Digital Lending Will Capture India's Expanding Formal Credit Market

Key Takeaways

• Digital adoption and AI-driven underwriting are transforming operational efficiency, expanding the client base, and enabling margin growth through enhanced sourcing and reduced costs.
  
• Strategic partnerships, scalability through co-lending, and regulatory shifts position Manappuram to capture premium markets, improve asset quality, and accelerate revenue and earnings growth.
  
• Heavy reliance on gold loans combined with rising competition, credit quality issues, and limited diversification exposes the company to growth, regulatory, and profitability risks.

Catalysts

A gold loan non-banking financial company, provides fund-based and fee-based financial services in India.

• While analyst consensus expects gold loan growth to be offset by lower yields, this overlooks the accelerating shift of affluent and middle-class borrowers-previously untapped-into organized gold loans due to formalization and digital adoption, enabling Manappuram to significantly expand its average ticket size and total addressable market, which could drive a step change in revenue and AUM growth well beyond current estimates.
  
• Analysts broadly agree that process overhauls and digital lending will boost operational efficiency, but they may underappreciate the impact of Manappuram's rapid digitization and AI-driven underwriting, which is already sourcing 85% of gold loans online, likely compressing cost-to-income ratios and meaningfully expanding net margins over the medium term.
  
• The co-lending model with banks and the rollout of gold loans through Asirvad's vast branch network is poised to unlock rapid scalability in gold loans and reach underserved rural markets, allowing for leveraged market share gains and a strong structural revenue uplift.
  
• Bain Capital's partnership brings not just funding but global best practices and financial sector expertise, which could catalyze capital efficiency, improve risk management, and enable bolt-on acquisitions or more aggressive expansion, all of which can accelerate earnings growth and fortify balance sheet strength.
  
• As tighter regulations and data infrastructure improvements accelerate the shift away from informal lenders, Manappuram's early-mover advantage and diversified secured lending focus position it to capture premium asset quality loans and lower credit costs, which will both stabilize and expand future earnings.

Manappuram Finance Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Manappuram Finance compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Manappuram Finance's revenue will grow by 35.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 20.1% today to 31.4% in 3 years time.
• The bullish analysts expect earnings to reach ₹31.4 billion (and earnings per share of ₹37.13) by about August 2028, up from ₹8.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 14.7x on those 2028 earnings, down from 28.2x today. This future PE is lower than the current PE for the IN Consumer Finance industry at 28.6x.
• Analysts expect the number of shares outstanding to grow by 4.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.45%, as per the Simply Wall St company report.

Manappuram Finance Future Earnings Per Share Growth

Risks

• Intense competition from commercial banks, fintech firms, and other NBFCs in the gold loan segment is leading to a secular trend of yield compression, as seen in Manappuram's phased reduction of gold loan rates from above 22 percent to a targeted range near 18 percent, which is likely to put long-term pressure on net interest margins and overall earnings.
  
• Manappuram's stated strategy to increase the gold loan share to 75 percent of consolidated AUM and ongoing challenges in diversifying beyond gold loans heightens its vulnerability to gold price volatility, collateral risks, and single-product dependence, threatening the stability and future growth of revenue streams.
  
• The company's non-gold portfolios, notably microfinance and vehicle finance, continue to exhibit elevated GNPA ratios (for example, 9.2 percent in vehicle finance) and periodic losses, indicating persistently high credit risk which could push up credit costs and erode net profits, especially if asset quality fails to recover.
  
• Ongoing stress and regulatory tightening in the microfinance sector, coupled with a conscious reduction in the microfinance book to below 10 percent of AUM, suggest limited growth avenues outside core gold lending, constraining revenue diversification and exposing the business to regulatory headwinds.
  
• Structural shifts in borrower preferences toward digital products, unsecured loans, and alternative credit sources in semi-urban and rural India, combined with regulatory hurdles (such as branch expansion restrictions and possible LTV caps), could limit customer base expansion and ultimately cap long-term AUM and revenue growth.

Valuation

• The assumed bullish price target for Manappuram Finance is ₹305.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Manappuram Finance's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹305.0, and the most bearish reporting a price target of just ₹185.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ₹100.1 billion, earnings will come to ₹31.4 billion, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 16.4%.
• Given the current share price of ₹266.05, the bullish analyst price target of ₹305.0 is 12.8% higher.
• 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.