added one more source of longer-term borrowing namely term loan from banks and other financial institutions which made up 12% of its total borrowing mix.

For Muthoot, we see something of an opposite phenomenon wherein the reliance on short term sources of Commercial paper has increased from 12% in Q1FY19 to 18% in Q4FY19.

Peer Comparison

Over here we have compared the financials and business numbers of Manappuram with Muthoot Finance.

Business Comparison

We see that while Muthoot has the same employees and ~20% more branches, the total AUM and AUM per branch is way more when compared to Manappuram, hinting at operational efficiency.

Financial Comparison

Now building upon my comment on operational efficiency just before the above image, we can notice here the return ratios and the financials (NII, Profit, Revenue, CAR, etc) and conclude that Muthoot is indeed more efficient and more profitable.

Risk Management

The word risk management appears 73 times (49 times for Muthoot) in its AR.

Well, as usual for all finance companies, Manappuram too has given the usual content on Risk management saying risk is that, risk management commitee does this and does that, but in all the noise, it has given 3 images that outline the risk in their business and what they do to mitigate it.

Now looks good right? The company is taking risk management seriously, but you know what just to be safe, I verified whether the company is actually executing its above mitigation techniques in real. And most of the above things have been met.

Technology

The word technology appears 58 times in Manappuram Annual Report (2019) as compared to just 37 times in Muthoot’s.

That 58 times occurrence of the word technology isn’t extraordinary though. To sum it up here’s what the company is using technology on –

“Our lending functions are supported by in-house, custom developed an information technology platform that allows us to, among other things, record relevant customer details, approve and disburse the loan. Our technology platform also handles an internal audit, risk monitoring, and management of the suitable credit and pledged gold related information. Our employees undergo periodic training related to the evaluation of the worth and authenticity of the gold that is pledged with us

The Company had rolled out an advanced Online Gold Loan product that is cashless and available to the customer 24X7. Given the convenience, and the fact that cash disbursements are being increasingly more regulated, OGL is well poised to take a larger share of the market.

The Company has begun a transformation of the technology landscape. Technology has been deployed to support the more straightforward implementation of partnerships for business generation and collections, operational efficiencies, and compliance with statutes. In line with this, the Company has implemented enterprise platforms such as business process management and business intelligence. Also, fortification of information security measures through IPv6, web proxy, network access control, and artificial intelligence-based network traffic analysis tool. The Company entered into IT services sourcing arrangements with global leaders of ITES to supplement the internal capabilities. Enhancement of digital solutions of customer mobile apps, payments, and KYC, as well as engagements for tapping into nascent technologies and the fintech ecosystem.”

So that brings us to the question – Is Manappuram doing any research & development? Seems like no, as the word research & development appears only once on the Annual report that too regarding their IT software in its subsidiary. It’s competitor Muthoot has 0 occurrences of the word R&D in the Annual report. At this point in time, it is important to see what India’s biggest NBFC Bajaj Finance is doing in terms of tech despite being the biggest (Click here to know). The reason is simple – innovate and step up with the new normal or else that firm will vanish.

Management commentary on Covid Impact

Our microfinance subsidiary Asirvad Microfinance reported an AUM of Rs. 5,503 crores, an increase of 43.3% year-on-year and 9.66% quarter-on-quarter. Going forward, we expect some short term pain in our microfinance portfolio after the moratorium. However, based on our experience in dealing with the episodes of stress in the segment, we are much more positive about the medium and long term.

Cost of funds at 9.4% – We have now set up a committee that will focus exclusively on optimizing costs and bring down the operating expenses further by looking at the areas besides security costs.

Q4FY20 moratorium book – Gold Loans only 5%, So, this is particularly nothing. In CV, out of Rs. 1,400 crores portfolio, yes, around Rs. 90 crores had opted for a moratorium. But some of them are paying even from those who opted for a moratorium.

In housing finance, out of Rs. 650 crores of the portfolio, around Rs. 200 crores, so that is the volume, have opted for a moratorium.

Valuations

They say that the market fully prices in everything and valuations wise it seems that due to its better and much efficient operations, Muthoot gets a premium valuation. (PBV and PE wise). On the other hand, Manappuram trades at a PE of 9.3x and a PBV of 2.37x.

To conclude, Manappuram has had a good run led by capable management along with favorable demand conditions. But in FY15, the management realized that the Gold Loan segment itself will not be enough with competitive forces cropping up and the geographical reach moat decreasing day by day (Due to increased technology and increasing awareness of better loan options which have much lesser loan rates), so they started diversifying into MFI, CV/CE and their aggression in the disbursals here clearly showed that the management knew they were in a race against time from getting defeated, but they did a mistake of getting too aggressive and it was too late as the NPAs spiked and profits reduced.

Would I buy this stock? Not really, as I feel the valuations are way too expensive at this point of time given that the business has been inefficient in cost of funds, has been facing competition from all corners and has been aggressive on Microfinance and CV/CE (The 2 segments which have a lot of cyclicality and if not the loans are not properly underwritten to these segments, they can go bad big time and erode the networth and profits of the financial institution).

For me, I would only look at this business when it trades at less than its book value. (That is my view, If you have another view, I would totally respect that)

More Information

What is the end use of a Typical Gold Loan?

How many of new loans are to the old customers? (Gold Loans)

Housing finance business – borrower profile and segmentation

Loan Value Bifurcation – Gold Book

Disclaimer

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