Operational Revamp And Regulatory Changes Will Improve Efficiency

Key Takeaways

• Focus on online lending and secured finance diversifies revenue and boosts operational leverage, enhancing earnings stability and potential growth.
  
• Easing regulations and improved microfinance processes contribute to market expansion and collection efficiency, positively impacting future revenue and credit cost stability.
  
• Challenges in microfinance and vehicle finance, coupled with regulatory and competitive pressures, risk hindering revenue growth and deteriorating earnings for Manappuram Finance.

Catalysts

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

• The RBI's lifting of supervisory restrictions on Asirvad Microfinance Limited and the company's efforts to revamp processes and systems could enhance operational efficiency and contribute to future earnings recovery.
  
• The organized gold loan market is projected to grow significantly, with Manappuram's focus on online lending likely improving operational leverage, potentially increasing revenue and net margins.
  
• Manappuram's increased emphasis on secured lending such as vehicle and equipment finance and home loans supports a diversified revenue base, potentially enhancing earnings stability.
  
• Regulatory improvements, such as the removal of branch opening restrictions for gold loans, could expand Manappuram's market reach and customer base, positively impacting future revenue.
  
• Tightened underwriting processes and cost rationalization measures in the microfinance segment aim to improve collection efficiency, which could stabilize earnings and reduce credit costs in the long term.

Manappuram Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Manappuram Finance's revenue will grow by 21.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 36.8% today to 33.8% in 3 years time.
• Analysts expect earnings to reach ₹32.5 billion (and earnings per share of ₹38.41) by about March 2028, up from ₹19.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, down from 9.2x today. This future PE is lower than the current PE for the IN Consumer Finance industry at 17.7x.
• Analysts expect the number of shares outstanding to grow by 1.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.47%, as per the Simply Wall St company report.

Manappuram Finance Future Earnings Per Share Growth

Risks

• The company's microfinance subsidiary, Asirvad Microfinance, has faced significant challenges, resulting in a substantial loss of ₹188 crores for the quarter. These challenges, including collection issues and climatic disruptions, have directly impacted the consolidated profit, which declined by over 50% year-on-year, posing a risk to earnings.
  
• There is a decline in consolidated Assets Under Management (AUM) by 3.3% sequentially and 9.5% year-on-year, primarily due to challenges faced by Asirvad Microfinance. This could impact revenue growth prospects if not rectified.
  
• The regulatory changes in gold loan practices, such as LTV monitoring and restrictions on loan rollovers, could potentially hinder growth in the gold loan business. While these regulations aim to ensure stability, they may also limit the company's ability to compete effectively, impacting future revenues.
  
• The company has seen rising GNPA in the vehicle finance division, with a significant increase to 5.2%. This rise in non-performing assets indicates asset quality issues that could deteriorate earnings and net margins if not addressed promptly.
  
• Increased competition in the gold loan market, coupled with slower growth in new customer acquisitions and potential regulatory changes, might limit the company's ability to maintain or increase its market share, affecting long-term revenue potential.

Valuation

• The analysts have a consensus price target of ₹204.143 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 ₹260.0, and the most bearish reporting a price target of just ₹160.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹96.1 billion, earnings will come to ₹32.5 billion, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 16.5%.
• Given the current share price of ₹213.95, the analyst price target of ₹204.14 is 4.8% 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.