Key Strengths

1. Long Track Record and Established Market Position

• Manappuram Finance Ltd (MAFIL) boasts a distinguished history of more than 25 years of operations in the gold loan financing segment.
• The company has successfully established a robust brand image in the market and is recognized as one of the largest gold loan Non-Banking Financial Companies (NBFCs) in India.
• MAFIL has significantly enhanced brand recall among customers through consistent advertising and branding efforts.
• Beyond gold loans, the company has diversified into vehicle finance, corporate loans to NBFCs, and Micro, Small, and Medium Enterprises (MSME) segments.
• MAFIL has expanded into microfinance and housing finance segments through its subsidiaries, namely, Asirvad Microfinance Limited (AMFL) and Manappuram Home Finance Private Limited (MHFL), both of which have received favorable ratings.
• As of March 31, 2023, MAFIL's consolidated presence includes 5,232 branches spread across India, with Assets Under Management (AUM) amounting to ₹35,452 crore.

2. Experienced Promoters and Management Team

• The promoters of MAFIL have a rich legacy in the gold loan business, spanning over six decades.
• The business was initially founded by V. C. Padmanabhan in 1949, and in 1986, V. P. Nandakumar assumed control.
• MAFIL was incorporated in 1992, with a strategic vision to expand the group's presence in the gold loan sector by establishing branches across India.
• The company's day-to-day operations are managed by a team of seasoned professionals, overseen by a board consisting of ten directors, including seven independent directors with extensive expertise in the NBFC sector.

3. Healthy Profitability

• During FY23, MAFIL's consolidated Assets Under Management (AUM) grew by 17%, notably driven by significant growth in the non-gold loan segment.
• The non-gold loan portfolio experienced impressive growth, expanding by 56% during FY23, based on AUM, while the gold loan portfolio saw a marginal reduction of 2% in FY23, AUM-wise, primarily due to fluctuations in the price of gold.
• Despite competitive pressure from banks in the gold loan segment, the company reported a Profit After Tax (PAT) of ₹1,500 crore on a total income of ₹6,750 crore during FY23, as compared to a PAT of ₹1,329 crore on total income of ₹6,126 crore in FY22.
• While the yield declined from 20.57% in FY22 to 19.20% in FY23, the Net Interest Margin (NIM) remained healthy at 11.72% in FY23, though slightly lower than 11.84% in FY22.
• Operating expenses (Opex) increased from 5.71% in FY22 to 6.08% in FY23, primarily due to branch expansion in subsidiaries and an increase in the workforce.
• Credit costs improved significantly from 1.50% in FY22 to 0.84% in FY23, with notable improvements observed in the microfinance segment.
• Consequently, the Return on Total Assets (ROTA) stood at 4.12% in FY23, compared to 4.11% in FY22.
• For Q1FY24, MAFIL (consolidated) reported a PAT of ₹498 crore on a total income of ₹2,057 crore.

4. Good Asset Quality with Improvement in FY23

• Thanks to the secured nature and shorter tenure of gold loans, coupled with timely auctions, MAFIL has successfully maintained a comfortable level of asset quality in its gold loan book.
• As of March 31, 2023, MAFIL (standalone) reported Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA) of 1.33% and 1.15%, respectively, which marked a significant improvement from GNPA and NNPA figures of 2.95% and 2.72%, respectively, as of March 31, 2022.
• The company's restructured portfolio outstanding stood at ₹18.3 crore as of March 31, 2023, down from ₹61.8 crore as of March 31, 2022.
• GNPA and NNPA as of June 30, 2023, were reported at 1.45% and 1.24%, respectively.
• While MAFIL has demonstrated robust asset quality in gold loans, its performance in the vehicle finance, housing finance, and microfinance segments, where it has limited track records, is yet to be established. CARE Ratings expects asset quality to remain stable in the medium term with improvements in the non-gold portfolio.

5. Comfortable Capitalization Levels

• MAFIL maintains a comfortable level of capitalization, supported by healthy internal accruals.
• As of March 31, 2023, the Capital Adequacy Ratio (CAR) and Tier-1 CAR were reported at 31.70%, compared to figures of 31.33% and 31.01%, respectively, as of March 31, 2022.
• The overall gearing (consolidated) as of March 31, 2023, stood at 3.09x, showing a slight increase from 3.06x as of March 31, 2022.
• As of June 30, 2023, CAR stood at 30.50%.
• CARE Ratings expects CAR to remain at comfortable levels in the future, considering the company's robust accruals.

6. Adequate Risk Management and Management Information Systems

• MAFIL has implemented rigorous risk management systems to ensure the safety and security of its gold loan portfolio.
• Employees at branches are well-trained to evaluate gold jewelry provided as collateral by prospective borrowers.
• The company has taken steps to enhance gold security and minimize custodial risks, including the use of highly-secured vaults with dual control and insurance coverage for gold.
• Surveillance cameras are installed in all branches to monitor activities.
• The core gold loan application software, developed in-house by MAFIL, is used across branches and integrated with financial software.
• The interconnectedness of branches enables real-time monitoring, and the company has also introduced an app-based (web and mobile) application for re-pledge and closure of gold loans.
• Adequate Information Technology (IT) infrastructure and Management Information System (MIS) ensure seamless operations and provide senior management with effective control over operations.

7. Diversified Resource Profile

• MAFIL (Consolidated) maintains a well-diversified funding profile, accessing funds from banks and market instruments, including Non-Convertible Debentures (NCDs) and Commercial Papers (CPs).
• As of March 31, 2023, the funding profile comprised bank borrowings in the form of term loans and CC, accounting for 75.5% of total borrowings, followed by NCDs at 23.4%, and External Commercial Borrowings (ECB) at 1.1%.
• The company managed to reduce interest expenses to average borrowings from 8.32% in FY22 to 8.10% in FY23.
• CARE Ratings anticipates continued access to a diversified lender profile in the medium term.

In conclusion, Manappuram Finance Ltd (MAFIL) possesses several key strengths that position it as a significant player in the financial services sector. Its long track record, experienced management team, healthy profitability, good asset quality, comfortable capitalization levels, robust risk management systems, and diversified funding sources all contribute to its stability and growth potential. However, as with any investment, it is crucial for investors to conduct thorough due diligence, considering the company's growth prospects, associated risks, and prevailing market conditions before making investment decisions in MAFIL.

Key Weaknesses

1. Exposure to Price Risk of Gold and Increasing Competition from Banks in the Gold Loan Business

• As of March 31, 2023, gold loans comprised approximately 78% of MAFIL's Assets Under Management (AUM), down from 89% as of March 31, 2022, on a standalone level.
• Loans with a tenure of more than 6 months increased significantly from 9% as of March 31, 2022, to 20% as of March 31, 2023, and further to 71% as of June 30, 2023. This exposes the company to the price risk of gold.
• The ability of the company to effectively manage auction losses remains a critical area to monitor.
• Banks have increasingly focused on gold jewelry loans, as per the sectoral deployment of credit by the Reserve Bank of India (RBI). Gold jewelry loans extended by banks grew from ₹33,503 crore as of March 27, 2020, to ₹88,428 crore as of March 24, 2023.
• MAFIL experienced a decline in the tonnage of gold holdings (underlying security), reducing from 68.0 tonnes as of March 31, 2022, to 60.1 tonnes as of March 31, 2023.
• The quantum of loans with a ticket size above ₹2 lakh increased from ₹6,575 crore as of March 31, 2022, to ₹6,629 crore as of March 31, 2023, resulting in declining yields due to heightened competition.
• The ability of MAFIL to attract new customers is crucial for AUM growth and remains a key area to monitor.

2. Geographical Concentration of Gold Loans

• While MAFIL has a PAN-India presence with 5,232 branches as of March 31, 2023, the southern states continue to account for a significant portion of the gold loan portfolio, constituting around 56% of the total gold loan portfolio as of March 31, 2023.

3. Challenges Associated with Non-Gold Segments

• MAFIL diversified into various segments as part of its strategy. These include vehicle finance, corporate loans to NBFCs, MSME loans, and other loan segments such as two-wheeler and micro home loans.
• While the vehicle finance AUM increased to ₹2,585 crore as of June 30, 2023, and the corporate loan portfolio expanded to ₹1,005 crore as of March 31, 2023, these segments have limited track records and seasoning.
• The microfinance sector, particularly within the subsidiary Asirvad Microfinance Ltd (AMFL), is exposed to inherent risks, including socio-political intervention risk, risks from unsecured lending, and the vulnerability of borrowers to economic downturns.

4. Liquidity

• MAFIL maintains an adequate liquidity profile with healthy internal accruals and access to both short-term and long-term funds.
• There is a cumulative mismatch in the 3-6 month bucket in Asset Liability Management (ALM) as of June 30, 2023, mainly due to the maturity of shorter-tenure borrowings shown in outflows. However, this cumulative mismatch can potentially be offset by the company's unutilized lines of credit and prepayment of loans.
• As of March 31, 2023, the company held a cash and bank balance of ₹2,080 crore on a standalone basis and had unutilized lines of credit amounting to ₹1,008 crore.

5. Environment, Social, and Governance (ESG) Risks

• While MAFIL has initiated measures to enhance energy efficiency and promote renewable energy, it is exposed to ESG risks, including climate change impacts.
• The company conducts scenario analysis to prepare for risks arising from climate change in units like agriculture, commercial vehicle finance, and microfinance.
• In terms of social factors, the company focuses on financial inclusion and customer relationship management.
• Governance practices prioritize risk management, transparency, and adherence to regulatory compliance.

These key weaknesses highlight potential areas of concern and risk for Manappuram Finance Ltd (MAFIL). It is important for investors and stakeholders to closely monitor these weaknesses and assess how the company addresses them in its strategic planning and risk management processes. Additionally, MAFIL's ability to diversify its portfolio effectively and adapt to changing market dynamics, especially in the face of increasing competition and price volatility in the gold loan business, will be crucial for its long-term sustainability and growth.