Top Brokerage Bullish On This Midcap NBFC Stock, Recommends Buy For Robust 36% Returns

Stock Outlook

The current market price of Manappuram Finance's stock on the NSE is Rs 118.25 apiece. Its 52-week high level recorded on 14 December 2021 is Rs 175.60 and the 52 week low level recorded on 20 June 2022 is Rs 81.50, respectively.
 
 The stock over the last 5 years has given mid returns to shareholders. The shares fell by 0.71% in the last 1 week and surged 1.03% in the last 1 month. In 3 months it surged by 15.2%. However, in 1 last 1 year, it fell by 30.75%, and in the last 3 years, it fell by 31.65%, respectively. In the last 5 years, it gave 15.82% positive returns.

Gold portfolio - RoE-focused AUM growth strategy

The period between FY21-Q2FY23 saw MGFL's gold loan AUM remain flat (vs. +1.4% CQGR for Muthoot / 3%+ CQGR for select banks). RoE over the same time however contracted ~800bps to 16.8% (calc) as management tried to juggle around AUM growth/RoE following increased competition from peers. A similar phenomenon was also witnessed in the case of Muthoot Finance (RoE contracted 550bps+). Our interaction with MGFL management hinted at corrective measures initiated to overcome these shortfalls. We see normalcy in RoEs to 16-17% for FY23E, inching upwards to 18%+ over FY24-25E as growth gathers pace.
 

Non-gold loan portfolio - Asirvad MFI, VF, and HF - in a sweet spot

The brokerage said, "Our interaction with laterals / MGFL management point to strong growth drivers in place for the MFI, Vehicle finance, and Housing finance segment (~33-34% of consolidated AUM). We are factoring in 23.3% CAGR in the non-gold portfolio over FY22-25E (vs 16% over FY19-22) and see the ratio inch towards ~43% of the consolidated AUM by FY25E. The strong AUM growth in the non-gold portfolio is also likely to offset the near-term growth moderation in the gold loan AUM given the competition/re-adjusting to the strategy of risk-adjusted RoE. An improved yield (across all segments), stable borrowing costs, and receding credit cost - an outcome of increased collection efficiencies and contained NPA, are like to push the consolidated revenue/earnings higher."
 

Earnings estimates

With credit upcycle, improved underwriting, and defined customer segment, we believe the stance towards the shift in AUM mix towards a non-gold loan portfolio should bode well for Manappuram in the medium-term. We are factoring in 13%+ CAGR in consolidated AUM over FY22-25E (vs. 9.5% CAGR over FY20-22). Further, even as we build in increased borrowing costs, the improved yields will support margins. The diversified AUM mix bodes well for Manappuram vis-à-vis Muthoot Finance which still has 90%+ of its AUM in gold loans. The new securitization norms are unlikely to have a direct bearing on MGFL given either longer duration portfolio (MFI) or limited overall borrowings under the said route.
 

Valuation and view

The brokerage said, "In our last note, we had highlighted the need for a definitive strategy around RoE-AUM in the gold loan portfolio. Albeit at a nascent stage, recent results and management commentaries hint at realigning to the same. This coupled with the cyclical upcycle in the non-gold loan portfolio will push consolidated RoE towards 18%+. Valuations at 0.8x FY25E ABV are inexpensive, when there are clear signs of a cyclical and strategic upswing. Retain BUY with TP at Rs160 (SOTP based valuation). Our upside case TP is at Rs180. Key risks: lower than expected growth in the non-gold portfolio, return in stance towards growth in gold loan AUM or margin pressure."

Disclaimer

The stock has been picked from the brokerage report of Monarch Network Capital. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.