Manappuram Finance Stock Research Report

The RBI has initiated action against select NBFCs and NBFC-MFIs and issued directions to cease and desist from sanctioning and disbursing loans effective from the close of business on 21st October 2024. These entities include 2 NBFC-MFIs – Asirvad Micro Finance Ltd (a subsidiary of Manappuram Finance) and Arohan Financial Services Ltd., along with 2 NBFCs – DMI Finance Pvt. Ltd and Navi Finserv Ltd.

The RBI’s action is a result of the supervisory concerns over pricing policies, related to the companies’ Weighted Average Lending Rate (WALR) and interest spreads. These were violating the regulatory framework, leading to the decision to restrict new loans sanction and disbursements.

In addition to the usurious pricing, these NBFCs were found to be in nonadherence with the regulatory guidelines on
1) Assessment of household income and consideration of existing/proposed monthly repayment obligations in respect of their microfinance loans along with
2) Deviations in respect of Income Recognition & Asset Classification (IR&AC) norms,
3) Mandated disclosure requirements on interest rates and fees and 4) Outsourcing of core financial services.

The RBI in its recent monetary policy announcement (Oct’24) had flagged concerns regarding certain NBFCs including NBFC-MFIs pursuing irrational growth without building up sustainable business practices and a robust risk management framework. Additionally, the RBI also highlighted NBFCs including HFCs and MFIs charging excessively higher interest rates coupled with unreasonably high processing fees and frivolous penalties. The RBI also warned that it is closely monitoring these areas and the regulator will not hesitate to take appropriate action, if necessary.

Manappuram Finance Stock Research Report

Impact on Manappuram

Manappuram holds ~97.6% stake in Asirvad Microfinance. The segment has been instrumental in driving healthy AUM growth on a consolidated basis, registering a strong 23% CAGR growth over FY21-24. The portfolio constitutes ~25% of the consolidated AUM of Manappuram. 

Over the last few quarters, the company, like other microfinanciers has been grappling with elevated asset quality stress. In Q1FY25, Collection Efficiency (CE) was impacted due to challenges in certain states (Punjab, Gujarat, MP and Rajasthan; though exposure to the northern states is limited to ~10%), general elections and heat wave. Manappuram has proactively identified bottlenecks and is ramping up collections efforts to ensure asset quality improvement.

It is difficult to gauge and ascertain the impact of these restrictions on the operational and
financial performance; however, we believe Manappuram’s consolidated AUM growth and
earnings momentum will take a sharp hit. Asirvad’s CRAR in Q1FY25 stood at 21.8%. Hereon,
given the asset quality stress in the sector and higher provisioning needs, any capital raise
required by Asirvad would remain a challenge and a key monitorable.

We expect the MFI portfolio is expected to de-grow sharply. Conversely, we expect gold loan
growth to remain buoyant, alongside continued traction in the non-gold portfolio (ex-MFI).
However, we cut our AUM growth estimates to ~15% CAGR over FY24-27E vs ~18% CAGR
earlier. We also cut our earnings estimates by 7-9% over FY25-27E. That said, the actual
financial impact would be largely dependent on the duration of the restrictions.

The stock has de-rated and corrected sharply by ~25+% in the past 3 months potentially factoring
in the asset quality stress and growth slowdown. We downgrade the stock to HOLD and revise
our target price to Rs 175/share (valuing the stock at 1x FY26E ABV), implying a downside
of 1% from the CMP. We believe near-term pressure on the stock will continue until investor
confidence is restored.