Compliance Efforts And Streamlined Operations Will Support Future Market Opportunities

Key Takeaways

• Streamlined gold loan practices and compliance with RBI guidelines may reduce fintech competition, support AUM growth, and improve operational efficiency, stabilizing revenue.
  
• Strengthening collection efforts in microfinance and reducing interest rates could enhance collection efficiency, lower credit costs, and unlock growth opportunities, boosting future earnings.
  
• Regulatory and compliance challenges, coupled with environmental and market risks, could pressure Manappuram Finance's operational costs, profitability, and revenue growth, especially in microfinance and gold loans.

Catalysts

A gold loan non-banking financial company, provides retail credit products and financial services in India.

• Implementation of streamlined gold loan practices following RBI guidelines may reduce competitive intensity from fintechs and bring stability, supporting AUM growth and improving operational efficiency, which can positively impact revenue.
  
• Asirvad Microfinance is strengthening collection efforts and implementing advanced tracking systems, which could lead to improved collection efficiency and reduced credit costs over time, benefiting net margins.
  
• Proactive steps to comply with RBI directives and reduce interest rates in microfinance may position the company favorably for the lifting of the disbursement ban, potentially unlocking growth opportunities and impacting future earnings positively.
  
• Growth in the secured loan portfolio, including home loans and vehicle financing, shows notable increases year-on-year, potentially driving top-line growth and contributing to revenue stability.
  
• The association and expected compliance with RBI instructions could stabilize systemic practices in gold loans, creating a level playing field and enhancing market opportunities, potentially increasing revenue and leveraging strengths to improve net margins.

Manappuram Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Manappuram Finance's revenue will grow by 18.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.7% today to 32.1% in 3 years time.
• Analysts expect earnings to reach ₹30.6 billion (and earnings per share of ₹34.56) by about February 2028, up from ₹22.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹35.8 billion in earnings, and the most bearish expecting ₹23.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, up from 7.8x today. This future PE is lower than the current PE for the IN Consumer Finance industry at 19.8x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.03%, as per the Simply Wall St company report.

Manappuram Finance Future Earnings Per Share Growth

Risks

• Asirvad Microfinance, a major subsidiary of Manappuram Finance, has been directed by the RBI to halt disbursements due to deficiencies in compliance and pricing policies. This could lead to lower revenue and increased compliance costs.
  
• Elevated credit costs in certain geographies, resulting in Asirvad's profitability being affected, suggest potential for increased provisions and decreased net margins.
  
• Natural disruptions and climatic impacts in various regions are affecting collections in rural areas, which could lead to increased non-performing assets in the microfinance section of the portfolio, impacting earnings.
  
• Regulatory scrutiny on gold loan practices necessitates immediate compliance changes, potentially leading to increased operational costs and adjustments in loan-to-value practices, impacting financial efficiency and profitability.
  
• Increased competition and regulatory changes affect the gold loan market, and reliance on this sector for 53% of consolidated AUM exposes the company to sector-specific risks, potentially impacting revenue if growth stagnates.

Valuation

• The analysts have a consensus price target of ₹202.615 for Manappuram Finance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹401.0, and the most bearish reporting a price target of just ₹120.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹95.2 billion, earnings will come to ₹30.6 billion, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 16.0%.
  
• Given the current share price of ₹208.3, the analyst price target of ₹202.62 is 2.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.