Manappuram Finance (MGFL IN) Growth picks up in gold loan; Microfinance drive profitability

INSTITUTIONAL EQUITY RESEARCH Manappuram Finance (MGFL IN) Growth picks up in gold loan; Microfinance drive profitability INDIA BFSI Quarterly Update Top takeaways from Q1FY19 Operating results inline with expectations with NII/PAT at Rs 6.4bn/2.0bn NII grew by 12% yoy to Rs 6.4bn led by 24% growth in AUMs, even as NIMs contracted 170bps yoy to 15.4%. AUM growth was largely led by non gold loan segments (57% yoy). Growth in gold loan AUM picked up at 16%yoy (6%qoq), led by a 11% increase in gold stock, 7.5% increase in gold prices, and 3 % decline in LTV. Operating expenses increased by 14% yoy led by a 17% increase in employee expenses and 9% increase in other expenses. The management guided for lower security cost in FY19 due to adoption of technology led solutions. While the GNPA ratio in the standalone entity remained steady at 0.7%, GNPA in microfinance further declined to 1.7% from 2.3% in Q4FY18, and GNPA in housing also declined marginally to 4.6% from 4.8% in Q4FY18. Microfinance subsidiary made a profit of Rs287.5mn vs loss of 164.7mn in Q1FY18. RoA back to pre demonitisation levels at 4.6% after five quarter of sub optimal RoAs. Management comments/concall takeaways Gold loan growth guidance was 15% for FY19; Growth in Microfinance book pegged at 40% in FY19. Recently acquired India school finance company seeing good traction; Expect AUM to reach Rs10bn by year end from current level of Rs6.5bn. Gold auction in Q1 was at Rs 620mn. GNPA in the home loan business should stabilise over the next three quarters from the current level of 4.6%. Share of the online gold loan book increased to 37% from 32% in Q4FY18. Rise in cost of funds is being passed on to customers in Q2FY19. Outlook and valuation: While MGFL s operational performance was inline with our expectations, compression in margins remain a worry. Pick up in gold loan disbursements, improvement in asset quality in its microfinance portfolio and higher profitability in microfinance subsidiary were positives. At CMP, the stock trades at 1.8x FY20 BV. We maintain our NEUTRAL rating on the stock with target of Rs 125 (unchanged). 9 August 2018 NEUTRAL (Maintain) CMP RS 113 / TARGET RS 125 (+11%) COMPANY DATA O/S SHARES (MN) : 843 MARKET CAP (RSBN) : 93.3 MARKET CAP (USDBN) : 1.4 52 WK HI/LO (RS) : 130 / 82 LIQUIDITY 3M (USDMN) : 6.1 PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % Jun 18 Mar 18 Dec 17 PROMOTERS : 34.6 34.6 34.7 FII / NRI : 38.3 38.2 35.5 FI / MF : 6.8 6.2 7.2 NON PRO : 7.7 9.5 8.4 PUBLIC & OTHERS : 12.6 11.5 14.3 KEY FINANCIALS Rs mn FY18 FY19E FY20E Net Profit 7,002 7,958 8,875 % growth 3.6 13.7 11.5 EPS (Rs) 8.3 9.4 10.5 BVPS (Rs) 45.3 52.9 61.7 ROE (%) 19.7 19.2 18.4 ROA (%) 5.0 5.1 5.0 P/E (x) 13.6 12.0 10.7 P/BV (x) 2.5 2.1 1.8 CHANGE IN ESTIMATES Revised Est. % Revision Rs bn FY19E FY20E FY19E FY20E NII 23.0 25.7 2.9 2.5 PPP 12.7 14.2 3.1 2.6 Core PAT 8.0 8.9 0.5 1.9 EPS (Rs) 9.4 10.5 0.5 1.9 Pradeep Agrawal and Manish Agarwalla (Rs mn) Q1FY19 Q1FY18 yoy % Q4FY18 qoq % vs. expect. % Comments Net Interest Income 6,415 5,734 11.9 6,217 3.2 0.07 Higher AUM growth eve as NIM contracted Non Interest Income 114 249 54.4 114 0.3 15.83 Operating Income 6,529 5,983 9.1 6,331 3.1 0.40 Operating Expenses 3,280 2,884 13.7 3,139 4.5 2.51 Employee expenses increased 17%yoy; other exp 9%yoy Operating Profit 3,248 3,099 4.8 3,192 1.8 3.16 Provision Charges 155 550 71.9 432 64.2 38.15 Prov. in microfinance down to Rs34.2mn vs 461mn in Q1FY18 Pre Tax Profit 3,094 2,549 21.4 2,759 12.1 0.35 Tax Provided 1,094 895 22.2 927 17.9 1.31 Profit After Tax 1988 1674 18.7 1832 8.5 1.82 In line with estimates Asset under management 166 134 24.2 158 5.4 16% growth in gold AUM; 57% growth in non gold AUM Gold Disbursement 231 127 81.9 205 12.7 Borrowing 110 87 27.5 102 7.7 NIM 15.4 17.1 (170bps) 15.8 (33bps) Lower yields and higher cost led to lower NIMs GNPA (%) 0.7 1.1 40 0.7 0.0 Auction of Rs 620mn Page 1 PHILLIPCAPITAL INDIA RESEARCH

Result update Rs mn Q1FY19 Q1FY18 Q4FY18 YoY (%) QoQ (%) Interest income 9,358 8,314 8,898 12.6 5.2 Interest expenses 2,943 2,580 2,681 14.1 9.8 Net Interest Income 6,415 5,734 6,217 11.9 3.2 Other Income 114 249 114 54.4 0.3 Total Income 6,529 5,983 6,331 9.1 3.1 Operating Expenses 3,280 2,884 3,139 13.7 4.5 Cost/Income (%) 47.4 45.6 49.6 185bps (218bps) Pre Provision Profits 3,248 3,099 3,192 4.8 1.8 Provisions & contingencies 155 550 432 71.9 64.2 Profit before tax 3,094 2,549 2,759 21.4 12.1 Tax 1,094 895 927 22.2 17.9 Profit after tax 1,988 1,674 1,832 18.7 8.5 EPS 2.4 2.0 2.2 20.9 9.2 AUM 166,179 133,799 157,648 24.2 5.4 Disbursements 231,000 127,000 205,000 81.9 12.7 Gross NPAs 872 1,180 821 26.1 6.2 Gross NPAs (%) 0.7 1.1 0.7 (40bps) 0 Net NPAs 374 965 352 61.3 6.2 Net NPAs (%) 0.3 0.9 0.3 (60bps) 0 CAR (%) 25.5 28.1 27.0 (260bps) (150bps) Source: Company, PhillipCapital India Research AUM (Rs bn) Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 YoY (%) QoQ (%) % of Total Gold Loan 107.3 107.6 113.3 117.3 124.6 16 6 75.0 Micro Finance 18.3 19.6 21.1 24.4 24.4 33 0 14.7 Home Loan 3.2 3.3 3.4 3.7 4.1 27 9 2.4 Commercial Vehicle 3.4 4.2 5.0 6.3 7.2 109 15 4.3 Others 1.6 2.5 3.7 5.9 5.9 266 0 3.6 Total 134 137 147 158 166 24.2 5.4 100.0 ` Source: Company, PhillipCapital India Research Key data Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 YoY (%) QoQ (%) Gold Stock (tonnes) 59.4 59.8 62.3 64.0 66.0 11.1 3.1 Avg Gold price Rs/ gm 2,878 2,895 2,923 3,022 3,091 7.4 2.3 Customer base (mn) 2.1 2.2 2.2 2.3 2.3 9.5 0.0 LTV on Gold Loan(Calculated) 68.5 67.8 67.9 66.2 66.6 2.7 0.7 Source: Company, PhillipCapital India Research Asset quality Rs mn Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 YoY (%) QoQ (%) Gross NPAs 1,180 1,291 793 821 872 26.1 6.2 Net NPAs 965 968 453 352 374 61.3 6.2 Gross NPAs (%) 1.1 1.2 0.7 0.7 0.7 Net NPAs (%) 0.9 0.9 0.4 0.3 0.3 Net NPAs/Net worth (%) 2.8 2.7 1.2 0.9 0.9 Provision cover (%) 18.2 25.0 42.9 57.1 57.1 Source: Company, PhillipCapital India Research Page 2 PHILLIPCAPITAL INDIA RESEARCH

Financials Profit and loss (Rs mn) Balance sheet (Rs mn) (Year Ending Mar 31) FY17 FY18 FY19E FY20E (Year Ending Mar 31) FY17 FY18 FY19E FY20E Net interest income 19,720 21,015 22,980 25,675 Equity 1,684 1,685 1,685 1,685 Other income 339 575 690 740 Reserves 31,424 36,460 42,927 50,260 Net Income 20,059 21,589 23,670 26,415 Net worth 33,108 38,145 44,612 51,945 Operating expenses 8,354 10,447 10,994 12,249 Borrowings 91,632 102,406 115,152 128,258 Preprovision profit 11,705 11,142 12,675 14,167 Current liabilities & others 6,724 6,208 7,088 7,088 Provisions 556 476 554 648 Total liabilities 131,464 146,759 166,852 187,292 Profit before tax 11,149 10,666 12,122 13,518 Net block 1,792 2,651 2,703 2,817 Tax 3,888 3,664 4,164 4,644 Investments 3,242 3,750 3,750 3,750 Tax rate 34.9 34.4 34.4 34.4 Loans 117,688 131,724 152,639 172,966 Adjusted Profit after tax 7,260 7,002 7,958 8,875 Current assets & others 8,742 8,635 7,759 7,759 Total assets 131,464 146,759 166,852 187,292 Dupont (as % of Assets) Key ratios (Year Ending Mar 31) FY17 FY18 FY19E FY20E (Year Ending Mar 31) FY17 FY18 FY19E FY20E Interest Income 26.8 23.2 23.3 23.3 NIM (%) 15.7 15.1 14.7 14.5 Interest Expense 11.2 8.2 8.4 8.4 NIM (%) On AUM 15.7 14.3 13.4 12.8 Net Interest Income 15.7 15.1 14.7 14.5 Cost/ Income (%) 41.6 48.4 46.4 46.4 Other income total 0.3 0.4 0.4 0.4 Credit cost (%) 0.4 0.3 0.4 0.4 Net Income total 16.0 15.5 15.1 14.9 RoA(%) 5.8 5.0 5.1 5.0 Operating expenses total 6.7 7.5 7.0 6.9 RoE (%) 24.0 19.7 19.2 18.4 Preprovision profit 9.3 8.0 8.1 8.0 Leverage (x) 4.1 3.9 3.8 3.7 Provisions 0.4 0.3 0.4 0.4 No of shares (mn) 841.9 842.5 842.5 842.5 Profit before tax and exc. items 8.9 7.7 7.7 7.6 Gross NPA (%) 2.0 0.7 0.8 0.9 Profit before tax 8.9 7.7 7.7 7.6 Net NPA (%) 0.7 0.3 0.5 0.7 Tax total 3.1 2.6 2.7 2.6 Provision coverage (%) 54.1 57.1 34.1 20.7 Profit after tax 5.8 5.0 5.1 5.0 Growth (%) Valuation ratios (Year Ending Mar 31) FY17 FY18 FY19E FY20E (Year Ending Mar 31) FY17 FY18 FY19E FY20E Net interest income 52.1 6.6 9.4 11.7 EPS (Rs) 8.6 8.3 9.4 10.5 Net Income total 50.4 7.6 9.6 11.6 PER (x) 13.1 13.6 12.0 10.7 Preprovision profit 112.3 4.8 13.8 11.8 Book value (Rs) 39.3 45.3 52.9 61.7 Profit before tax 114.8 4.3 13.7 11.5 P/BV (Rs) 2.9 2.5 2.1 1.8 Profit after tax 115.3 3.6 13.7 11.5 Adjusted book value (Rs) 38.1 44.9 52.0 60.3 Loan 13.3 11.9 15.9 13.3 P/ABV (Rs) 3.0 2.5 2.2 1.9 Disbursement 44.6 18.5 15.0 15.0 P/ PPP 2.8 3.4 3.5 3.7 AUM 19 15 17 17 Dividend yield (%) 1.3 1.8 1.2 1.2 Source: Company, PhillipCapital India Research Estimates Page 3 PHILLIPCAPITAL INDIA RESEARCH

Stock Price, Price Target and Rating History 140 120 100 80 B (TP 130) B (TP 130) B (TP 135) N (TP 105) B (TP 110) N (TP 107) N (TP 125) N (TP 125) 60 40 20 0 J 16 F 16 M 16 M 16 J 16 A 16 S 16 N 16 D 16 F 17 M 17 M 17 J 17 J 17 S 17 O 17 D 17 J 18 M 18 A 18 J 18 J 18 Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL 15% > to < +15% Target price is less than +15% but more than 15% SELL <= 15% Target price is less than or equal to 15%. Page 4 PHILLIPCAPITAL INDIA RESEARCH

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